Maersk left. Ecco stayed, and Carlsberg won’t be out of Russia before mid-2023. Why did we see different approaches to doing business in Russia after the invasion of Ukraine? And what can business leaders learn from the present geopolitical unrest for future foreign investments?
By CBS Leadership CentreOnce a month, researchers from CBS write a column in Børsen, where they give readers a current and research-based perspective on management.
This column is about the new dilemmas that arise in a time of geopolitical change based on the research article “Should I Stay or Should I Go? How Danish MNE's in Russia Respond to a Geopolitical Shift" by Larissa Rabbiosi, Michael Mol and Grazia Santangelo, professors at CBS Department of Strategy & Innovation, published in AIB Insights.
The Russian invasion of Ukraine took many business leaders and political observers by surprise. It also pointed to an urgent dilemma regarding firms' decisions on what foreign investments or divestments to make given increasing geopolitical unrest. Should they stay or should they go?
In a recent research paper, we looked at the strategic responses of several Danish firms running operations in Russia during the invasion. We found that the really tough dilemmas appeared when the companies faced both high operational costs of exiting and high reputational costs of staying. Based on our observation, companies are less accustomed to assessing the reputational costs of evolving geopolitical environments, which has implications for their ability to balance operational and reputational costs. Based on the insights from these companies, we have derived recommendations for managers for handling international investments in the presence of geopolitical turmoil which we would like to share with you.
As of now, out of 55 Danish firms listed on the leave-russia.org website that is dedicated to tracking how foreign firms have responded to the invasion, 12, such as Maersk, have left Russia completely. 17, including Vestas, are in the process of leaving. 11, like Novo Nordisk and Carlsberg, operate a reduce-but-wait approach, while 15, including Rockwool and Ecco, have so far decided to stay. Some of these cases, like Ecco and Carlsberg, have really caught the spotlight in Denmark and even internationally. But why are both these companies’ decisions and the public responses so different?
Larissa Rabbiosi, Michael Mol and Grazia Santangelo, professors at CBS Department of Strategy & Innovation
Dilemma: Taking a financial or a reputational hit?
Suddenly leaving a country behind years of investment is costly, although it is easier for firms with limited physical assets like Maersk than for companies with manufacturing facilities like Rockwool or Carlsberg. Selling foreign assets in Russia has become even more expensive now that the Russian government has effectively started charging a 10% tax on these deals. But the reputational damage from staying can equally be costly, as Ecco has experienced among others by losing its status as a royal supplier.
The trade-off between operational and reputational concerns can be easily solved when operational costs of exiting are high and reputational costs of staying are low. In this scenario, firms will stay. Similarly, the decision is straightforward when operational costs of exiting are low but reputational costs are high. Firms will leave. When both are low, arguments of convenience will prevail. For instance, Novo Nordisk and other pharmaceutical firms use the argument that medical needs of people must prevail.
The interesting cases, however, occur when both costs are high. Carlsberg and Ecco are good examples of this: Both companies had significant operations in Russia, making a withdrawal very costly. But both also faced real reputational damage by continuing their business in Russia. Eventually, Ecco decided to weather the storm, whilst Carlsberg, after some deliberation, made its way for the exit but in a protracted way. Resolving this kind of trade-off is one of the hardest leadership challenges managers will encounter in the years to come, given the recent geopolitical developments. So how can they go about it?
Acquire a profound awareness of company circumstances
When making the decision to stay or go, managers must take into account the specifics of their company, the industry they operate in, and the countries they are from and operate in when considering their investments. This may sound obvious, but the turmoil produced by the Russian invasion shows that it is not.
For instance, firms in the pharmaceutical industry, like Novo Nordisk, will always have strong arguments to stay put and shield from ethical accusations because they are saving lives by doing so. But other firms like consumer goods companies could quickly be accused of aiding war efforts or other simmering geopolitical situations by producing and selling goods of no basic necessity that help sustain the local economies and their governments.
Change mindset: preparedness is everything!
Years of relative geopolitical stability lulled companies into believing this was the new normal. But we have discovered it is not. As Anders Holm, the CEO of Sportsmaster Denmark, said “Nobody has prepared on how to lead in times of war. This is entirely new for all of us". The current global shift toward greater geopolitical instability requires a change of mindset because there is no one-size-fits-all solution for how to deal with it. Gone are the times of incident-based responses.
Preparedness for geopolitical storms is the new normal to avoid being caught in the crossfire. Preparedness requires a profound awareness of company circumstance (e.g. corporate identity, operation reversibility, technological appropriability, rivals’ strategic posture) and their influence on operational and reputational costs. This is our first advice to business leaders: Be prepared.
Larissa Rabbiosi, Michael Mol and Grazia Santangelo, professors at CBS Department of Strategy & Innovation
Making it work
The second piece of advice is to build up more expertise and analysis in geopolitics within companies and search for this expertise in the system supporting companies (organisations such as Dansk Erhverv and Dansk Industri, consultants and the public sector). Following this advice will, for most companies, reveal that in more recent years and in the period leading up to the Ukraine conflict they have been grossly underestimating geopolitical risks in their risk analyses. From now on, companies have to accept big risks are the new normal.
A good specific tool for analyzing geopolitical risk is scenario planning. If companies have insights into how different geopolitical scenarios might evolve, such as the China-Taiwan standoff (continued tension, peaceful resolution, a limited military operation, or full-scale war). This could inform both their investment decisions on possible entry and exit as well as the day-to-day operations of their subsidiaries in these countries. To do this work companies engaging in international business must establish crisis management departments that include geopolitical experts. Doing this is no longer optional.
A final piece of advice is to be aware, and perhaps wary, of how countries are now using their companies as geopolitical instruments. Even geopolitical shifts involving friendly countries lead to firms getting caught in conflicts, as banks and other financial institutions have experienced through Brexit when they were forced to relocate activities. So, managers must take into account the possible actions of their own government as much as anything else.
CBS Leadership centre is connecting researchers and leaders around a shared ambition: to enable professionals to successfully assume their leadership and create value and resilience in businesses and organisations –and bring on necessary transformation fueled by significant societal agendas such as green transition, diversity, digitalisation, innovation and ethics.
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