Opinion

The Great Debate

Bankers can’t kick the sporting habit

By Alexander Smith
February 11, 2009

Alex Smith– Alexander Smith is a Reuters columnist. The opinions expressed are his own –

People are up in arms about bankers receiving bonuses when the banks they worked for have gone down the pan. But isn’t it just as shocking that so many state-backed financial firms still subsidize the eye-popping wages of sporting superstars through rich sponsorship deals?

It’s the same story on both sides of the Atlantic. Citigroup, which received $45 billion from the U.S. government, is sticking with a $400 million marketing deal from 2006 which includes the naming rights for the new home of the New York Mets baseball team, which will be called Citi Field.

Meanwhile Royal Bank of Scotland announced it had renewed its sponsorship of the 6 Nations rugby competition last month, only 10 days after reporting the biggest loss in British corporate history. And it continues to sponsor the Williams Formula 1 team, a sport known for eating up tens of millions a year.

There is indeed a strange correlation between failed companies and sporting sponsorships.
Manchester United sponsor American International Group (AIG), Newcastle United supporter Northern Rock and failed British bank Bradford & Bingley, which sponsored not one but two soccer clubs, Bradford City FC and Barnet FC, have all crashed spectacularly since during the credit crisis.

And it isn’t just financial firms which have run into trouble and seen their names stripped from team shirts and hoardings. English premier league club West Ham United lost their sponsor when tour operator XL Leisure Group folded.

But this shouldn’t really be a big surprise. Some have even made a direct link between sporting sponsorship and corporate underperformance. A recent report by U.S. fund advisory firm Advisor Perspectives crunched the numbers for U.S. companies that entered into so-called “naming rights agreements” and believes it has established a statistical connection.

Its study of 69 U.S. naming deals shows the performance of companies that purchase such rights trails the S&P 500 index by 4.7 percent over the course of the deal. If you invested in a company the day it announced a naming agreement and sold when the agreement was done (or still held onto it for current name holders), your portfolio would be down 9.1 percent, versus a fall of 4.5 percent for the S&P 500.

Advisor Perspectives argues that poor corporate governance, leading to risky or bad decisions on capital allocation, is to blame for this underperformance and points out that three of the top five largest bankruptcies in history, Worldcom, Enron and Conseco all sponsored major U.S. sports venues.

They also point the finger at executives who benefit from the luxury boxes, hospitality packages and privileged access to sporting celebrities, all at the expense of shareholders.

So when Royal Bank of Scotland struck its Formula 1 deal with the Williams team, Citigroup signed its Mets deal or AIG paid to have its name on the shirt of the world’s most successful soccer team

Manchester United, investors should have read these as clear sell signals for the stock.

Given the financial wall some of the banks have hit it is puzzling why they haven’t pulled the plug on these embarrassing deals. After all the CEOs of RBS, Northern Rock and Bradford & Bingley have all been jettisoned, as have the bosses of Citigroup and AIG.

But with some lengthy sports sponsorship deals, ending them would in most cases be counterproductive, wiping out any value left. And where banks have been nationalized, political factors come into play. In the case of Newcastle United, any damage caused by ending the sponsorship agreement with Northern Rock and alienating a fiercely loyal soccer fan base would have far outweighed the cost savings of scrapping the deal.

So for an early warning signal of a company with a vain or out-of-control CEO, a poor record of capital allocation, a likely share price underperformance and in the worst case scenario an above average chance of going bust, look no further than the big sports signings, not of players but of sponsors.

– At the time of publication Alexander Smith did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. –

Comments
21 comments so far | RSS Comments RSS

Interesting analysis. Correlation and causality certainly are not the same thing, but I think the subjective portion of the analysis does ties it together. In fairness, though, a lot of sponsorships come from the banking sector, which is underperforming the market across the board. You could have some winners that are lumped in with sector that are underperforming the market through no fault of their own, but have sports deals. I’d be interested to seeing the performance tied to earnings instead of share price.

