Ethical business in an evil world

At the start of this week, my colleagues at the FT reported on how western banks still operating in Russia have seen their profits balloon in the country. As a result, they contributed nearly €1bn in taxes last year to a Kremlin hell-bent on annihilating free Ukraine. It’s a particularly stark example of the murky ethics of western businesses’ Russia presence, and one that sent me back mentally to when I was wearing a moral philosophy hat. (You didn’t know I once had a moral philosophy hat? You must have missed my recent essay on effective altruism!) Below are some thoughts about how to think ethically about such business decisions.

The FT bank story is just the tip of the iceberg. The total amount of taxes paid by all western companies could be 20 times greater. The Kyiv School of Economics and the activist initiative Leave Russia track about 3,500 western companies with a Russian presence, as part of a campaign to make them pull out. They find that about two-thirds have not.

Why not? Many cite legal obstacles and punitive exit taxes, and no doubt many find it hard to let go of lucrative profit-makers. Nevertheless, a number of businesses have clearly found it possible to divest completely. And in the case of European banks, their supervisor has ordered several of them to scale down their operations in Russia.

But it bears noting that even those corporates that make a clean break typically do so through a sale or split-off. So the business activity still gets carried out, just by new owners or under new brand names, as a wide-ranging KSE report has laid out. Whatever economic value was being created before, still is, and taxes keep being paid on that value. It’s not obvious what this achieves, reputation-laundering aside.

What, then, is a poor business executive to do, if they want to do the morally right thing, but find themself with significant operations in Russia or another trigger-happy dictatorship? There are often transparent answers to what would best safeguard a company’s reputation (usually to turn your coat with public opinion) and somewhat less transparent ones to what would maximise profits (do the maths on the reputational costs of staying versus forgone profits of leaving). But that’s not the question here. What if you have principles and actually want to act ethically? The question arises for portfolio investors, too, not just corporates.

To think in a principled way about how to avoid doing wrong, you need clarity about what the wrongs you are potentially committing consist of. Back in the stone age when I was teaching business ethics to Wharton students, I made sure they became familiar with the three families of western ethical thinking: consequentialism (what outcomes do my actions produce), deontology (what rights and duties must I respect, and in the Kantian version, can I justify my action as something that could be universally performed), and Aristotelian role ethics (how do I best fulfil my function in society).

Business executives (indeed anyone) should only consider themselves well-informed if they are familiar with these. But in themselves they are neither sufficient nor, perhaps, necessary for solid applied moral reasoning in a specific case (especially given the temptation to pick a framework and the ease of reverse-engineering an argument that concludes with what you would like to do anyway). Instead, here is a more intuitive way to break down the problem.

Companies could be morally at fault in three ways (some of which also apply to portfolio investors). They could be unethically benefiting from wrongdoing. They are, after all, in Russia to make profits. They could also be enabling the country’s wrongdoing — such as by contributing to the public purse through taxes. The case of the banks is particularly flagrant: as my colleagues report, western banks retain access to the global Swift transaction processing system and can offer local clients a service that Russian banks increasingly struggle to match, and which undoubtedly makes sanctions evasion easier. Finally, even if a corporate’s or investor’s presence makes no direct material difference, they could still be judged complicit with the regime’s crimes through the endorsement implicit in choosing to stay.

But this does not always lead straightforwardly to a conclusion that western investors and corporates ought, morally, to leave. Depending on how you define “leaving”, there are moral costs of leaving as well. If you sell your investments to local investors, you are not just benefiting but accelerating your own financial reward. If, conversely, you dispose of your investment at a below-market price, so it could be said to benefit less, you are granting something of value to someone else — which in Russia and similar cases is likely to be someone with close relations to the regime and who may be deeply implicated in the wrongdoing that’s going on. And whatever the price you get, if you simply cash out, the business activity in question goes on as before, and so does any enabling of Russia’s war. If you have to pay a special tax to get out, your leaving may even enable it more than your staying.

