In sports, fixing the game is the ultimate sin, and all sports leagues work hard to prevent contests from being decided by anything other than the skill and the effort of the players and coaches. No sport survives for long if it does not make the delight of its fans its central purpose, the perception of unfairness is fatal to fans’ appreciation of the game. For this reason, a recently uncovered point shaving scheme (where gamblers pay players to underperform) in college basketball, and referee scandals and a systematic home-field bias found in World Cup soccer could be seen as serious threats.
At the same time, a player succumbing to the lure of easy money, or a referee caving to the pressure of tens of thousands of local partisans can be explained by individual weakness, not necessarily as a sign of a systemic problem. Bias and cheating are impossible to eliminate entirely, but leagues can preserve their own reputations through careful adoption and enforcement of fair rules to ensure the integrity of games.
Of greater concern, however, is when the public begins to associate the unfairness with the management of the league itself, which becomes a matter of corporate governance.
In 2011, two years after media reports estimated that 70% of NFL players were either bankrupt or in financial distress two years after retiring, the National Football League was engaged in a protracted labor dispute with its players’ association that resulted in a spring lockout of players and a delay of the opening of training camps. In addition to disputes over pay and benefits, a conflict emerged about a proposal by the owners to expand the season from 16 to 18 games — a move that surely would have been popular with fans. Players objected to the measure on the grounds that two extra games would create unacceptable risks to players’ health, and the proposal was never implemented.
The owners’ desire to expand the season seems particularly tone deaf in light of the ongoing controversy over the game’s long-term impact on the health of pro football players. While this has been of concern for many years, the issue gained widespread attention in 2012 when Junior Seau, one of the league’s greatest linebackers and top players for twenty years, committed suicide. An autopsy showed that Seau was suffering from chronic traumatic encephalopathy (CTE), a brain disease often associated with repeated concussions. Seau’s tragedy was only the most publicized of reports about increasing common experiences of former NFL players, including headaches, erratic behavior, depression and addiction that can be caused by the physical impact of the game.
In a pair of lawsuits, former players allege that not only did the league take no action in the face of strong evidence that its players were suffering long-term effects from blows they absorbed during games, but instead injected players with powerful and addictive pain killers in order to keep them on the field. The league awaits judicial approval of a proposed $765 million settlement of a lawsuit on behalf of all retired players, though the judge on the case has expressed concern that the amount is too small. A second lawsuit, filed by 14 former players related directly to allegations of excessive use of painkillers, is pending.
While the potential liabilities from these lawsuits are significant some analysts’ estimate them at $10 billion, or about one year’s worth of revenues the long-term risks to the league are far more substantial. The NCAA has been criticized for inadequate protection of its players, and recently the first lawsuit involving youth football was filed. Simply put, with increasing concern about the health of younger players, football faces the possibility that parents will steer athletic children to other sports, diverting potential talent away from football over the long term. Moreover, is it possible that the league could alter the game to protect players without sacrificing the excitement that draws fans to the game?
The game has suffered other employment related embarrassments as well. During a 2012 lockout of referees over a dispute about compensation and benefits, the NFL used undertrained and inexperienced replacement referees as a negotiating tactic. The replacement referees’ unfamiliarity with the rules and inability to keep pace with the game affected the outcome of some key contests and may have placed the safety of players at risk, provoking outrage among fans and in the media. The league quickly settled the labor dispute on terms favorable to the referees, but the damage was done. A Sports Illustrated poll found that 75% of fans thought that the reputation of the league was damaged by the lockout.
Additionally, this year several NFL cheerleaders have filed suit against the league, claiming that they had been paid less than minimum wages and forced into degrading situations. Separately, the league has also faced increasing pressure to change the name of its Washington-based franchise, which is offensive to many Native Americans. The U.S. Patent office recently refused to grant trademark protection to the name because it was deemed “derogatory.” While the team shows no sign of changing the name, negative media coverage of the issue continues to grow.
It wasn’t supposed to be this way. In 2011, Roger Martin, a Toronto University Professor, wrote a well-received book called Fixing the Game, which argued that companies should consider the customer, not the shareholder, the primary corporate stakeholder. The NFL served as his example of the ideal of corporate governance because of its exclusive focus on customer satisfaction.
But recent history raises questions about the NFL’s relationship with its other stakeholders, especially its employees. As the referee lockout shows, failing to properly value its on-field officials ultimately damaged the quality of its product. The feature of the game most appealing to fans, the hard-hitting action, seems incompatible with preserving the health of its players. And though seemingly minor, its needlessly protracted disputes with cheerleaders and Native Americans force the league to defend itself against charges of racism and sexism.
Long-term, the league is at risk of not being able to maintain the quality of its service to customers unless it can attend to the welfare of its employees.
Fixing the Game argues that corporate strategy whose primary objective is to delight customers will produce more long-term sustainable value than one designed to maximize shareholder returns. But as the example of the NFL shows, a strategy designed to delight customers at the expense of other stakeholders may not be sustainable. The problem is not the choice of primary stakeholder; the problem is the focus on one stakeholder at the expense of all others. Fans want a great game. They tune in for an exciting viewing experience, not because the NFL respects the well-being of its players, referees and cheerleaders. But in the long term, the success of the game and the league relies on all who take part.
There is no perfect solution to this dilemma, but more investors are taking an interest in how the corporation builds shareholder value in addition to how much value it builds. Just as the NFL relies on players and referees (and to a lesser extent, on cheerleaders) for the quality of its product, companies create value for shareholders only in partnership with a variety of stakeholders. Yet, as in the case of the referees, the value of these stakeholders may be overlooked because they are intangible. As in the case of players and fans, the interests of different stakeholders may conflict. Even the treatment of apparently minor stakeholders, as in the cases of the cheerleaders or the trademark, may impact the reputation of the company as a whole.
Stakeholders are a firm’s key resource. While balancing the welfare of all stakeholder groups raises the complexity of the task of governing a company, ignoring key stakeholders entails risk to the company and its shareholders. Many companies report on stakeholder relations in their corporate social responsibility reports, but these reports vary widely in sophistication and usefulness to investors. Investors should directly engage with companies and ask: Who are the company’s key stakeholders? How does the company measure the value of each one? How does the company manage and evaluate the relationship? What risks exist and how is the company addressing them?
John Wilson is the Head of Corporate Governance, Engagement & Research at Cornerstone Capital Inc. Prior to Cornerstone, he was the Director of Corporate Governance at TIAA-CREF and the Director of Socially Responsible Investing at the Christian Brothers Investment Services. He is also an Adjunct Assistant Professor at the Columbia University Graduate School of Business.