The globalization of corporate governance

Global economic sanctions against Russia, and the potential impact of their enforcement, will have significant implications for US corporate governance. This will be the case whether they have been direct participants in the sanctions process or are merely observers, indirectly affected by what should be a significant ripple effect.

The breadth, size and reach of the sanctions have been called economic warfare, and experts predict they will continue to affect the Russian economy for years to come. But as is becoming increasingly clear, the enforcement and prosecution of sanctions will also have significant, possibly lasting, implications on the broader trade spectrum, which US corporate boards will be called upon to identify and monitor. .

The most immediate impact on governance is likely to be in decisions about doing business in Russia or with Russian-based companies, as well as participating in the delivery of humanitarian aid to Ukraine and its citizens. . The longer-term impact could be the need for more focused oversight by the board of directors of the economic, social and political implications of a possible return to a global West/East Cold War environment.

Global considerations have long been a staple of sophisticated enterprise risk management programs, but have been monitored with varying degrees of engagement by board audit and risk committees. They have generally addressed risks that are primarily based on environmental, social, health and cultural issues from “around the world”. The particular focus on “ERM” global risks has been placed on recognizable topics such as climate change, climate inaction, infectious diseases, the erosion of social cohesion and the deterioration of natural resources.

Additional risks, as identified by the World Economic Forum’s Global Risks Report 2022, include labor market gaps, protectionism, education disparities, greater barriers to international mobility, and overpopulation and competition in space, as well as supply chain and operating challenges impacted by the foreign economy. tendencies. All these risks are, of course, legitimate for the company. They deserve to be considered by the boards of American companies, especially when examined through the experience of a multi-year global pandemic. But they were not always treated with any degree of priority or urgency by the council.

All that changed with the advent of a ground war in Eastern Europe, concerns about global authoritarianism, and a possible return to the Cold War. These are global business risks that are real and tangible, not speculative. They are likely to have risk implications for most US companies, whether they are directly engaged in business activities in Eastern Europe or are likely to experience the related ripple effects. Restructuring the board’s focus on enterprise risk to include these concerns has become a critical governance task.

Specific elements of these new global risks to be considered by the board, or its ERM committee, could include the following:

leave or stay: For companies operating in countries with recognized authoritarian governments, the complex and overriding question is whether to continue these relationships, or suspend or terminate them. As has been widely announced, many American companies have already made the decision to leave the Russian market.

Among the difficult issues for the board to resolve in the face of such a decision are those related to loss of revenue and market share, the risk of nationalization of resident assets and possible threats to its resident employees.

Supply chain disruption: Many American companies do business directly or indirectly with suppliers in Russia and Ukraine. These are particularly concentrated in the areas of computer software and services and consumer services as well as energy products and raw materials such as wheat and corn. It will be important for the board to understand how the company’s supply chain could be disrupted by the invasion.

Financial volatility: The dramatic increase in the rate of inflation is partly attributed to the closure of access to Russian energy resources and the rising cost of gas (as well as basics like rent and food). The extent to which the Ukrainian conflict continues to contribute to inflationary pressures, and the resulting impact on business operations, remains unclear. Related financial concerns stem from global instabilities related to access to Russian and Ukrainian cultures; the significant write-downs suffered by companies leaving Russia and the potential for Russian default on foreign bonds.

Humanitarianism: Decisions reflecting an extension of ESG principles and an appreciation of corporate tokenism will include whether, and to what extent, companies will consider it consistent with their “sense of purpose” to make financial and extraordinary nature to Ukraine and related companies. humanitarian efforts.

External pressures: From a corporate citizenship perspective, boards will need to assess whether pressures from employees, politicians and social media are reasonably expected to influence decisions about business relationships with Russia and other controversial diets. How responsive should the company be to the voices of its constituents and other third parties on these issues? What are the implications for future social crises or controversies?

Workforce Culture: Given its obligations to oversee labor issues, the board should be mindful of how concerns about rising global tensions and clear signs of war and human misery may affect key issues such as employee morale, employment participation and labor supply.

Individual customers: Decisions about ending routine business activities will likely be different from decisions about ending the company’s significant relationships with individuals and families, such as investors, personal service customers, and individual business owners. Additionally, charities face tough decisions regarding sources of philanthropy such as those closely associated with controversial leaders, such as the so-called oligarchs.

The end game: More existential but real risks stem from the ultimate resolution of the current crisis. What is the risk of Russia retaliating against the West, and if so to what extent? Will it be limited to cyberattacks (which most companies prepare for) or will it go through other more powerful means? Is there a reasonable limit to the board’s obligation to plan for extreme conflict risks?

The impact of the Russian invasion of Ukraine and the sanctions applied by Western allies could widely affect all American businesses. They extend, in unique and unexpected ways, the business risks that the board is supposed to address. More generally, a return to a Cold War environment and the rise of authoritarianism will force US corporate boards to reorient their agenda to focus more closely on global trends and events.

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