Multinational corporations are giving up billions of dollars in Russia, as they cut back operations there in response to Moscow’s invasion of Ukraine. Of almost 1,100 firms tracked by Yale University, more than 750 have voluntarily scaled back business beyond the requirements of international sanctions—and the choice, in many cases, carries serious costs: BP estimates it will lose $25 billion in revenue; Shell, $5 billion. These public decisions to side with Ukraine follow years of corporations increasingly taking liberal or progressive political positions on divisive cultural issues, including voting rights, rights for gay and transgender people, and the Black Lives Matter movement. But corporate leaders knew those moves wouldn’t cost them substantially, because few consumers consider corporations’ social and political stances when buying goods or services. So why are these companies willing to forgo billions of dollars now?

Neil Malhotra is the director of the Center for Social Innovation and a professor of political economy in the Graduate School of Business at Stanford University. A few executives, Malhotra says, acted on intuition to get out of Russia early, and then a cascade effect developed, with others not wanting their companies to be seen going against an apparent global consensus on a historic issue. According to Malhotra, corporate calculations on social and political stances have changed since Donald Trump became president of the U.S.—but they haven’t changed fundamentally. Businesses are still driven by financial considerations above all, and the decisions to get out of Russia are based on a judgment that leaving is the better move to ensure long-term profits. But it also sets a precedent, Malhotra says, with unknown implications across an array of fraught social and political causes.

Michael Bluhm: Why are corporations going beyond their legal requirement to cut ties in Russia?

Neil Malhotra: It’s a fascinating situation. Corporations are going far beyond government sanctions. They’ve left real money on the table. Russia is a significant market that they’re not serving anymore.

The situation reached a tipping point. If you’re not leaving Russia now, you won’t be seen as a legitimate company—and that’s going to get you effectively on a blacklist among consumers, potential employees, investors, and so on. It’s an example of how society as a whole coordinates on an issue, and companies don’t want the impression that they’re on the wrong side of it.

Since 2020, every single proxy statement—in which a corporation must publicly provide shareholders relevant information about it before any shareholder meeting—has a section on diversity, equity, and inclusion, and a section on environmental, social, and governance policies. If you don’t have that in your proxy statement, you’re viewed in society as an illegitimate company.

This corporate reaction to the war is even stronger. It’s not just propaganda or PR in a proxy statement; it’s leaving money on the table.

Bluhm: Why are some organizations choosing to stay in Russia?

Malhotra: There are ethical reasons to stay. If you’re a pharmaceutical or a medical-device company, your decision to leave could put innocent people’s lives at risk. Other companies, such as FedEx or UPS, also provide essential services but have decided to leave anyway.

Illia Kholin

Some could argue that there’s a lot of innocent Russian people, including people who’re protesting or against the regime’s activities, who would be punished by these departures. Unlike the Biden administration’s sanctions, these departures are not surgical—they restrict goods or services from an entire country of people, many of whom are innocent.

It’s one thing to say Nintendo won’t sell any games there; that’s not a necessity. It’s quite a different thing when a necessity isn’t available to the market.

Bluhm: In recent years, some leading voices in the corporate world have called for a move from shareholder capitalism to stakeholder capitalism, which would include more consideration for workers, suppliers, and local communities—and give greater priority to concerns beyond the bottom line, such as the moral questions at stake in Ukraine. How do you understand that shift?

Malhotra: The terms of stakeholder capitalism get muddled a lot. All these companies are fundamentally shareholder-focused companies. What’s at stake is the mechanism for achieving shareholder value.

This idea of shareholder value itself was popularized by Milton Friedman in the 1970s and by former CEO of GE Jack Welch in the ‘80s. You have to understand the time period; it was characterized by American companies being uncompetitive internationally and by stagnation in the American economy. It was considered immoral that companies were not looking out for their shareholders, because the shareholders own the company. When managers are not doing a good job, it’s bad for American capitalism; it’s essentially stealing money from shareholders. Today, a lot of people look back on shareholder value as an immoral thing. But the people advocating for it had moral arguments.

All these companies are fundamentally shareholder-focused companies. What’s at stake is the mechanism for achieving shareholder value.

Stakeholder capitalism is the idea that you can’t be myopically focused only on shareholders and think only in the short term, but you have to realize that taking into account the interests of other stakeholders is a good vehicle for long-term shareholder value. It’s basically an enlightened, less myopic form of shareholder capitalism.

Companies have to care about certain constituencies more than they did. I don’t think there’s a lot of evidence that consumers care much about this stuff, but elite constituencies do. These can include investors, suppliers, employees, as well as activist groups, interest groups, and the government. These are all sources of risk for companies, so they have to account for these stakeholder interests, if they want to achieve long-term shareholder value.

Bluhm: A year ago, you indicated that corporations wouldn’t compromise profitability for social ethics. Yet now, as you say, companies are leaving real money on the table by ending their businesses in Russia. What’s different now?

Malhotra: It’s hard to disentangle profit motives from social motives for every company. The power elite—Fortune 500 companies, major media outlets, major universities—control a lot of global power. They institutionalize moral beliefs, and you see the trends in these beliefs. As a company, you have a choice: You can stay within this consensus or detach yourself from it—and there are some big costs if you detach yourself.

Rob Walsh

McKinsey [the major global management-consulting firm], for example, is highly dependent on being well respected and liked in the elite corners of the United States. A firm like McKinsey depends on legitimacy. If they were stepping out from the herd and saying, We’re going to continue providing services in Russia, it could jeopardize their standing among Fortune 500 and other multinational companies. And the cost for those companies of switching from McKinsey to another management consultant, like Bain or Accenture, is very low.

