Clawback Coaches Compensation

            On Monday, the NCAA punished Penn State University with sanctions that included “$60 million fine, 40 scholarships, a four-year bowl ban and 112 vacated wins” for the school’s failure to prevent and report the child sex crimes that occurred on its campus from1998-2007. Reaction by various members of the sports world to this decision range from Forbes reporter Mike Ozanian saying the sanctions are “too weak to dissuade other schools with valuable football teams from being run with the interests of the football program paramount above all other considerations” to former Notre Dame football coach saying Lou Holtz saying “I am just overwhelmed by the magnitude of the penalties...I cannot think of a more devastating decision by the NCAA.”

            While people’s opinions vary on the severity of the sanctions, most agree about two important items. First, the NCAA’s intent is to prevent similar behaviors and actions that took place at Penn State from happening in the future at other schools. More specifically, the goal of theses sanctions is to help ensure that administrators and academics will supersede coaches and athletics when it comes to making decisions about conduct within sports programs. Second, the people who will feel the brunt of the punishment handed down by the NCAA are the current coaches and players at Penn State – none of whom had any connection to what occurred with Jerry Sandusky and the alleged cover-up perpetrated by former school officials.

             The economic downturn largely caused by major financial and insurance institutions forced people to ask similar questions people are asking now with regards to Penn State. At the time, leaders of companies like Lehman brothers, Bear Stearns, Merrill Lynch, AIG, and Goldman Sachs each made decisions that cost billions of dollars in losses, millions of people to lose their retirement savings, and the global economy a worldwide recession. While it is true that some of these firms at the center of the crisis no longer exist, finding the appropriate way to hold the specific individuals accountable has proven to be a significant challenge. Similar to Joe Paterno, most of the many of the people who had started and caused the crisis had received millions of dollars in compensation prior to the economic collapse in the fall of 2008. Similar to both current and former Penn State football players, employees, investors, and ordinary people are feeling the brunt of the repercussions from these decisions.  

            And Similar to the way the NCAA levied sanctions against Penn State, Congress passed the Dodd–Frank Wall Street Reform and Consumer Protection Act to directly address what happened during financial crisis and put in risk management regulations that would prevent a future collapse from happening. This is not the first time Congress has tried to pass regulation to ensure that corporations have appropriate risk management procedures in place after a major economic calamity in the past ten years. In 2002, Sarbanes-Oxley was passed to prevent another Enron, Worldcom, etc. collapse from damaging the global economy. While the impact of the legislation is controversial, Sarbanes-Oxley clearly did not prevent firms from making risky decisions that could have worldwide impacts. Even after the Dodd-Frank act was passed into law, major financial institutions have made similar risky bets that have led to these firms recording record profits both in 2009 and 2010. The financial incentive remains in favor of making transaction that could generate profit over those that could minimize risk.

            If we agree that what happened with financial institutions has parallels to what happened at Penn State then what occurred after the financial crisis may leave most people with little hope that things will change in college football. As Ozanian states, many football teams simply make too much money for their colleges and universities for coaches and athletic directors to not exert significant pressure on college administrators to make decision that favor athletics over academics. If the NCAA handing down sanctions will not change behavior then what will?

            This time we can turn to both Dodd-Frank and Sarbanes-Oxley for a potential blueprint. Both pieces of legislation allow for the government to pursue clawbacks from senior leaders had companies when there “accounting restatement due to any material noncompliance with financial reporting requirements under securities laws”. In English, this means that when a firm does not accurately report its revenue, costs, or profits in any year, the government can force specific individuals to pay back money they have earned in compensation during this time period. While clawbacks have existed since Sarbanes-Oxely was passed in 2002, the courts have only recently upheld that the SEC has the power to enforce clawback provisions (in a similar way that the Affordable Health Care Act was upheld as constitutional by the Supreme Court in June of this year). The SEC has already started to use this provision more frequently and plans to adopt more official rules on “erroneously awarded incentive compensation” by the end of this year.

            Clawbacks are provisions that the NCAA should have in all coaches and administrators agreements have with colleges and universities. This is potentially the only way that the NCAA can hold accountable those people who cause schools to lose “institutional control”. Having clawbacks also allows the NCAA to create a fund that can help student-athletes at institutions that are subject to sanctions but had nothing to do for why the institution received punishment. For example, the NCAA can use this fund to help support non-revenue generating sports that depend on football or basketball revenue to survive.

            While these clawbacks may not end the types of systemic problems that happened at Penn State, it does provide incentives for coaches and administrators to make the right decisions. By holding individuals financially responsible, the NCAA can send an even stronger message to institutions than the actions it took with Penn State. 

RePACing Media Rights Deals

            While the Supreme Court’s controversial decision in the Citizens United verdict may have gutted campaign finance reform, it represents a boon for sports organizations. You may have many questions including what is the Citizens United case and how could campaign finance reform (or the lack of it) impact sports organizations. The Supreme Court’s decision in the Citizens United v. Federal Election Commission case allows companies to make unlimited campaign contributions to certain organizations (most frequently to Political Action Committees or PACs). As long as these organizations do not “coordinate” with a campaign then they are free to spend unlimited amounts of money on any “issue” they want.

