Businesses balance reputation and revenue in response to war
EU and US sanctions have forced many companies to end their business relationships with Russia.
However, the past two weeks have also seen many others engage in “self-sanctions”, with promises to end or suspend operations in the country in response to Putin’s war on Ukraine.
Energy giants BP and Shell were among the first to move – both now seeking to dump billions of dollars in investments in Russia.
Countless consumer brands have followed since, with big names like Apple, Nike and Coca-Cola suspending sales in Russia and retail giants like McDonalds, Starbucks and Ikea closing outlets there – for the time at least.
In this case at least, these decisions were probably quite easy for these companies.
“It has to be said, it’s an extreme,” said Padraig McKeown, communications consultant and senior lecturer at DCU. “The fundamental decisions are not as clear as what is happening with Russia right now.”
That’s not to say it’s easy to act, especially if it means closing outlets, laying off staff and turning away from a source of revenue. But it comes at a time when corporations are increasingly called upon to take a stand on social and political issues large and small.
“There’s a global context around reputation that maybe didn’t exist 20 or even ten years ago,” Padraig said. “Especially in the teens and 20s, they have a very low threshold for any kind of economic support to any organization that doesn’t treat the world better.
“There is a significantly higher degree of expectation – and a greater expectation that companies call what they see; the idea of the activist CEO has become a thing.”
This comes as reputation has become a focal point for businesses, as it is seen as an essential tool for attracting and retaining customers.
“There is a strong link between the health of an organization’s reputation and business results,” said Niamh Boyle, chief executive of The Reputations Agency. “We know the public is ten times more likely to buy from an organization with a great reputation than one with a bad reputation.”
Pressure from all sides
The internet has allowed the public to be far more informed and engaged about a company’s behavior than ever before – and that’s influencing their spending habits.
It also makes it easier for people to respond to business practices they don’t like, whether through boycotts, protests or other forms of activism.
But the pressure to do the right thing doesn’t just come from consumers – financial markets are also increasingly demanding better ethical standards.
“The rise in ethical investing, which has become much more pronounced over the past decade, is evident in the ESG (Environment, Social and Governance) reporting function,” Padraig said. “For public companies or companies that have a public mission… it is inconsistent with their obligations to society to be involved in any element of humanitarian abuse.”
Ethical investing is far from a new phenomenon – its roots go back to 18th century Quakers and Methodists.
However, the number of funds focusing on what happens beyond a company’s bottom line has increased significantly in recent years, in particular due to the climate crisis.
Morningstar research last year suggested that the value of ESG funds could reach $53 billion by 2025, when they would account for a third of all assets under management globally.
And as if the pressure from above and below were not enough, it also comes more and more from within.
Multiple surveys by consulting firms in recent years have revealed that the majority of employees now assess a company’s values the same way they might view salary and other benefits on offer.
“In this market, it’s really important for organizations to have a strong reputation,” Niamh said. “People want to work for organizations with a strong reputation.”
The disappearance of duplicity
And with such scrutiny from investors, staff and consumers, companies no longer have the luxury of just keeping up appearances.
“There’s no facade you can’t walk behind, and that’s the reality of the world we live in,” Padraig said. “There would have been many, many facades in society in the past that you couldn’t hide, so you could present a front, but you can’t do that anymore.”
This new reality was exposed as recently as this week.
In the immediate wake of Russia’s assault on Ukraine, Shell announced it would pull out of the country – selling its stake in a joint investment with Gazprom as well as its share of a liquefied gas plant in the country, while ending its involvement with the current mothballed Nordstream 2 Pipeline.
But a few days later, he quietly bought a batch of Russian crude oil.
When the deal first became public, Shell defended its actions – but it quickly gave up trying to justify any ongoing dealings with the country.
“Our decision last week to buy a shipment of Russian crude oil…was not the right one and we are sorry about that,” Shell CEO Ben van Beurden said in a statement.
At the same time, the company also gave more details of its withdrawal from Russia – including the immediate closure of its gas stations there – while pledging to spend any remaining profits it makes in Russia to a fund for Ukrainians.
“You have to be very careful not to ‘wake up’,” said Niamh – a term used for a company that tries to present itself as ethical while continuing to engage in problematic business practices.
Morality against money
But while a decision may ultimately be ethically correct, the reality is that it can often come at a significant upfront cost to a business.
Shell has valued its Russian assets at $3 billion, while BP has valued its exposure there at $25 billion.
By halting sales and closing stores, McDonalds, Coca-Cola and Adidas have all lost revenue and, likely, the country’s profits. The same will apply to any other company that has decided to end or even suspend its trade with Russia in the last fortnight.
But companies must balance that impact with the potential hit their business could take elsewhere if they fail to act.
“So let’s say 5% of a company’s revenue came from Russia, so getting out of there will have an immediate impact on revenue and profit,” Niamh said. “But if they don’t, we could have a 10% or 15% drop in support and the propensity for people to buy their product over a competitor’s.
“The reputational impact of each of these decisions is something that organizations need to pay close attention to.”
It can be difficult to calculate the potential cost of inaction – or wrong action. However, Niamh says the starting point is understanding what a company’s stakeholders value most.
“If you understand the components of your reputation and which ones are at risk if you make the wrong decision, that helps,” she said. “For example, we know that in the grocery retail industry, value for money and high quality are big reputation drivers.
“But in the financial services industry, the conduct of financial services organizations is much more important.”
Overall, however, his research consistently reveals that whether an organization is perceived to have a positive influence on society is a key factor in building a good reputation.
Right versus reality
But even where what is “right” is obvious, from an ethical and business perspective, putting it into practice can be complex.
For example, cutting off a revenue stream, even for ethical reasons, can prevent a company from meeting the expectations of investors or shareholders in the short term. They may need to determine if these stakeholders are comfortable with this.
The “right” decision can also have other ramifications or be weaponized by others with an agenda.
“You have to be careful with the choices and decisions you make and make sure you don’t throw your organization into the middle of a situation without thinking about it,” says Niamh. “You have to ask yourself ‘what is our mission, is there a contradiction in what we propose to do or does it correspond to our clear objective?’.”
McDonalds, for example, tried to toe a fine line in its suspension of commerce in Russia. Despite the closure of its outlets there, it announced that it would continue to pay staff in the country.
This seems to be an attempt to express opposition to the Russian authorities, without punishing normal people who depend on their jobs to survive.
McDonalds is likely hoping the move will also keep it from becoming the target of any anti-Western sentiment in the country, while keeping some goodwill alive for any comebacks it might make in the future.
Having a clear view of business priorities can help navigate these pitfalls and permutations.
This means that management knows what is most important to them and reduces the likelihood that stakeholders will be surprised by the decision ultimately made.
“It sounds a little twee, but it’s about values - it’s what you as an organization think you stand for,” said Padraig, citing an article by Paul A Argenti of the Tuck School of Business at Dartmouth College, which outlines a framework for businesses to decide when to take a stand on a social issue.
“A lot of organizations will always start with ‘who matters to us and do they care?’ “, He says.