Lots of high-profile professional athletes have been in the news lately-and not for the right reasons. The NFL’s domestic abuse cases are probably the most notable examples, but several others are worth mentioning as they highlight human factor risks, a unique form of third-party risk that businesses must account for in their broader risk management strategies.
Take legendary golfer Phil Mickelson, whose name was raised in association with an insider trading investigation. Imagine the discomfort for KPMG, his lead sponsor, when Mickelson wore a hat emblazoned with its logo at a press conference discussing the situation. Although many risk management professionals have begun to question just how severe reputational impacts really are, for an audit firm, the guilt-by-association factor was potentially deadly.
Going back a few years, Nike faced fairly serious fallout when Tiger Woods and Lance Armstrong-both of whom had long associations with the brand-were in the news for different kinds of cheating. The controversy about “sweatshop” conditions at its contract manufacturing plants was another source of unwanted attention. In fact, in light of several recent NFL player scandals, it is no surprise that shareholders brought up the risks of associating with such athletes at Nike’s most recent annual meeting.
The bottom line is that companies face specific and highly unpredictable risks when they make big investments to partner with human beings. Those risks extend beyond the realm of celebrity endorsers. The decision-making of CEOs and other important employees can present equally serious threats. American Apparel’s controversial CEO Dov Charney and JPMorgan Chase’s rogue trader, nicknamed the London Whale, remind us of that lesson.
So how do companies do a better job in planning for and managing unique third-party and human-factor risks? There are a range of steps companies can take-from a strategic “rethink” of these relationships to specific tactical actions-to help ensure they avoid or minimize damage. The critical components of any plan are to have a clear exit strategy defined in the beginning of the relationship, and have the courage to execute that strategy based on pre-defined criteria.
Strong exit strategies require thinking about the good, the bad and the ugly before entering into relationships. Companies must understand their risk appetite for experiencing the ugly, in particular. This can be a difficult task, because the euphoria of a sponsorship deal often clouds more grounded, risk-informed thinking about what happens if and when things go wrong. It is a situation analogous to marriage: while rice is being thrown and celebratory toasts are being made, no one wants to think about the statistically valid possibility of divorce. In business, where entities get hitched for money rather than love, pre-nuptial agreements are a critical risk management best practice.
A deep understanding of whom you are marrying-gained through a formal and robust due diligence process-helps reduce the risk of things getting ugly. The right approach must be designed to carefully assess and anticipate risk for all types of suppliers. Companies need to go beyond financial details, regulatory standing and the background of the executive team. For example, risk managers should take advantage of social media to gain real-time insights into their potential partners.
The process does not end when deals are signed. Human factor risk management is not a “one and done” proposition. Rather, it is an ongoing activity that requires risk appetite to continually be recalibrated throughout the course of such relationships.
In other words, firms should anticipate the divorce during the deal process, even as they work to minimize the risk of it happening. No matter what the agreements say, no matter how detailed and comprehensive the contracts, companies must be prepared to own the termination of the relationship. That means a specific process for deciding if deals must be terminated and clearly articulated plans for making the separation.
Robust vetting would not necessarily have stopped Nike from signing a deal with Lance Armstrong or Adrian Peterson. Nike’s decisive reaction in cutting ties with Peterson after his child abuse allegations surfaced, however, showed it had a clear plan. At the same time, the NFL flip-flopped on its policies and in its reactions to individual cases, illustrating the value of having a plan in place before such issues occur.
Obviously, there was less than full consensus about the NFL’s player conduct rules and how to interpret or apply them internally. The league’s substance abuse policies are clearly spelled out, based on a collectively bargained agreement between the owners and players association. There is no clear guidance on domestic violence, however, so the individual teams began taking disciplinary matters into their own hands, with inconsistent outcomes. Knowing who controls the communications in response to a PR crisis means such communications are more likely to be clear and consistent, not to mention timely and appropriate.
The point is, there must be an exit strategy for every critical third-party relationship and a willingness to execute it, since prolonged waffling minimizes the benefit the relationship was designed to achieve in the first place.
Reputational Risk in Context
Some leaders in the risk management space have begun to question what reputational risk really means and just how important it is. After all, consumers are still using their credit cards at Target, Home Depot, P.F. Chang’s and other businesses that have suffered high-profile data breaches. One day, Apple was in the headlines for the hacking of its iCloud service. A few days later, there were bigger headlines about the latest iPhones. Fans still watch NFL games on television.
While stock prices dip temporarily when crises occur, the true long-term impact of reputation risk can be very hard to measure. Still, it is safe to say there is no upside to being in the news because of partners’ misdeeds. That is why third-party and human factor risk management matters.
There are also practical reasons to get it right. Companies will continue to seek value by associating with top-performing and high-profile athletes. In the outsourcing era, all types of companies, including those outside the professional sports industry, are more reliant than ever on strategic partners and other suppliers. And nothing lasts forever-certainly not business relationships.
Meanwhile, a little advice for those who sponsor athletes: put a clause in your contracts that they cannot wear your apparel when doing a press conference about a misdeed they have committed. This way, at least, when they are answering uncomfortable questions on television, the public will not be looking at your logo while they do.