In a post one year ago aimed at situating the prevailing corporate governance trends for directors of Canadian companies, this blog noted that “there is a torrent of profoundly important issues facing society in our time, many of them amounting to real crises… [A]s pressures mount on corporations to react to external crises, directors of Canadian corporations must keep their corporate duties as the lodestar of their decisions.” It went on to summarize those duties in the context of the ongoing and still accelerating transition in corporate philosophy from one of shareholder primacy to a philosophy focused on corporate purpose, along with the related scrutiny of corporate sustainability and its environmental, social and governance factors. That was before Russia’s invasion of Ukraine.
That invasion represents the eruption of geopolitics onto the list of risks that corporate directors must consider. It has convulsed supply chains already disrupted by the global pandemic, roiled markets already volatile from rising inflation and other factors, and placed boards of companies with assets or stakeholders in Russia in a dilemma fraught with moral, business and legal thorns.
The framework described in the March 2021 blog post is as applicable to the invasion of Ukraine as it is to climate change, a pandemic or a domestic blockade. It provides a mode for how a given board of directors might face the questions being raised now – whether to withdraw, to scale back, or to carry on – and for the future, where the invasion may be a harbinger of further geopolitical crises.
The Fiduciary Duty and What is “Right”
The question as to how corporations ought to react to Russia has largely and understandably been framed in moral terms, and the evolving list of companies that have withdrawn from Russia compiled by the Yale School of Management is now well known. Describing the influence of the multinationals on his list, professor Jeffrey Sonnenfeld identified a moral imperative that, in his view, ought to be driving their decision-making: “When they’re courageous enough to use that power for the good, it can help topple repressive governments,” though he accepts that “it’s impossible to say whether all of these companies are motivated by purely moral concerns.”
Each of those companies’ reasons for scaling back or withdrawing completely from Russia would have been unique, and would have resulted from a multifaceted discussion among the directors that brought their business judgment, along with their moral compasses, to bear. As Bernard Looney, the CEO of BP was quoted as saying, “I am convinced that the decisions we have taken as a board are not only the right thing to do, but also in the long-term interests of BP.” For boards of Canadian companies still in the process of making or modifying those decisions, a discussion of where what is “right” aligns with what is in the company’s interests, is essential.
From a legal perspective, it’s important to understand that directors, as fiduciaries, are not permitted to be motivated exclusively by their moral concerns. Obviously, moral concerns will play a role in directing a corporation’s actions, but moral concerns belong to human beings, not to legal fictions. The moral element of a corporate act must come from the individuals that play a role in its decision-making. Those individuals, however, must be guided by their fiduciary duty.
In other words, each director brings his or her moral compass to the boardroom; surely the quality of that compass was part of the reason he or she was nominated and elected to the board. But the arrow of that compass may, in the corporate context, be drawn left or right of a particular director’s true north by the magnetic force of the company’s best interests. What is “right” may not be universal, and what one director believes it to be cannot overcome what the deliberative body, after deliberation, decides is best for the company.
In short, “purely moral concerns,” even in the rare circumstances where the morality is abundantly clear, cannot override the legal duties that directors have accepted; and yet the humanity of corporate directors cannot be, and should never be, suppressed in guiding the board’s decision-making. Alignment over the long-term, as BP’s board apparently found, is not only achievable, but necessary, as long as it arises from deliberation on the company's interests.
Stakeholders, Sustainability and Freedom
The March 2021 blog post describes the fiduciary duty in Canada, along with some of its history and development before and within the current context. There is no need to reproduce that description here. However, it is worth reiterating its basic premises, that a director has a duty to act in the best interests of the corporation, and that “once the corporation’s purpose has been articulated, its best interests are, at least broadly speaking, quite clear: to achieve that purpose.” Further, under Canadian corporate law, in considering the best interests of the corporation, the directors may need to consider the interests of stakeholders affected by its decisions. Surely the employees of a Russian subsidiary, service providers to a Russian asset and customers of the business in Russia deserve consideration.
But even where sanctions permit a business to carry on in Russia, those interests must be weighed against the interests of stakeholders harmed, even indirectly, by a decision to do so. Not only that, the long-term ability of the corporation to operate freely in achieving its purpose is reliant on the legal and political environment in which the corporation exists.
Corporations, at least those on the Yale list and those in Canada, are formed under and allowed to prosper within laws enacted in and sustained by open societies. Almost every company’s long-term sustainability is dependent on the maintenance of the fabric woven by those societies, in their various ways, with the threads of capitalism and democracy. Almost none would have better chances of success in a world imagined by George Orwell. The discussion of how to react to international aggression and atrocities must therefore not only account for and calibrate the moral horror, nor must it only engage in the colder business calculus of how stakeholders in the West will react to the decision, but should comprehend a more fundamental question of how far the company must go in promoting, or at least not actively fraying, that fabric.
As the March 2021 blog post put it, “it is not the job of every corporation, nor its board, to solve the climate crisis, reduce income inequality and end gender inequality and systemic racism... Those are purposes to be pursued by governments and societies more generally. However, every corporation has a role to play in those important societal objectives.” Similarly, it is not the job of every corporation, nor its board, to censure Russia for its behaviour. That job is in part covered by sanctions imposed by governments. But in the face of geopolitical shifts and deglobalization, every corporation in the West has an interest in ensuring that freedom endures, and that interest may not always allow expansion and integration in countries seeking to impose illiberal aims. The question at least deserves consideration.
Sustainability itself has acquired a somewhat chimeric quality in the current corporate governance discourse, as its prominence and immediacy and the complexity of its components have increased. But if the last page of the post-Cold War chapter has been turned, businesses with assets, operations and stakeholders abroad will need to remain vigilant in how the next chapter develops and affects them, and boards should focus not only on the evolving array of geopolitical risks, but consider their companies’ roles in reinforcing the fragilities laid bare in recent years in the open societies that sustain them.
The views expressed in this blog post are the author's own and do not necessarily reflect the opinions or views of the firm.
 Chat Ortved. The Momentum of Purpose and the Gravity of the Fiduciary Duty in Canada. Posted on the Lawson Lundell Business Law Blog on March 29, 2021 and available here.
 For further discussion of this transition and the prominence of climate change disclosure in particular, see our August 28, 2019 blog post The Business Roundtable and the Continuing Trend From Primacy to Purpose, available here, and our November 25, 2021 blog post The Canadian Securities Administrators Propose Mandatory Climate Related Disclosure for Reporting Issuers, available here.
 Jeffrey Sonnenfeld and Steven Tian. “Some of the Biggest Brands Are Leaving Russia. Others Just Can’t Quit Putin. Here’s a List.” The New York Times, April 7, 2022. Available here.
Chat has a broad corporate and securities law practice, with a particular focus on mergers and acquisitions, corporate governance and corporate finance. Chat advises clients on a wide range of domestic and international ...
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