The McKinsey report Survival through purpose: How Ukrainian businesses endured amid extreme uncertainty offers fascinating insights on how Ukrainian companies were affected by Russia’s invasion in February 2022 and how they responded to the extreme challenges that this created. While specific to Ukraine, some of the observations in the report led us to consider the broader implications of war, and similarly rare but extreme events, on public and private sector companies — and the importance of planning and thinking on your feet.

What it’s about: More than a year into the war in Ukraine, McKinsey surveyed 122 Ukrainian companies about how the dramatic events since February 2022 had changed their business environment, what strategies they had adopted to mitigate these impacts, and which of them had worked to date (or not).

The consequences of the Russian invasion have been enormous in terms of lives lost, infrastructure destroyed, and people displaced. This has affected businesses of all shapes and sizes and in all sectors — it disrupted their ability to operate normally and, for the most part, decreased demand for their goods and services.

Yet, of the organisations McKinsey surveyed, only 2% ceased operations, despite the fact that 47% recorded a drop in sales of more than 30%. This remarkable resilience, the report outlines, comes down to four factors: providing employees with safety and purpose; quickly shifting to a “wartime operating model” of agile decision making; implementing existing contingency plans; and senior executives leading from the front and by example.

Why it matters: One of the rationales behind McKinsey’s report is that events like the war in Ukraine generate lessons that “apply to any company hoping to create a tool kit to deal with true black swans.”

War, like major natural disasters, large-scale terrorist attacks, and man-made catastrophes, is often considered a black swan event — an event that is extremely impactful, but also extremely rare. Taken as singularities, this is probably true. Looking at it from a more cumulative perspective, it is more doubtful that we are really dealing with events that only occur once in a blue moon.

Over the past decades, hardly a year has passed without testing the resilience of states and societies in different parts of the world and around the globe, often to, and sometimes beyond, breaking point.

The end of communism and the collapse of the Soviet Union, German unification, the wars in the former Yugoslavia, 9/11, Afghanistan, Iraq, the global financial crisis, the war in Georgia, the Arab spring, Fukushima, the annexation of Crimea, the COVID-19 pandemic, the return of the Taliban, and now the full-scale Russian invasion of Ukraine and the escalating civil war in Sudan are just some examples of such events, many of which had not just an immediate impact but lasting consequences.

Add to this natural disasters like earthquakes, tsunamis, and climate-change related events like floods, droughts, and wildfires that occur more frequently and with greater regularity, and it becomes clear that many black swans are taking on a decidedly lighter shade of grey.

Our take: War is a man-made disaster in both its immediate consequences and in how states and societies respond to it — not only those immediately affected by it but also further afield. This adds complexity to how businesses can cope, and, crucially, prepare for such an event.

The war in Ukraine demonstrates this complexity in a number of ways. For companies in Ukraine, as the McKinsey report highlighted, the key impacts were on operations and demand. Businesses further afield are similarly affected, as we have seen in terms of inflationary pressures, which increase operational costs but can also depress demand because inflation hits consumers as well. Supply chain disruptions are another factor, as are the broader impacts of increasing geopolitical and geoeconomic fragmentation.

This fragmentation — sometimes also referred to as decoupling or de-risking — is partly a choice made in response to war and in an effort to deal with its consequences, as we discussed in an earlier piece, Mitigating the risks of geopolitical fragmentation: regulation, oversight, and good corporate governance. One of the West’s responses to Russia’s invasion of Ukraine has been a significant up-scaling of sanctions since February 2022. This has not only had an effect on Russia’s war effort, as detailed, for example, by the World Economic Forum in a report last December, but it has also increased the regulatory burden on companies and the costs of non-compliance.

Non-compliance is wide-spread, partly because of deliberate circumvention of sanctions, partly because of the complexity of the sanctions regime. With sanctions widely used by the US, the EU, and their G7 partners as geopolitical and geoeconomic tools of statecraft, ensuring compliance has become a major, and constantly evolving, task for business organisations.

Non-compliance can have a serious effect on company profits. Even before the Russian invasion of Ukraine, Standard Chartered Bank was fined just over £20m by the UK Treasury in 2020 for breaching sanctions imposed by the European Union over Russia’s annexation of Crimea. Unrelated to the war in Ukraine, Royal Bank of Scotland and French bank Credit Agricole were fined $100m and $800m, respectively, in 2013 and 2015 by the US Treasury for violating various sanctions then in place against a number of countries, including Iran, Sudan, Myanmar, and Cuba.

Given that sanctions violations remain high on the radar of western governments and international financial institutions, compliance should also become, or remain, a priority for companies in their corporate governance efforts.

At the same time, war has always created opportunities for growth, investment, and innovation as well, and the war in Ukraine is no exception in this regard, as detailed in a recent report by the Financial Times. This, however, also indicates a shift in public and private financing priorities in times of war, which means that in sectors other than those relevant to the war effort, access to capital and skilled labour will be more difficult and potentially have long-term negative impacts. The longer wars last, the more entrenched shifts to war-time economies become, and the more time- and resource-intensive post-war transitions will be in economic terms.

The bottom line — regardless of whether one looks at war or other black or not so black swan events — is that risk management and contingency planning are important aspects of any organisation’s resilience to major external shocks. But they are only part of the answer. What is equally, and perhaps more significant, is having well-qualified and well-motivated people working for the organisation from top to bottom who can think on their feet when any kind of event requires activating these contingency plans. This means realising that resilience is above all about people, and that investing in people is key to increasing resilience.

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