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Russia-Ukraine conflict and long-distance, long-term board governance

type
Article
author
By Guy Beatson, GM Governance Leadership Centre, IoD
date
10 Mar 2022
read time
6 min to read
Looking up at two skyscrapers facing each other

The Russia-Ukraine conflict may be some distance from Aotearoa New Zealand but it is already starting to have an impact. Petrol, food (including grain and dairy products) prices are on the rise and it’s likely that there will be more price hikes ahead including the cost of shipping and flights. Along with this will be disruption to computer chip production, and a likely severing of banking, investment and even sporting ties with Russia. And the impact will only increase with sanctions against Russia ramping up worldwide.

Many big organisations are taking a stronger response than governments shuttering their Russian operations, stopping energy investment projects, disconnecting social media and ceasing investments and banking connections (through SWIFT).  It seems likely there are more and tougher sanctions coming, including on energy purchased from Russia.

In our country, boards governing the full range of entities – companies, not-for-profits and government entities – will not be immune to the impacts of this conflict.  This comes on top of the ongoing Covid-19 impacts on supply chains, prices and staffing.

What action should your board be considering?

Board action in relation to the Russia-Ukraine conflict depends on:

  • the sector your entity operates in
  • the timeframe within which impacts will be felt.

However, the areas for considering action are consistent with the governance focus boards have already had through the Covid-19 pandemic, guided by practice outlined in the Four Pillars of Governance Best Practice.

In this Directors Brief we look at the major issues and suggested board actions arising from the current conflict, including:

  1. Medium term strategy
  2. Supply chains and trade
  3. Economic and financial impacts
  4. Entity purpose, ethics and values
  5. Cyber security threats.

Medium-term strategy

Major issues

Major strategic issues arising from the conflict relate to four of the top five issues we identified for directors in 2022.

The current conflict touches each of these:

  • Significant implications for oil, gas and coal supply and prices will arise from the conflict.
  • Supply chains will be disrupted for goods and services for some time, including self-sanctions being imposed by global organisations.
  • Food and fuel costs will rise impacting staff and there may be impact on specialist staff including for example burnout of specialist staff.
  • The New Zealand Government has legislated for unilateral sanctions related to the Russia-Ukraine conflict outside the United Nations framework.
Suggested board action
  • A regular focus on strategy, including major geopolitical developments to ensure the long-term sustainability entities.
  • considering alternative future scenarios and balancing short and long-term thinking and needs, including Covid-19 and the current conflict.
  • Revisiting the board’s role in a crisis and preparing for the unexpected.
  • Seeking management and legal advice about the potential impact of New Zealand’s autonomous sanctions legislation on an organisation and board/ director responsibilities.
More detailed information

Supply chains and trade

Major issues

Russia is New Zealand 27th largest bilateral trade partner and New Zealand has limited bilateral trade with Russia and Ukraine. 

Russia has an economy about the same size as Luxembourg, Belgium and the Netherlands combined. However, there are potentially significant impact on supply chains for New Zealand which Board should pay attention to.  A range of New Zealand organisations will be affected by price increases or supply to their operations, including energy, grains, fertiliser, computer chips, investments, banking and IT including cloud computing and other services. 

As a result of the New Zealand sanctions regime against Russia, New Zealand entities need to consider where goods and services are from and who is delivering them.  And this needs to go back to the start of the supply chain, including suppliers as well as customers.

Suggested board action

Taking on board the potential legislative action and being consistent with an organisation’s purpose and ethics, boards should ask management about:

  • Any export or trade connections with Russia.
  • Any supply chain connections that may connect with Russia including suppliers or customers.
  • The extent of significant price and supply disruptions to the organisation’s operations that may threaten resilience.
  • If supply risks are material, a board should ensure that steps are taken to strengthen the supply chains and take mitigation measures, including alternative sources of supply and, in the medium-term, consideration of the organisation’s operating model.
More detailed information

Economic and financial impacts

Major issues

There will be indirect economic and financial impacts on the New Zealand community and organisations including:

