Handling Scandals

08Jul10

This is the second post in a three-part series examining different ways in which companies can respond to scandals involving their athlete endorsers.  The last part looked at what companies can do when their endorsers are able to repair their images.

Part II – When the athlete has a complete downfall

Although this particular situation worked out well for most of Bryant’s sponsors, there are many situations where athletes are unable to repair their images.  For example, in the early part of the 2000s, Barry Bonds had endorsement deals worth millions of dollars with companies such as MasterCard and KFC.  He did this despite his reputation for shying away from fans and the media.  However, in 2003 he was accused of taking steroids as part of the BALCO scandal and in 2007 was indicted on perjury charges related to his steroid use.  While he has never been convicted of anything, his refusal to talk publicly about the issues only compounds the negative public opinion surrounding him.  He has handled the issue very poorly, and his sponsors received very little benefit, if any, from his endorsements.

In such a situation, there are things that companies can do to protect their investment in the athletes.  Many companies include morality clauses in their contracts so that they can terminate the contract in the event that the athlete does something that could damage his/her reputation.  However, these clauses are often a contentious point of discussion.  Athletes usually want a morals clause to give the company the right to terminate the contract only in the event that they are convicted of a felony.  This is because convictions usually take a long time to occur, and first-time offenders can generally agree to a plea bargain involving only misdemeanor charges.  However, companies usually want the right to terminate the contract after “any occurrence of moral turpitude.”  This broad language gives companies greater flexibility in terminating the contract.  Payments can also be structured in a way such that the company will only lose a minimal amount of money if the contract is terminated.  For example, by paying the athlete mostly at the end of the deal, the company is protected in the event that the contract must be terminated midway through the deal.

A recent area of growth has been insurance against endorsers getting involved with scandals.  This has been a rising trend recently, and requests for such insurance have greatly increased since Tiger Woods’ well-publicized scandal in late 2009.  While most companies have been purchasing insurance in the event of death or injury to their athletes for many years, insurance against public scandals is a relatively new concept.  According to Dan Trueman, who runs the enterprise risk department at R.J. Kiln & Company, there was an eightfold rise in inquiries into this type of insurance between September and December of 2009, around Woods’ scandal.  Generally, the more specific the language in the morality clause of a contract is, the more expensive insurance is.  This is because there are more possibilities in which an athlete could violate the clause.

An issue for companies involving this type of insurance is the amount of money that they should insure.  In addition to the actual dollar value of the endorsement contract, companies must consider the damage that scandals bring to their brands.  In the case of a specific product that is tied to a celebrity, companies can use the difference in sales prior to the endorsement and after the athlete started endorsing the product.  It is a safe assumption that this increase in sales is tied to the athlete, and that the company stands to lose that much in sales if the athlete is involved in scandal.  For example, Tiger Woods has a signature line of Nike golf shirts which saw a defined increase in sales after he started endorsing them.  However, it is more difficult to ascertain the amount of insurance needed when the athlete is involved in general branding around a company, rather than just endorsing a specific product.  For example, Tiger Woods was involved in general branding activities with Accenture, a technology consulting company.  Rather than involve him directly in branding specific services out of their broad variety of offerings, they involved him in general branding around their company.  It is much harder for them to determine the value that he brings to their brand, and in such situations it is therefore very hard to know how much insurance to purchase.  The seven publicly traded companies that had been sponsoring Woods saw a collective $12 billion loss in their market values in the month after Woods announced he was taking an indefinite leave from golf, and a sizeable percentage of that number is likely due to the Woods scandal.

Next: A look at the future of managing these types of issues.

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