Edward Keunuk Shin, MiM student at ESSEC Business School, explores some of the foul play that has occurred in the sports industry during the pandemic and looks beyond to those in the sector who do good as part of their daily game.
Is responsibility worthwhile?
Professional sports clubs rely on several revenue streams, of which sponsorship deals make up a significant portion. With great revenue, clubs can afford to pay millions or even tens of millions of dollars to attract top professional athletes. Several factors can lead to successful sponsorship deals for both the clubs and the players. Tangible elements such as the attendance and intangible elements such as club reputation can affect sponsorship deals.
At first glance, there should be no social and ethical responsibility. After all, the difference between an amateur and a professional is that the pros make money. Financial gains for both professional athletes and clubs are determined by the market economy, where transactions happen because all parties consider it as beneficial. Let’s explore whether it is worthwhile for the sports industry to adopt responsible business practices.
More than just the numbers
Major professional sports leagues in America and the top level football leagues in Europe are composed of profitable clubs that employ well-paid athletes. The English Premier League of 20 teams turned 4.87 billion Euros of revenue during 2015/16 season (Ramchandani et al., 2018), and in the US, the Major League Baseball of 30 teams turned 10.7 billion USD of revenue in 2019 (Brown, 2019). Many of these professional sports clubs are valued at over 1 billion USD each, while footballers’ transfer fees have regularly exceeded dozens of millions of Euros in the past decade (Muller et al., 2017).
There are several sources of revenue for these clubs: ticket sales, merchandising, and of course sponsorship deals that can range from broadcasting rights to advertisements and much more. TV rights in particular are a significant source of revenue. The American sports media rights market was worth 21.881 billion USD in 2018 (Sport Business Media, 2019), and about half of the revenue in French football during the 2012/13 season came from TV rights (Scelles and Andreff, 2017). Thus, it is clear that the sponsorship deals are a major part of the professional sports’ business model.
The market economy enables individuals and organizations to take appropriate actions, while keeping within the legal system, to profit as much as possible. In this light, the aforementioned elite group of professional sports clubs and their athletes who are paid millions of dollars in salary are doing an exceptional job. They offer high quality entertainment for their fans, and the large fanbase leads to enormous profit for the sports industry.
Moreover, one benefit of sports is that it fosters teamwork. Professional sports can be a large industry because it unites the fanbase to have a common purpose. Additionally, there is often forgotten background work done by administrative and operational staffs to successfully host sporting events. Therefore, one could consider the concept of unity to be the foundation of the sports industry. So can this industry persist without the concept of community? Does it make practical sense for the industry to have social and ethical responsibility?
Positive externalities and practical motivations
In a pure market economy, there is no explicit obligation to uphold social and ethical responsibility. Fans pay big money for their enjoyment; clubs and athletes put on a spectacle. This is theoretically a fair deal for both producers and consumers. Nevertheless, there are still incentives for the sports industry to respect and conduct CSR, whether the motivation comes from staying true to its aforementioned team spirit, or from simply expecting a greater future cash flow.
Indeed, reality has more layers than theoretical market economy. Emotionally, fans want to be a part of their favourite athletes. They get extra satisfaction from real interaction with the athletes and the management team. There are also non-playing employees who put in hard work to ensure that every event exceeds the high expectations of the fans. The fans, athletes, management group, coaches, and the staffs all together are a necessary component for the clubs to win sponsorship deals. As such, the extra effort given by the club and the athletes to best treat their fans and the workers can lead to positive externalities.
The sports industry also has a practical motivation to care for its community. The clubs and the athletes, as well as their sponsorship deals, cannot exist without the fanbase and the non-playing staffs. Consequently, the overall economy and fans’ feelings can affect the industry’s revenue streams, economic recession and disappointed fans being able to reduce future cash flow in various ways. Ticket sales can dwindle if the club continues to abuse its loyal fanbase – whether that is refusing to acquire top athletes or even threatening to relocate. In addition, sponsors have motivation to support clubs with good social reputation, and CSR activities can have a positive impact on club image (Lee and Ryu, 2018). As such, it is sensible to think that the social and ethical responsibility shown, or neglected, by the clubs and its athletes can alter future cash flow.
Disappointed fans – inadequate response to COVID-19
We have seen how the public reacted to certain professional sports clubs during the ongoing COVID-19. The clubs that decided to lay off non-playing staffs, or reduce their wages, have been heavily criticized. Fans across different sports have expressed disgust over the lack of empathy shown by the billionaire owners and the millionaire athletes to the administrative and operational staff who make less than a hundred thousand USD, Euros, or British Pounds a year. At best, such actions could lead to boycotts – at worst, kicking in when the season eventually resumes, whether that is in the coming months or following year. Even in the most optimistic scenario, fans will be less forgiving when the clubs and athletes underperform.