 

I would expand this debate to include fiscal policies of taxation. The total cost of sporting events – sponsorships, luxury boxes/tickets, related entertainment – is deducted against taxes the companies & executives otherwise would have had to pay. Taxes that have to be made up by other taxpayers. Therefore, I urge everyone who agrees to copy & paste this recommendation in emails to your Congressional reps, the Treasurer, & the White House:

Beginning with TY2008:

1. Apply a 70% tax rate to total salaries over $500,000 received from a TARP recipient, including stock options, cars, drivers, planes, etc. – valued as of 1/1/2008.
2. Apply an 80% tax rate to the total value of bonuses received by anyone earning more than $250,000 from a TARP recipient.
3. Disallow any personal deductions up to the total amount of salaries and bonuses received from a TARP recipient.
4. Eliminate deductions for entertainment and marketing expenses claimed by a TARP recipient or by any employee of a TARP recipient.

MomsHugs (http:momshugs.blogspot.com)

 

It is at this moment and time we shall all find out how to live within our means. The ridiculous wages paid to ball players, bonuses of millions paid to CEO’S for a small return for most folks. The cat is out of the bag and it is time for everyone to pay the piper.
The only solution to instill confidence in the american people is to publicly indict all individuals responsible & jail them.
If I robbed one of their banks or investment houses I would have to spend jail time!

Posted by Alan | Report as abusive
 

This is an excellent article making an excellent point. My view is that the fundamental underlying issue is a very problematic wealth and wage distribution in America. Everybody cheers when Tiger Woods gets a $100 million endorsement deal, but it’s still part of the problem. Ultimately you need to have a robust middle class to keep corporate America alive, but all the money’s going to enrich a handful of stars, so everybody suffers.

 

The obscene amounts of money “invested” in sponsorships for spectator activities like sport and motor racing are simply another manifestation of the stupidity that has given birth to the current global crisis. With the benefit of hindsight, nobody doubts the fact that many of the men and woman entrusted with looking after our money are now defined by their lack of financial acuity.

Posted by anton kleinschmidt | Report as abusive
 

SOME PEOPLE NEED TO REALISE THAT THE MONIES SPENT BY THESE COMPANIES TO PROMOTE WELL PUBLICISED AND PATRONIZED SPORTING EVENTS ARE PART OF THE MARKETING AND PROMOTION BUDGET.SINCE ATHLETES ARE THE ONES WHO MAKE THESE SPORTING ACTIVITIES EXCITING BY WORKING HARD AT THEIR SPORT THEN THEY SHOULD BE COMPENSATED ACCORDING TO SUPPLY AND DEMAND ie MARKET FORCES.THERE ISN’T ANYTHING PREVENTING YOU OR ME FROM PRACTICING LONG HOURS AND BECOMING ONE OF THOSE ATHLETES WHO BENEFIT.

Posted by JONATHAN | Report as abusive
 

Interesting scope on the correlation between sports and the business magnates. What\’s of concern is what someone put through as \’sports sponsorship being pet peeves of corporates executives\’. I believe some corporates get it right, like Coca-Cola\’s association with World Cup & Olympics.
Again, sports finance analysts will need to come up with watertight due diligence studies justifying why companies should support sport.
It\’s enlightening to learn some insights on naming rights. But the writer would have noted some successful ones like the Emirates Stadium -England which though still be repaid has more or less seen a profitable trajectory.

 

The sad part is in todays world, Corporates have completely failed to walk the talk when it comes to walking the talk – as far as Governance is concerned.

Some of the major faults, I have seen corporates commit increasingly over the years are listed below – all of which I think have contributed in a large measure to todays corporate failures.

1. Obscene salaries and wages – the issue has been debated and known enough – but today’s announcement by the Citi CEO that he will take $1 and no salary smacks of a gimmick – typical of politicians who will lie any amount to save their skins. what the public is wanting is a CAP on salaries that is reasonable for leading a decent life – not obscene payments without limits in millions of Dollars to any executives anywhere in the world.

