Ukraine Could Be A Turning Point For GCs And ESG

Law360 (March 21, 2022, 4:45 PM EDT) -- Russia's war in Ukraine could be a watershed moment for general counsel and their boards when it comes to how they weigh geopolitical risks and moral values in a business landscape already transformed by environmental, social and governance concerns.

Major companies such as McDonald's, Starbucks, Apple and Mastercard have publicly said they're either suspending or completely withdrawing operations in Russia following President Vladimir Putin's Feb. 24 invasion of Ukraine and the resulting humanitarian crisis.

General counsel at companies of all sorts have acted quickly to comply with the slew of sanctions and export controls that the U.S. and allies have placed on Russia. But experts say it's also crucial for in-house legal leaders to weigh the more strategic, complicated decision of whether to eventually reengage with the Kremlin — a choice that could influence companies' relationships with other countries accused of objectionable behaviors.

Mike Callahan, a former LinkedIn and Yahoo general counsel who is now professor of the practice of law and executive director of the Rock Center for Corporate Governance at Stanford Law School, said he expects the conflict in Ukraine will be a defining moment for general counsel and their companies, because it's likely to result in a new focus on geopolitical risks and values.

Choosing whether to eventually return to doing business in Russia is further complicated because, assuming sanctions are lifted, it's more of a moral issue than a legal or compliance one, he said.

"It's that part of the framework of decision-making — when it's not legally required — about where you place your values and where you place your emphasis," Callahan told Law360. "I think that is the most interesting part of this crisis, which is, how do you decide to weigh those different issues?"

The conflict is playing out as employees, customers, shareholders and regulators increasingly demand that companies produce high-quality environmental, social and governance, or ESG, reporting information and take stances on issues.

Since COVID-19 was declared a pandemic in 2020, corporations and their general counsel have embraced ESG perhaps more than ever, with many focusing their attention on the social part.

The May 2020 police murder of George Floyd in Minneapolis spurred corporate law departments to commit to fighting racism and bias, and the Jan. 6, 2021, U.S. Capitol riot pushed some companies to pause their political spending or freeze donations to legislators who objected to the outcome of the most recent presidential election.

With the conflict in Ukraine, most businesses likely haven't seen this level of widespread consideration since the pressure to divest from South Africa during apartheid, said Douglas Chia, the president of his own corporate governance consulting practice Soundboard Governance LLC.

And determining whether to do business in Russia is not as clear as the decision to operate in, say, Iran, North Korea or other countries sanctioned by the Office of Foreign Assets Control.

Experts say a company's decision about doing business in Russia could eventually influence its choice to remain in a country like China. Not only have international human rights organizations accused China of committing crimes against humanity, including against Uyghurs in the northwest territory of Xinjiang, but Russia has asked China to give it military support for the war in Ukraine, according to media reports.

President Joe Biden said the U.S. will punish China if its President Xi Jinping provides military aid to the Kremlin.

A.B. Cruz III, a senior adviser at BarkerGilmore LLC and a U.S. Navy veteran who has been general counsel at four companies, said top corporate lawyers, C-suites and boards need to closely monitor China's actions and develop contingency plans for their businesses based on those possible scenarios.

"Shame on them if they're not," he said.

Still, companies aren't necessarily leaving China en masse, nor publicly speaking out about the allegations of human rights violations there. For some companies, angering the Chinese government could have a different outcome than acting in the same manner toward the Russian government, Chia said.

"Here's where some companies can make a calculus of saying, 'OK, Russia is a pretty small market for our business and just in general,'" Chia said. "But when you're dealing with China, that's a whole different ball game."

While some corporate executives believe that remaining quiet on an issue will negatively affect their long-term bottom line, others don't want to share their views on any societal or political issues, Chia said.

The latter scenario played out last year in Georgia. Religious leaders and activists called for a boycott of high-profile, Atlanta-based businesses, including Coca-Cola Co. and Delta Air Lines Inc., for not speaking out publicly to stop Republican Gov. Brian Kemp from signing into law new voting restrictions that included identification requirements for absentee ballots.

Experts acknowledged that making decisions on macro issues isn't simple for general counsel, boards and other executives.

"That kind of goes to the essence of ESG. It's not easy to make these decisions, but that's what you're there to do," Chia said. "The board is there to make complex decisions, and you as a GC can't just say, 'OK, here's the legal angle from it, now you guys decide.' The GC has to explain a lot of the other factors."

Callahan strongly encouraged general counsel to proactively develop a playbook outlining internal and external communications strategies and decision-making, as well as identifying the key internal players and relevant regulators to contact. These steps might look similar to existing contingency plans for dealing with a cyberattack, #MeToo accusation or natural disaster.

He also encouraged general counsel to make sure business leaders communicate clearly with employees, regulators and the board, which can help demonstrate that they have a framework of values or business concerns related to the ultimate decision.

"You're never going to satisfy all your employees or all your investors or all your customers. Half the people will agree and half the people will disagree with whatever decision you make," Callahan said. "I think what corporate leaders should focus on here is transparency about the values that drive the decision and the process for making the decision."

--Editing by Alanna Weissman and Nicole Bleier.

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