Risk Management

The NFL’s Reputational Value Crisis

With much riding on a resolution to a bungled referee call, the threat of reputational risk led to quick and decisive action.
Nir KossovskyOctober 15, 2012

On a Tuesday morning in late September, a legion of NFL football fans was collectively aggrieved. The night before, Seattle Seahawk quarterback Russell Wilson threw a 24-yard potential touchdown pass to wide receiver Golden Tate on the final play of the game. As Tate went up for the ball, he was swarmed by two Green Bay Packers: Tramon Williams and M.D. Jennings. Packer fans cheered as Jennings came down with the ball — an interception, and a win for the Packers!

Or so it would appear. In the rarified world of refereed sports, the officials write history. While one of the officials hired by the league to replace regular referees during the four-month referee lockout signaled for the clock to stop as the players came to rest on the ground in the end zone, another replacement official signaled a touchdown.

The official call: touchdown, and a Seahawk victory — a score that was upheld after review.

Refereeing a professional sporting event is an operational process, and the bad call at the end of the game represented an operational failure. Examples of other operational failures are trains running late, cars being recalled, and phone calls being dropped.

By the Tuesday morning after the game, the operational failure was maturing into a full-blown reputational value crisis for the NFL. The Tate Touchdown presents a business case for CFOs in reputational value management.

Crises that destroy reputational value are not necessary consequences of operational failures. Reputation risk comes from failing to meet market expectations in the six business areas that are the pillars of reputation: ethics, innovation, quality, safety, sustainability, and security. The NFL’s problem involved one of these pillars, quality, and it was of its own making.

Other factors that helped to transform the Tate Touchdown into a reputational value crisis included:

• The NFL’s public relations and official pronouncements about the reasons for the lockout were at odds with general public sentiment that the owners were making money with substitute labor while professional referees were starving.

• The event affected a large number of stakeholders comprising many different interests. Fans, players, coaches, sportscasters — you name it — were enraged.

• The 24/7 news coverage and incessant exposure through social media promoted heightened awareness of the event. Vikings punter Chris Kluwe wrote that the NFL’s reputation “is tarnishing faster than a sailor’s virtue in a two-dollar whorehouse.” The quality of the substitute referees was not meeting market expectations. “Players see it; coaches see it; fans see it,” Kluwe said in an open letter to NFL commissioner Goodell. “These refs are not fit to stand in for the men you’ve locked out for what is increasingly looking like nothing more than simple greed — attempting to squeeze blood from a stone simply because you can.”

Reputation in a business context can be summed up neatly: it is what the market expects a company to do, and that’s why reputation rewards some companies and punishes others. Reputation has measurable value. “Lose money for the firm,” Warren Buffet would tell his employees, “and I will be understanding; lose a shred of reputation for the firm, and I will be ruthless.”

When companies meet expectations, markets reward them with enhanced value. A better reputation translates into value from all stakeholders: customers will accept higher prices, vendors and employees offer better terms for their services, creditors and equity investors offer better terms for capital, and regulators tend to be more forgiving.

A reputational value crisis places these benefits — measurable entries on a P&L statement — at risk. For the NFL and its owners, measurable losses in a reputational value crisis would include fans buying fewer tickets and branded products; fans watching less broadcast programming; lost pricing premiums on tickets, branded products, and broadcast slot advertising; greater employee costs (turnover, litigation); greater supplier/vendor costs; greater credit costs; and possible loss of antitrust immunity.

The reputational value at risk is material. According to the annual Forbes survey of the business of football, over the past 10 years, the top five teams increased their revenues by 100% and increased operating income by an average of 150%. Pricing power and lower cost of goods sold (COGS) are measurable components of reputational value.

Temkin Group, a market-research firm, found that more than 57% of U.S. consumers in 2012 reported they enjoy watching football. Baseball, basketball, and NASCAR came in next with 35.1%, 31.1%, and 17.8%, respectively. Those consumer eyeballs bring the league $4 billion a year in the current deals it has with NBC, Fox, CBS, ESPN, and DirecTV. Major League Baseball collects an average of $711 million every year from ESPN, Fox, and Turner.

The team that is most effective at generating local revenue is the Dallas Cowboys. Its stadium-sponsorship revenues and its wholesale-merchandise revenues combined generate $160 million per year.

Ironically, Forbes calculates that the most lavish sports fans are Packers fans — who were denied a victory that Monday night —  where local revenue from tickets, concessions, advertising, and local media deals come to about $390 per citizen of the Green Bay metropolitan area.

Professional football is an entertainment business. Its customers expect, well, entertainment, and for both customers and employees that means fairness: a just application and interpretation of the rules of the game. Referees and the quality of their calls are critical to that process. With professional referees locked out of the games in a pay dispute with the National Football League, much rested on the capabilities of the substitute referees.

To the NFL’s credit, the reputational value crisis did not last long. Like the 70% of corporate directors who rank reputation as their firm’s topmost concern and the 71% of S&P 500 companies that now disclose the materiality of reputation risk in their annual reports, the NFL appreciated that the consequences of reputational value loss could be severe.

For the median public company, the cost of reputation is 7% of market cap. Unlike public companies with superior reputation risk controls that can purchase reputational value insurance to protect themselves from threats to their market cap, the NFL can’t. On September 27, it settled. It is unlikely that the reputational value damage to the NFL is material, as the NFL is a monopoly. Even so, the league’s rapid resolution speaks to how much it values its reputation.

CFOs of public companies that operate in a competitive environment should take this lesson to heart. Mindful of the impact of reputation on revenues, costs, and regulatory burden, CFOs may wish to revisit the operational controls they hold over the six business processes underpinning reputation. If controls are weak, a business case could be made to invest in solutions that improve oversight and controls in way that would enable the market to appreciate and reward their company.

Did I mention that reputation has significant value?

Nir Kossovsky, CEO, Steel City Re (www.steelcityre.com), is the author of the forthcoming book Reputation, Stock Price and You (Apress). He can be reached at [email protected].