2. Governance – many Corporates talk big about CSR and adding “value” to “key stake holders” etc. They do not realize that employees and the society and consumers come before investors and share holders – whose (investors and shareholders) primary commitment should be to the society and not just to make more and more money – probably the Top Managements in the Corprate secotor have misunderstood the shareholder needs. If employees, who built all those reserves over the years of hard work, are laid off because the company is NOW suffering due to recession – that is simply not fair.

Corporates owe it to soceities and employees to keep the fire burning – particularly in the employees homes and shun obscene salaries that Top Managements take home. The reserves have to be utilized for the “family” that so many companies claim their employees belong to.

3. Old is Gold – several corprates have rushed in the past decade to promote youngsters who are not ready, who have not understood values enough to govern companies – all they expected these young blokes is to deliver enormous profits and these new breed of young executives have gone over board with greed and avarice taking huge risks without any semblence of prudence.

Old and experienced employees who are risk averse or more balanced were eased out in millions and with them the old values of TRUE CORPORATE ETHICS.

In todays scenario there is no loyalty expected or given by the employees or the employers. Only the Old hands value loyalty. Even older comapnies have changed their values seeing newer companies gorging profits by over leveraging. Many of the newer comapnies have a shorter life span because of this.

The Hudson pilot – is an old hand – he proves a lot as to why experienced employees count.

There is a need to grrom executives over time – there is no point in handing them jobs that they cannot handle in a value based manner – they can be aggresive only and nothing else in ahieving goals – but in the process expose the org to unimaginable risks that get compuneded.

Todays younger execs are just interested in meeting their immediate goal to get an immediate vulgar pay packet and bonues and move on.

Experinced employees are a rare commodity now a days – bring in the retired folks!!

4. Risk Management ignored – in todays orgnaizations, riks managemnet, complaince, ethics, governance are all given the go by. Only how to sell (by hook or crook) and make money is important! Sadly that has led to the sorry state of affairs now.

There is no prudence in lending, or borrowing – risk managemnet, regulations and complaince culture need to be strengthened a great deal!

Posted by Rajan | Report as abusive
 

The Bankers at hearings today showed why we shoulg be grateful WalMart and Sears were never given requested Banking powers.-Yhe small Bank where everyone knows everyone should return with a Central Bank for International work.
My Business and Banking is with 3 small Banks-they know your name as you come in the door.They could even HIRE people to fill these friendly jobs not be trying to change accounting rules//
ike

Posted by ike | Report as abusive
 

So don’t buy tickets to sporting events. Seems pretty easy to me.

 

A few years ago I noticed Skandia were sponsoring a sailing event at Cowes. No doubt the directors were using it as an excuse to invite their cronies out for the weekend, at my expense. This was enough for me to pull my savings from them as soon as I could. Vote with your feet, or pocket.

Posted by chris | Report as abusive
 

It Makes for good reading to point to the Bankers about what they are doing, but until someone makes the point and it sticks and the congressman are told to look in the mirror to see who created this dam problem it will never get solved.

Posted by Jerry | Report as abusive
 

I agree that we need a society where Tiger isn’t a king and we aren’t all paupers.

And marketing, whether through a sports team or Superbowl commercial may be overpriced. The true value of marketing is debatable, especially compared to investing in customer support or business infrastructure.

But this article and the whole “bankers and sports/movie stars” make too much money discussion misses one point.

The problem is when CEOs and bankers of any industry WANT to be sports and movie stars. They’re not. They don’t compete in one-on-one or team sporting situations. They don’t depend on their unique athletic or artistic abilities where THEY themselves become a product. They may have fans in their industry, but they’ll never be Tiger.

No one golfer is as good as Tiger. But a well-lead team of 20 executives can probably run circles around any single CEO. And the leader of the team of 20 executives should admit that it’s all the people who work for him that bring success.

Egos and narcissism, self-importance and selfishness, are behind the problems we are facing today.

