Corporate Foreign Policy in War

Abstract

On February 24, 2022 Russian troops invaded Ukraine. Almost a year later, the war has claimed tens of thousands of lives and led to the displacement of millions. This spring, both Ukrainian and Russian forces prepare new offensives to gain territory, while the U.S. has committed to providing Ukraine with military tanks – a move that Russian officials have warned constitutes direct involvement in the war. While NATO countries debate how to respond, we also witness the privatization of foreign policy as hundreds of companies around the world similarly seek to assist Ukraine or punish Russia using the very tools of national foreign policy – humanitarian aid and economic sanctions. Companies assist Ukraine by donating millions of dollars to relief organizations or offering aid directly to those fleeing the war. Other companies punish Russia by closing stores, postponing investments, and exiting altogether.

This Article explains that these individual business decisions illustrate a broader phenomenon of corporate foreign policy, which refers to business policies that use the traditional tools of national foreign policy to influence a government’s conduct towards another government or international organization. It develops a market framework to explain that corporate foreign policies result from the interaction of two sets of factors: demand factors, such as preferences of governments, consumers, and investors, and supply factors, which refer to organizational, contractual, and regulatory factors that enable or inhibit the capacity of companies to meet those preferences, such as business model used for Russian operations; contract provisions that enable suspension of performance obligations; availability of political risk insurance and international investment dispute resolution to absorb losses; and organizational preparedness for crisis response.

This Article makes three primary contributions to the study of foreign policy and international business transactions. First, it provides an analytical framework for understanding, evaluating, and even predicting whether companies will use a particular foreign policy in a crisis. Second, it uses this framework to analyze whether companies may similarly exit from China because of fears of military aggression in the region. Third, this framework offers practical guidance to both policymakers and business executives on using foreign policy effectively in future crises. For policymakers, this framework explains that economic sanctions imposed by governments can encourage a second wave of private sanctions imposed by companies that magnify the economic, social, and political consequences of the former. This Article’s framework helps policymakers to predict the nature, breadth, and strength of these private sanctions so that they can better evaluate if and how to use sanctions. For executives, this Article explains the relevance of business model, contract design, and strategic partnerships for preparing for the next crisis. Many of these decisions are made decades before a crisis arises but can inhibit a company’s ability to respond when it does. It is therefore important to evaluate these decisions now in order to respond effectively in the future.

Keywords: board governance, contracts, Russia, Ukraine, war, armed conflict, sanctions, corporate social responsibility, ESG