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Stakeholder Motivations for “Private Sanctions” Against Russia

Naomi Koo for ProMarket

As the war in Ukraine enters its second year, a new study measures stakeholders’ desire to see their firms exit Russia and how these stakeholders take into account the financial costs of their values. The authors’ findings contribute to a growing literature on the role of values in stakeholders’ decisions to support a firm.

In the weeks following Russia’s invasion of Ukraine, Richard Edelman, the eponymous CEO of the world’s largest public relations firm, joined Capitalisn’t to discuss the voluntary exodus of corporations from the Russian market in response to the war – i.e. companies that left independent of government-mandated sanctions. A project initiated by Yale University’s Jeffrey Sonnenfeld has recorded more than 1,000 companies that have voluntarily curtailed operations in Russia since the start of the war. 

Edelman said on the podcast that businesses have arrived at the conclusion that they must act independently of official political sanctions to appease stakeholders because of a lack of public trust in the government. “Geopolitics used to be something that business avoided like the plague, but now it’s the new trust test,” he said. 

In new research, economists Oliver Hart of Harvard, David Thesmar of MIT, and Luigi Zingales of the University of Chicago (and also ProMarket’s founder) investigate stakeholders values propelling these companies’ decisions to exit the Russian market to understand which audiences – consumers, employees, customers, etc. – these companies might be responding to. The authors also examine consumer support for these actions and their willingness to pay a personal cost in support.

The authors surveyed 3,000 U.S.-based respondents randomly assigned to three stakeholder roles: employees, customers, or shareholders of hypothetical companies that refuse to exit Russia. Their survey found that 61% of the respondents wanted the firms they have a relationship with to exit Russia, regardless of the consequences. Only 37% said that leaving Russia is a purely business decision best resolved by a traditional cost-benefit analysis. Furthermore, only 30% said that the government alone should take actions of principle against a country, such as sanctions. However, 66% of stakeholders would boycott nonconforming businesses, though the desire to boycott diminishes as costs to the respondent rise.

“Sixty-one percent said they were willing to punish companies that refuse to halt their Russian operations because ‘doing business in Russia is like being an accomplice of the war.’”

Overall, the study finds that stakeholders want their firms to take a position in the war, regardless of their relationship with the firm. Sixty-one percent said they were willing to punish companies that refuse to halt their Russian operations because “doing business in Russia is like being an accomplice of the war.” These private sanctions – or punishments – included selling stocks for shareholders, quitting their job for employees, or boycotting the product for consumers. 

However, the authors highlighted the difficulty in understanding the exact motivations for stakeholders arguing for their companies to exit Russia. Motivations can be either financially consequentialist, i.e., the stakeholders are concerned about the economic costs of remaining in Russia, or deontological, i.e. the morality or principle of the decision to remain in Russia, regardless of its economic or ethical consequences. The problem is, the authors said, that a stakeholder’s belief about the economic consequences of a firm’ decision to stay in Russia correlates with the stakeholder’s values (the deontological motivation). 

To try to sift through the stakeholders’ complexity of motivations and understand their trade-offs, the authors developed a framework with three components: a deontological value, a randomized dollar cost of acting, and the welfare impact of the moral action (partly randomized: some participants were told their action has no impact on the firm, others that it did). They found that the stakeholder’s willingness to punish a firm for not leaving Russia is sensitive to the personal cost of punishment. Sixty-one percent were willing to punish a firm when they incurred no personal cost. That percentage dropped to 53% when the personal cost amounted to $100, and 43% when the personal cost came in at $500. 

Vatsal, age 30, a randomly chosen customer at a McDonald’s restaurant, was one such respondent who said he would be willing to bear a personal cost of just a little over $500 if McDonald’s left Russia. ProMarket interviewed Vatsal for further insight into the authors’ findings. At the beginning of the Russian invasion of Ukraine, McDonald’s had over 800 restaurants across Russia with over 60,000 employees, hundreds of suppliers, and millions of daily customers. Soon after the invasion, McDonald’s completely suspended their operations in Russia. Vatsal said he was more supportive of a multinational company like McDonald’s taking action against Russia, knowing it would still have a presence elsewhere in the world.

The authors of the paper contend that the piecemeal tradeoff Vatsal and other respondents made suggests they were not purely virtue-signaling (i.e. the “Hawthorne effect”), an error intrinsic to most surveys.

However, the authors cautioned about the difficulty of extrapolating their findings to conflicts beyond Russia. Some of the findings, such as that liberals are more willing to punish firms than conservatives, corroborates other academic findings. However, the authors surprisingly also found that older respondents are more willing to punish companies compared to younger respondents, and the authors surmise this may have to do with memories of the Cold War and a negative view towards Russia in particular. As Edelman pointed out in the aforementioned Capitalisn’t episode, former President Barack Obama made this same allusion to the Cold War in a speech: “We have a fundamental conflict of systems. And any notion that we’re at the end of history and all that stuff from the early ’90s is now passé, and this is a global struggle, and you have to choose.”

Although the specific findings of the survey may be difficult to extrapolate, they help provide a theoretical framework for how companies can navigate politically charged environments. The authors consider the case of former President Donald Trump’s conservative social media platform Truth Social, which is available for download in the United States, Canada, and Brazil. Both consumers and  infrastructure service providers such as Amazon Web Services (AWS) have boycotted the platform because Trump often uses it to spread election falsehoods. 

“One tool [for Truth Social] to manage stakeholder-induced risk would be to work with employees, suppliers, and investors that share your values,” the authors wrote. Thus, Truth Social could protect itself against the risk of a boycott by not contracting with AWS at all, or contracting some stiff penalties in advance in case of a sudden interruption of its relationship with AWS. If the contractual penalty for interrupting the relationship is sufficiently high, even the most enthusiastic liberal stakeholders would desist from boycotting.

Many of the final results of Hart, Thesmar, and Zingales may be limited in extrapolation to circumstances beyond Russia, but they nevertheless provide insight into how the preferences of a company’s shareholders, customers, and employees could begin to play a larger role in international trade.

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