By Heather J. Van Meter & Christine M. Zinter
Bullard Law Firm
Many large companies have announced they are divesting from Russia due to Russia’s invasion of Ukraine. The moves impact many aspects of Russia’s economy, from energy to news, furniture to clothing. BP and Shell have announced they are selling their stakes in Russia’s state-controlled oil company Rosneft. Apple announced it will halt product sales in Russia and also will block Russia’s state-controlled media outlets from its app store. Spotify “indefinitely” closed its Russia offices. Ikea announced it is closing its 17 stores in Russia, halting production in Russia, and halting shipments to and from Russia. H&M announced it is halting all sales in Russia. Expedia announced it will halt travel bookings into and out of Russia. Adidas ended its partnership with the Russian Football Union.
As Russia’s bombardment of many Ukrainian cities continues, employers may be considering divesting from Russia as well. Here are some things to consider.
– For manufacturers and retailers, what supplies, ingredients, component parts, and other inputs come from Russia, and can the company source them elsewhere? Can this be done in a timely and cost-effective manner and/or with minimal impact on the company?
– For service providers, what tools or parts come from Russia, and can the company source them elsewhere cost-effectively? Or are there enough tools and parts on-hand to cease using the Russian supplier for a time period?
– For all employers, what contracts, if any, exist with Russian companies, does the contract allow for cancellation, and on what terms? Can the goods or services be procured by a non-Russian company?
– For all employers, does a Russian-based company provide technology software or hardware or IT services on an ongoing basis, and can it be replaced?
– For governmental entities, what investments exist in Russian companies that can be sold or canceled?
– For retirement plan administrators, what funds in the retirement plan have Russian company investments, and can those funds be either exchanged for other funds not invested in Russia, or can the fund managers be contacted and asked to divest from the Russian company investments or else face being sold?
– If the company has Russian offices or stores, should the offices or stores be closed? This may be a difficult question, as it may unwittingly affect or punish ordinary Russian people for the choices of its government, whether the people support those choices or not.
Governmental and private retirement plan administrators considering divesting from Russian company investments face additional considerations. While some American politicians have been calling for public pension plans to divest investments with ties to Russia, it may not be practical for employers who sponsor single-employer retirement plans. Even within the confines of multi-billion dollar public pension trusts, a rush to divest represents complex problems for plan fiduciaries. With the Russian stock market shut down, Russian-based investments are trading at steep discounts—and that’s assuming buyers, or even a venue to trade, can be found. From a fiduciary responsibility standpoint, employers sponsoring retirement plans have a legal obligation to act in the beneficiaries’ best financial interests. While divesting in Russian assets at this time may represent the moral thing to do, it may not represent a smart financial decision. It also bears noting that Russian stocks make up about 1% of total U.S. pension assets; therefore, any moves an individual employer makes to divest will be largely symbolic.
Employers considering divesting should also consider their customer and employee make-up. For example, some companies may have larger Russian or Ukrainian customer bases, and favoring one group over another may risk reduced sales. Additionally, employees may be Russian, Ukrainian, or both, by heritage or birth, and again favoring one group over another could create employee satisfaction or dissatisfaction, coming at a time of tight domestic labor supply.
Employers may also consider the external optics of their choice to divest or not. Divestments by BP, Shell, Apple, and others have been highly publicized, likely fitting within a wider corporate image strategy. Employers determining that at least some steps towards divestment can and should be made may also consider how the decision fits within the company’s image and what internal or external marketing and promotion can and should be carried out regarding a divestment decision.
For any questions on divesting of retirement plans, contact Bullard Law’s benefits specialist Christine Zinter. For questions regarding divesting and ESG goals generally, contact Heather Van Meter.
The content of this Alert is provided for general information purposes only. It should not be considered legal advice or used as a substitute for consulting an attorney for legal advice.
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