US companies leaving Russia have more at stake than money

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“The business of business is the business.” This famous quote from Nobel Prize-winning economist Milton Friedman implies that corporations should maximize their profits and let the owners of capital do with that wealth as they please. Companies should refrain from doing good unless these activities lead to doing good.

Yes, most companies no longer strictly subscribe to this credo. But in the face of Russia’s invasion of Ukraine, the willingness to risk gains to make a moral and political statement is being tested.

The invasion forced international companies to reconsider their business relationships with Russian companies, individuals and/or the government. CEOs must decide whether to continue these relationships not only during the war, but also after.

READ MORE: Vanguard has stopped buying Russian stocks. AmerisourceBergen said it always supports patients in drug trials there

Earning money in Russia or with Russian companies has become problematic on many levels. Business relationships may have been lucrative, but they now carry great risks, not only financially, but also in terms of corporate image. Companies are cutting ties and in the process gaining good press.

While government and regulatory sanctions largely prevent some companies from continuing to operate, most of the actions have been taken voluntarily.

The list of companies suspending relations is long and spans a range of industries. Energy companies are limiting or stopping their product purchases and abandoning long-term investment projects. Travel agencies bypass Russia. Financial companies have reduced their financing activities and taken measures to prevent the use of their products, such as credit cards and cash transfers. Vehicle and aircraft manufacturers halted production and shipments. Major consumer goods companies have reduced or suspended sales. Delivery companies have stopped sending parcels to Russia.

There is even a “fingerless zone” in Russia; shorthand for McDonald’s decision to temporarily close its hundreds of restaurants nationwide.

Sometimes companies get it wrong and don’t understand that there is a potential trade-off between corporate image and the short- and long-term financial impact of certain actions. It can be a painful lesson to learn that the two overlap.

Let’s take an example. Shell Oil announced it was severing ties with its Russian supplier, creating a massive writedown. But then he said he would continue to buy oil from Russian suppliers until he could find a replacement.

In a world with an energy shortage, this could take a long time and when it was discovered that the company had bought oil on the spot market, the backlash was massive. The risk to the company’s image forced Shell to end this practice. Shell has relearned that image and finance go hand in hand.

READ MORE: Lukoil boycott takes off in Philadelphia amid calls to ban all Russian oil imports

This example raises some tricky questions: how do companies not only react in the current situation, but perhaps, more importantly, what do they do if Russian President Vladimir Putin remains in power? Will the outrage be temporary or will permanent business changes be implemented?

The Conference Board, a non-partisan, business-led organization, provided advice on approaching the compromise between business and social concerns as they relate to Russia. He published an article titled “Cutting Ties with Russia: A Guide to Decision-Making Now and in the Future”.

In the document, there is no simple answer to the question: “What should companies do?” The suggestion is that everything, including financial, social, image, corporate culture and regulatory concerns, should be weighed.

But the report says: “Cutting ties with Russia can have far greater business and financial implications than taking a stand on a social issue, which means that shareholder interests should be given more weight in the analysis. .

The report also contains a warning that companies must be prepared “for nation-state-backed retaliation in cybersecurity or other areas.”

READ MORE: Should Pennsylvania’s big pension funds pull out of Russia at a loss? It’s the moral thing to do, but a state senator has warned it could make the oligarchs rich

This brings us to the final concern: Putin. What should companies do if Putin stays in charge of Russia. Can businesses resume business as usual? If they do, what does that say about current decisions to act against Russia?

If Putin loses his grip on power, the decision becomes easier. Unless the new Russian leadership restricts companies that have suspended operations, most companies will likely attempt to resuscitate their Russian operations. That’s why most companies haven’t announced any permanent changes.

The corporate world has, to a large extent, stepped up its efforts in the face of Putin’s war. But let’s not exaggerate in congratulating them. Companies that have made more permanent changes to their business relationships with Russia should be applauded for putting their money (and that of their stakeholders) where their mouths are.

But for those who have hedged their bets, it’s what they do over the next few months or years that matters. For them, the jury is still out on whether they made decisions that reflected their social and moral concerns, or whether they took the path that protected their short-term position so they could secure their long-term income. .

Joel L. Naroff is president of Naroff Economics in Bucks County.

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