            Many political campaigns have used the money they raise for media buys in specific markets. After the Citizens United verdict, it is anticipated that the 2012 presidential and congressional elections will set records for the amount of money spent on media purchases particularly with television advertising. For example, Republican super PACs raised more money than the four major candidates’ campaigns did in January of 2012. ESPN is already capitalizing on this trend. The Wall Street Journal is reporting that “The sports network has struck a deal with a middleman that will result in more political ads appearing on ESPN programs, including NFL and college football games, in October and November—the critical period before the general election.” The reason that political campaigns and PACs would be willing to spend with ESPN is that NFL and college football games reach large and specific audience demographics in targeted markets. Because many sports fans watch games live as opposed to on DVR, campaigns and PACs could be more confident that voters will watch their advertisements.

            ESPN’s decision to reach out to political campaigns, however, is not the most critical element of this Journal article. In fact, it is the combination that most campaigns / PACS are looking to spend money on sports broadcasts and that most political advertising occurs on local television channels that should be the really exciting factors for most sports organizations. Sports decision makers should recognize that there should be a dramatic influx of spending every time there are political campaigns. While much of the spending may come from national or statewide races (which occur generally every two and four years, respectively), local elections should have increased advertising purchases because of the Citizens United verdict. “Swing” states (Michigan, North Carolina, Iowa, Arizona, etc.) or states with open (i.e. no incumbent running for office) Senate and House of Representative seats (Maine, Nebraska, Virginia, etc.) will see a dramatic increase in local television advertising. For small colleges, universities and high schools located in these areas, this represents a reason to talk with Regional Sports Networks (RSNs) about broadcasting their games because their audiences include voters who could be critical in influencing the outcomes of elections.

            As has been mentioned in other blog posts, media rights agreements have become an increasingly important source of revenue for many sports organizations. Yet, many have argued that there is potentially a “bubble” in the space – i.e. RSNs will not be able to sustain the large contracts given to sports organizations. The new influx of political spending means that RSNs should expect a sustained increased in spending at least every two years particularly in the months closest to primary and general elections. For those entering new negotiations or looking to have their games broadcast for the first time, a discussion on the lucrative impact of campaign / PAC spending is something that needs to be part of any negotiation because this new advertising spend source can help justify increases in media rights agreements.

How The Name Game Impacts Sports Organizations

              “Ninety-Nine Problems but a new Brooklyn Arena ain’t one.” This admittedly nerdy adaptation of Brooklyn Nets minority owner Jay-Z’s lyric could have applied to his team over the past five years. The team had four coaches and two general managers. Its most famous player was arguably Kris Humphries and that was because of his short marriage to celebrity Kim Kardashian. Yet, it finally appeared that the Nets fortunes were changing. The team signed its marquee free agent in point guard Deron Williams, acquired All-Star Joe Johnson in a trade with the Atlantic Hawks, and appeared to be the leading contender to land All-NBA Center Dwight Howard. All of this positive momentum suggested that the Nets luck was finally changing for the better.

            And then the Barclays’ London Interbank Offered Rates (LIBOR) scandal broke almost at the same time that the team announced its most recent transactions. What does LIBOR have to do with the Nets? Barclays’ chief executive officer, chairman, and chief operating officer have resigned for illegally manipulating the rates that are used for a number of different debt capital transactions including setting rates for subprime and adjustable rate mortgages. Barclays is also the naming rights sponsor for the Brooklyn Nets’ new home (called the Barclays Center). After signing a $400 million 20-year agreement with Barclays in 2007, the Nets are “stuck” with having to deal with the fallout of a major scandal involving their largest sponsor (many sports organizations would probably like to be “stuck” with $20 million per year from a naming rights partner). 

            This is not the first time that a corporate partner has done something that would potentially embarrass a sports team after signing a naming rights deal. As The New York Times noted, there have been numerous companies with naming rights that have gone bankrupt or been involved in a scandal. The most famous example of both of these problems occurred when the Houston Astros agreed to name their venue Enron Field in 2000. The Smartest Guys In the Room ended up making a deal that caused the Astros to look pretty stupid after Enron’s spectacular flameout in 2001.

            The New York Times article brings up more critical questions that need to be considered by sports organizations in light of what occurred with Barclays. Do sports organizations evaluate the risk of naming rights deals before signing these agreements? For example, the Houston Astros seemed to be as fooled as most financial analysts when it came to the health of Enron in 2000. Yet, there is little evidence to suggest that the Astros put any consideration into what would happen if Enron did get into some kind of legal or financial trouble. More importantly, what impact do scandals of corporate partners have on the brands of sports organizations? Sports organizations usually have little or no control over the management of their sponsors (the primary exception being if a team’s owner(s) also has a controlling stake in a corporate partner). Yet, one of the most visible symbols of a sports organization’s brand is their stadium, arena, or venue. When scandal hits a naming rights partner, fans, media, employees, and other sponsors can create a connection to the sports organization.

            Despite the problems with Barclays, the revenue and benefits generated from naming rights agreements make it unlikely that these agreements will substantially change.  In addition, most companies that can afford large naming rights deals are relatively unlikely to have the types of scandals that have impacted Barclays or Enron. Yet, enough problems have occurred with these types of corporate partners that sports organizations need to be prepared for a worst-case scenario. This does not necessarily mean finding a new naming rights sponsor for a venue (as the Astros did by renaming their stadium Minute Maid Park after Enron collapsed). Sports organizations need to have a comprehensive communication and crisis management plan in place to deal with the fallout that could occur when corporate partners have significant legal or financial issues. This includes completing an audience analysis to see how the fallout impacts a sports organization’s key customers and demographics. By understanding how a problem with a naming rights partner can damage its brand, a sports organization can be prepared to deal with any fallout that occurs while maximizing the benefits of its current agreements.