  • the impact on oil and gas supplies from Russia
  • the impact on platinum, palladium and titanium supply from Ukraine which is a major supplier, as well neon, used in computer manufacturing.
  • Global food supply disruptions, particularly for grain exports from Ukraine.
  • supply chain disruptions adding to those already arising from Covid-19.
  • continued deterioration in milk supply globally and indirect impacts of the Russia-Ukraine conflict.  While this could be seen as a benefit for New Zealand dairy suppliers, it also increases the domestic price for these goods.
Suggested board action

Boards should direct their attention to:

  • Cost increases for staff that will add to current salary and wage pressures.
  • Further impact on existing issues for companies securing talent, one of IoD’s top five issues for directors in 2022.
  • Reviewing the risk management plan and its implementation to ensure these and other related developments are taken into account, have the appropriate mitigations in place, along with the appropriate allocation of leadership responsibility.
More detailed information

Potential impacts of the Russia-Ukraine conflict on the New Zealand economy. (Ministry of Foreign Affairs and Trade, February 2022)

Less milk, Ukraine conflict driving dairy prices up (Rural News, March 2022)

Entity purpose, ethics and values

Major issues

Board character is identified as one of this year’s top 5 issues for directors. The ongoing conflict presents challenges for boards in terms of:

  • Having courage and commitment to ensure entity ethics and standards are maintained through supply chains and in the face of significant pressure on executives and staff.
  • Staying true to the entity’s purpose, values and commitment to upholding human rights.

This has been felt most acutely and immediately by financial institutions such as ASB Bank and Investment entities such as the NZ Super Fund, the Accident Compensation Corporation and the National Provident Fund with ethical and responsible investment policies.  Other entities with ethics policies and a clear purpose including not-for-profits with a humanitarian purpose will also confront these issues in a slightly longer timeframe.

There is increasing pressure on organisations and boards to give greater attention and recognition to stakeholder interests. This means recognising an organisation’s social licence to operate within broader society, and to be aware of some societal expectations that directors and Chief Executives are more vocal on social and ethical issues.

The 2021 IoD/ ASB director sentiment survey report found that 54% of respondents said Boards should speak out on social issues beyond the business of the organisation. Similarly, the 2021 Edelman Trust Barometer found that 86% of the general population expect CEOs to speak out on social issues. 

Calls by the UK Institute of Directors and European sister organisation for UK and European Directors on Russian entity boards to resign their directorships on grounds that the Russia-Ukraine conflict “violates international rules” reflect this humanitarian and ethical position.

Suggested board action

Consider your purpose and underpinning board ethics including:

  • Revisiting the core purpose defined by the Board is a critical component of determining the organisation strategy. This is because it defines an organisation’s fundamental reason for being, beyond making a profit.
  • Relooking at the ethical base that underpins the Board governance culture will be important.  A commitment to ethics and aligning business practices with broader human rights framework is increasingly important, particularly when there are challenges posed such as the Russia-Ukraine conflict.
  • Consider public statements about the Board and entity stance on the conflict in light of public expectations.
  • Be mindful of the potential increase in stress and anxiety on staff mental health and wellbeing. Organisations with employees or supply-chain connections based in Russia, Ukraine, and neighbouring countries will need to consider the safety and wellbeing of staff in the short and long term.
More detailed information

Cybersecurity threats

Major issues

In the past several years, New Zealand organisations and their Board have managed the effects of bad cyber security actors.

While the threats are significant, international and domestic advice suggests they are no higher than they have been to date.

The current conflict and Russian threat to cyber security in Ukraine raises the threat level, at least indirectly.  It emphasises the need to be prepared, have a plan and to build resilience.  Boards have a significant role in asking good questions about cybersecurity and testing the answers.

Suggested board action

Cyber security requires ongoing vigilance and Board oversight as a critical part of management accountability.  With cyber playing a part in the current conflict, Boards should:

  • Be fully aware of the ways in which cyber attacks could occur for your organisation and the impacts they may have.
  • Ask good questions of management about the levels of preparedness, cyber security protections and recovery/ business continuity approaches.
  • Further consider overall board capability to effectively govern and oversee this aspect of the entity’s operations.
More detailed information

We acknowledge the legal advice on sanctions and supply chains provided by IoD’s National Sponsor Dentons Kensington Swan.

Dentons Kensington Swan logo

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