Sports sponsorships are now a $145 billion business. But this remains a risky endeavor, particularly when studies indicate that reputational risks are regarded as the greatest threat to a company’s market value.
Sporting transgressions have all kinds of consequences for sponsors. Take Tiger Woods. Nike was able to sell about 1.4 million more golf balls per month when Tiger was under a Nike endorsement contract. Unfortunately, shareholders of the company and other sponsors collectively lost billions of dollars in the wake of the scandal involving his extramarital affairs.
Due diligence can mitigate this risk but never eliminate it. “Cobras,” the industry parlance to describe disasters that strike suddenly, cannot be entirely avoided. Many would argue that the Tiger Woods scandal was one such example. On all accounts, the athlete was a good family man who lived to protect and promote the integrity of golf for all stakeholders.
The more recent case of the FIFA scandal is different. It should not have come unexpected as rumours of corruption and human rights violations have been simmering for a long time. More than a cobra, this was a “python” — a slow-burning crisis that eventually strangles an organization.
There’s probably a commercial and reputational price associated with being a long-term sponsor of an organisation presented as a poster child for corruption. However, the problem runs deeper. Sponsors may have hoped to contain the issue to an acceptable level, counting on the fans’ willingness to separate the officials from the sport and its sponsors. After all, why not? The strategy largely worked as U.S. football went through a series of scandals.
Unfortunately, corruption is contagious. Even the best people can succumb. Nike, a long-time supporter of Lance Armstrong stopped sponsoring him only after he was banned for doping. The company, also a long-time supporter of FIFA, is now under the microscope and had to issue a statement indicating that “there is no allegation in the charging documents that any Nike employee was aware of or knowingly participated in any bribery or kickback scheme.”
For the sponsors, the battle for public opinion has started but their official reaction has been largely subdued. Scandals such as the multiple doping incidents in cycling can damage the value of sports. Yet, few, if any, have publicly divulged specific steps they are taking to pressure FIFA.
For FIFA, the situation is even more critical but it may look at the International Olympic Committee (IOC) reaction to its own major crisis for lessons. In 1998, the year that Sepp Blatter became the president of the FIFA, allegations of incestuous relations between IOC officials and the agents who helped cities bidding for the competition threatened to derail the 2002 Olympics in Salt Lake City. Leaks revealed cash payments to IOC members, along with sweetheart deals, trips to the Super Bowl, and other lavish gifts.
The IOC’s response was an effective approach to managing reputational risk: It followed a three-step model: apologise immediately, investigate & punish in the mid-term, reflect & reform in the long run. In the midst of the crisis, numerous senior figures in the IOC expressed regret and contrition. Then, credible internal investigations led to the substantial number of departures. A body including outsiders was set up to develop structural reforms that led among other things to the introduction of a code of ethics and an explicit policy on conflict of interest.
Once again, a scandal is hitting the world of professional sports. Once again, the actors profess shock and dismay. Sadly, by now, the rules of the game are known and the organizations involved need to clean up their reputations to remain respectable for the long-term.
Gilles Hilary is an INSEAD Professor of Accounting and Control and The Mubadala Chaired Professor in Corporate Governance and Strategy. He is also a contributing faculty member to the INSEAD Corporate Governance Initiative.
Leesa Soulodre is the Managing Partner of RL Expert Group, the Asia Associate of the Reputation Institute and an Adjunct Corporate Communications Faculty Member at the Lee Kong Chian School of Business, Singapore Management University.
The full version of the article this post is based on can be found on INSEAD Knowledge here.