They’re all reading the writing on the wall. You can view leaving Russia as leaving $5 billion on the table, or you can view it as buying a $5 billion insurance policy against losing your status in global society.

Bluhm: How do corporations go about making decisions on their social and political positions?

Malhotra: There are two types of issues here: long-term issues and crisis management. For long-term issues such as diversity, equity, and inclusion, or environmental sustainability, you have the time to do market research and understand what your employees, investors, and customers are thinking. You carefully tailor your business strategy to these stakeholder interests.

But the Ukraine crisis was very quick. You don’t have time to do a three-month study on how you should respond to the war. The situation is fast-moving; it’s been changing day-to-day; and CEOs have had to depend on gut feeling. They’ve had to make snap decisions.

A firm like McKinsey depends on legitimacy. If they were stepping out from the herd and saying, We’re going to continue providing services in Russia, it could jeopardize their standing among Fortune 500 and other multinational companies.

That’s where these tipping points can occur. If you have a few people making quick choices, then others’ can come rapidly in turn: Okay, we’ve got to join the herd. A lot of this isn’t based on data-driven research; it’s a judgment call.

In this case, the Yale list was a catalyst because it’s a coordinating mechanism. Other companies made the decision to leave, and then it was a flood of companies leaving.

Legal scholars argue that stakeholder capitalism is allowed under the legal standards of fiduciary duty because there isn’t very good data on how companies achieve long-term shareholder profitability. So it’s good to give a manager discretion that might take into account social interests, which could be the wise thing to do. We rely on managerial discretion to make those judgment calls, especially in crisis situations.

Bluhm: You mentioned the importance of shareholder interests again. How has the definition of shareholder interests evolved in recent years?

Malhotra: It’s a good question. The mechanisms for this are different now. In the 1940s and ‘50s, business was very socially minded. Businesses, especially local businesses, and their leaders were very involved in civic life. The heads of the local insurance company also had to be in the Rotary Club or the Lions Club—embedded in the social capital of society.

J.P. Valery

When corporations take social stands now, it has a lot to do with employees. There’s a generation of people who find a lot of meaning through work, and they want to work for places that they’re proud of and that share their values.

It’s important to them use their work not just to make money but to express their values. If a company wants to compete in the labor market and prevent employees from getting upset and revolting, it has to take all these social issues very seriously, see what its employees think, and realize they’re an important constituency.

Bluhm: What events have caused these shifts in beliefs among employees and managers?

Malhotra: It goes back to the financial crisis in 2008-2009. There’s a generation of people who have been locked out of the American dream. Their values have shifted toward asking, What is work for?

I definitely see the rise of populism and Trump as a key set of events pushing companies to take social and political stands. If you look at the proxy statements of 2019 and then in 2020 and 2021, after George Floyd’s murder, they’re vastly different. I didn’t quantitatively analyze this, but qualitative analysis suggests that George Floyd’s murder really did affect how corporations communicate to the world. Part of it may be trying to communicate to employees in a labor market they want to compete in.

When corporations take social stands now, it has a lot to do with employees. There’s a generation of people who find a lot of meaning through work, and they want to work for places that they’re proud of and that share their values.

Bluhm: One of the newest events causing conflict is the stance of Disney on the Florida law widely referred to by its critics as “Don’t Say Gay.” On The Signal, Carmenita Higginbotham said she thought the move by Disney was unprecedented, as the corporation has for decades tried to stay in line with mainstream political and cultural sentiments.  How do you see Disney’s actions?

Malhotra: Their first move on the issue was to say, We’re not a political company, and they got hammered for that. Disney has a long history with this. They got protests from conservative-Christian groups when Disney allowed LGBT groups to celebrate important dates at Disneyland.

Disney has always had a hard time dealing with crisis-management situations. One reason is that they’re a global brand, and they have footholds in competing constituencies. Disney is a very popular brand in the LGBT community and the conservative-Christian community. At some point, you have to side with one or the other. First, they said, We’re not going to side with anybody, and they got hammered for that. Then they were on the side of the LGBT community, and now they’re getting hammered for that. Disney is in a very hard position—they were going to get blowback, no matter what they did.

There’s a general perception among people on the U.S. right that American society’s elite institutions—whether it’s universities or Fortune 500 companies—don’t represent them and aren’t on their side. It’s going to be interesting to see how this plays out, because the Chamber of Commerce and Fortune 500 companies have traditionally been a bedrock of the Republican Party. This could be a big turning point in American politics, where that isn’t the case anymore.

Nathan Watson

Bluhm: What are the consequences of so many major corporations taking this kind of public stance? What kind of precedent does it set?

Malhotra: It’s interesting that a lot of major non-Western powers, such as China and India, haven’t taken a clear side on this conflict. Is this a harbinger of a global schism in the corporate community?

Companies could move out of Russia and not have too many difficulties, but Taiwan is the semiconductor-chip capital of the global economy. If China threatens it, how would the global corporate community react? This current war does set a precedent, but Taiwan would be a much tougher test.

Bluhm: The political positions taken by corporations in recent years are almost all in line with the positions of liberals and progressives in the U.S., who mostly live in urban areas. How is this precedent of leaving Russia going to affect the positions that corporations take in the U.S. context?

Malhotra: Opposition to the war isn’t unique to the urban left. Polling data show that broad swaths of the American population aren’t supportive of Russia. But there will be other issues, and the urban left is going to have a disproportionate say because they make up the managerial teams of many multinational companies.

The war will set a precedent where a group says, You gave up X billion dollars over Russia and Ukraine, so why wouldn’t you give up X billion dollars over this other social issue? People are going to ask, Why would you give up money for this predominantly Western European group of people in Ukraine, but you wouldn’t give up an equivalent amount of money for another group of people from a different background? The war is going to set a precedent that leads to tough questions.