Again, western banks are an important special case. Many of them have tried to “leave” by swapping their own assets held up in Russia with Russian interests frozen by sanctions in the west. The fact that Moscow is keen on such swaps should be enough to smell a rat. The particular moral cost here is that a swap would remove a means of leverage for the west against Russia — and no doubt on very favourable financial terms for the Kremlin and its friends.

So just leaving does not necessarily keep you morally in the clear. Once blood money comes your way, you do not avoid the stains by simply handing the money back.

Still, it’s not a justification for doing something wrong that another would do it in your place if you refrained. Staying in when you can leave does make you complicit, even if the wrongdoing goes on anyway. That should matter. And it would clearly be wrong to send any fresh money into Russia. So would pretending to pull out but continuing to supply what used to be the local subsidiary through a new middleman in Dubai, as the KSE report claims of a well-known western cosmetics company.

But what if leaving would worsen the enabling or support of wrongdoing — because you pay more tax on leaving than you would have done on staying, say, or because you hand control of the business activity to someone more eager to use it for the regime’s benefit?

This may not be a very realistic scenario; in a dictatorship such as Russia, it is easy for the government to direct what a business does anyway. But it suggests the minimum conditions for it being morally acceptable to stay, namely that you can and do use your presence, while it lasts, to minimise any benefit or support it lends to the war. This will almost always require a drastic change to business as usual. But it may not always point to a clean exit as the first resort. Instead, it points to something deeply counterintuitive to good business people: to do the business badly.

The most striking quote in my colleagues’ story is one from a frustrated European banking executive:

We can’t do anything with Russian deposits apart from keeping them with the central bank. So as interest rates went up, so did our profits.

They couldn’t help making outsize profits (and paying outsize taxes), poor things. But that is surely not true. There are lots of things you can do to drive your profits down to zero. You can curtail activity (in the case of banks, that means calling in old loans and not making new ones). You can make your services slow, poor and bureaucratic (“thanks for filling in 100 forms, here is yet another for your extended family’s last 10 years’ of travel, with documentation”). You can reduce your workers’ hours while maintaining their pay (“the office will only be open from 11am to 2pm today”). You can keep shops and branches closed (“closed for maintenance”). You can rent huge new spaces and never open them. You can allow people to pretend to work. You can shift people into completely unnecessary and unproductive jobs. You can, in short, aim to replicate many features of the Soviet economy.

This is meant to make you smile but it’s not mere silliness. If you are going to stay for ethical reasons, you have to use your presence in ethical ways, and in today’s Russia that means detracting from rather than contributing to the economy and especially taxes. That should be your goal, even if you can’t really speak too loudly about it or you will soon see your business handed over to more enthusiastic owners. This sort of sabotage mentality means unlearning how good business executives normally think about their jobs. But that, I think, is what ethics requires in this evil situation.

There are three arguments against the demanding nuances I have set out, in favour of a much simpler “just get out” conclusion. The first is that in a clouded and noisy reality, it is hard to judge nuances and easy to let pre-existing biases dominate — and most companies’ bias would be towards staying in and continue making money while possible. The ethical executive can pre-empt this bias by avoiding the situation altogether.

The second is that it is dangerous for local staff. It would certainly have to be directed by western executives from afar, which may not be feasible.

The third and most important argument is that what Ukrainians themselves ask for must matter. And there is a clear desire in Ukraine for Russia to be maximally isolated from the west, in all possible ways. The need for such cross-cutting consistency — a message of how Russia has alienated itself from western democracy — could outweigh anything that could be achieved by strategically using whatever influence remains on the ground.

Businesses without an extremely principled ethical backbone and a clarity of vision to use any remaining presence in Russia ethically should clearly just leave. Even the best-run (in an ethical sense) businesses need to accept that exit is the ultimate destination. But on their way out, they should see the value in whatever sabotage they can cause, for as long as possible.

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Source: Economy - ft.com