The British EPL (football) and the North American NHL (hockey) delayed suspending their seasons for as long as possible and consequently, the decision played a role in speeding up COVID-19 infection during its initial stage. The leagues were short-sighted by the revenue loss from the current 2019/20 season, and ultimately their decision may have contributed to the worsened economy. As of April 6, 2020, the USA has led the world in COVID-19 infection by more than twice the country second on the list – China, while the UK is the 8th most infected country in the world despite being an island. The worsened economic conditions, partially caused by the neglect of social responsibility, could mean that fans may not be able to afford to attend games anymore, and the sponsors may not be as generous as they were before.
Fanning the flames
Many teams, such as Tottenham Hotspurs of the EPL, placed various measures to cut their spending on non-playing staffs as a response to the shortened season due to the pandemic. The fans were furious following the announcements because they identified more with the non-playing staff who do not have the financial safety net that the millionaire athletes may have and whose salaries remained unaffected. It may make sense from the club’s perspective to mistreat easily replaceable staff, but their lack of ethical responsibility exposed the true intentions of these clubs: immediate profit and nothing more.
Mr. Daniel Levy, the Chairman of Tottenham Hotspurs, is EPL’s highest earning executive, earning £7 million a year. Mr. Levy also has an estimated net worth of £1 billion (Yahoo, 2020). Ironically, Mr. Levy cut 20% of 550 non-playing staff at Tottenham on March 31st, allowing them to earn a maximum of £2,500 per month (Wood, 2020). If we assume all those staff can earn this maximum wage, for the simplicity of the calculation, Tottenham is paying (2500 GBP/month) * (550 employees) = 1.375 million GBP per month, rather than (1.375 million GBP/month) (1/0.8) = 1.72 million GBP that they would have formerly paid. In other words, to save 0.344 million GBP per month, which is equivalent to about 0.0344% of Mr. Levy’s wealth, Tottenham Hotspurs decided to forgo their social and ethical responsibility of taking care of the employees that truly run the club. For Mr. Levy, 0.0344% is likely less than his investment portfolio volatility during the same duration, yet for the 550 employees, their livelihood has been threatened. Needless to say, fans of the clubs that conducted similar practices, as well as the general public, are disappointed by their clubs’ lack of social and ethical responsibility. Aside from the public sentiment, we can sympathize with the employees who may not work to their best capacity even after the situation returns to normal.
A few pages from the game plan
But there are also many examples of the sports industry exhibiting exemplary social responsibility. Mr. John Tavares and Mr. Connor McDavid in the NHL are superstars who signed contracts that underpay them. In a league where each team can only spend up to the allowed salary cap on total players, the players’ gesture showed their fanbase that they want their teams to be able to sign other top talents to form a competitive team. The players stayed true to their ethical responsibility of being professional athletes: win games. Subsequently, these 2 players were able to secure larger player sponsorship deals than they would have otherwise.
Mr. P.K. Subban and Mr. Vincent Lecavalier are other professional athletes who made significant contributions to society. In 2016 Mr. Subban made a 10 million CAD donation to Montreal Children’s Hospital, and in 2007 Mr. Lecavalier donated 3 million USD to help build a Pediatric Cancer and Blood Disorder Center at All Children’s Hospital in St. Petersburg. When their play deteriorated later on in their career, they still had a loyal fanbase, making it difficult for their teams to buy out their expensive contracts. As such, these examples demonstrate that maintaining a high level of responsibility led to greater financial gain through various means.
Responsible business: it’s a win-win
Although companies exist to make profit, a non-economic purpose of sports can be thought of as “unity” that delivers positive externalities. The fans and the public should appreciate clubs that can respect the sense of community between the sports industry and society. Indeed, our world is more complicated than today’s mere cash flows.
Selfish business practices in professional sports is not optimal because professional clubs have an incentive to take on social and ethical responsibility. Responsible clubs stay true to the spirit of sports, thus increasing the public perception that can lead to higher expected future cash flows. Certainly, a responsible mindset ultimately adds value to the club.
Of course, there are practical limitations. Lack of time and money, as well as the physical assets required to conduct responsible engagement with society can hinder the sports industry in their ambitious contributions to society. Nevertheless, embracing ethical business operations is a win-win situation for both the professional sports industry and society at large.