Posted by Pete | Report as abusive
 

Although no scientifically “bullet proof”, the sponsoring of major commercial sports activity reveals a state of mind for the management, the desperate need to be part of the “game”, which is being gossly overpaid to “entertain the “people”.

As Mao said (and maybe the only thing I agree with !) : Sport is the opium for the people … and the last summer olympics games in Beijing prove it !!!

We are scandalized by the banks, next should be professional sports. And then, what about the entertainment industry with all those singers complaining we are “stealing” their authors’rights … and ask for ridiculous concert ticket prices, and where we still pay for the agent of the agent of the agent … and finally the authors’rights for the only three good songs of the album !!!

This financial crisis should help us ask our “corporate” to go back for what they are paid for : management, not entertainment.

Posted by Guy Malboeuf | Report as abusive
 

Lets go to the game!!
$80.00 for ticket
$20.00 park the car
$20.00 hot dog & beer
$120.00 for a game

Not many people I know can even afford to see a game!

It’s easy to see why these exec’s and players claim they are underpaid… GREED!

 

“In the case of Newcastle United, any damage caused by ending the sponsorship agreement with Northern Rock and alienating a fiercely loyal soccer fan base would have far outweighed the cost savings of scrapping the deal.”

I don’t want to nitpick but that’s not necessarily true. The main reason Northern Rock won’t pull out is because the money is already spent.

Northern Rock is a different story to some of the other financial institutions that have sponsored the sporting arena during the credit crunch and are paying by the year for these rights – and therefore not the best illustration for your point.

Rather than an ongoing agreement, Northern Rock’s long-term sponsorship deal was paid for upfront so the money could be used by Newcastle United to sign Michael Owen from Real Madrid – long before a credit crunch showed signs of appearing.

Posted by Warwick | Report as abusive
 

There certainly is a lot of arrogance out there among supposed responsible leaders of banks and all kinds of other business.
However, I think it is a mistake to look at sports sponsorships solely as another undeserved and overpaid for perk for top company executives. More than anything, it’s advertising and as such, the money will be spent/wasted on some other form of it if this were to become illegal. In other words, not a penny more will be used for anything we may find more worthwhile. It could be debated whether advertising budjets are used effectively, I for one wouldn’t be competent to comment on it. My point is, we don’t have to like bank executives, but we should remain fair and objective in our judgement.
One more thing. A lot of people like us work at regular jobs associated with those events. Their families depend on those jobs and, therefore, on those companies doling out sponsorship moneys. Kinda like an ongoing stimulus program, if you will :)

Posted by Laz | Report as abusive
 

Kitty, it’s all very well saying don’t buy a ticket, but some of us have family connections with clubs in our communities that go back several generations. Why should we be expected to sever our connections with our clubs, which our ancestors created before sponsorship even existed? That’s just handing over our heritage to the barbarians. I don’t have a solution, but it is not “simple”. Sport is a legitimate and healthy activity, and it should be protected from corporations. Tell them to go away, not the fans.

Posted by Oliver Chettle | Report as abusive
 

as a student of law school,it is easy to understand that any agreement signed by the two parties according to the law cannot be repealed solely,and with the exception of the drastly-changing situation of the performance based on the contract,then you can do that modification or cancellation.
like citibank\’s naming right on the venue,northrock choose to cotinue supporting newcastle united entirely regarding the credit in the comercial deal and perhaps to some extent it will help that sort concerns out of the meltdown caused by this financial crisis.
furthermore,for the sporting partners,many benifits will come from this performance of the deal such as the transaction of the michal owen operated by the new castle united and the real madrid in spain.

Posted by patrick | Report as abusive
 

Deductions allowed to corporations for sports and entertainment events have an insidious economic result for taxpayers unlucky enough not able to take a deduction for the same event. Demand for tickets is artificially higher than it should be because corporations hold many of the box seats and better seats on an annual basis for these events. As a result everyone has to pay higher ticket prices.
Nor is the problem limited to economic effects. A certain percentage of the beneficiaries of corporately owned tickets are not real fans but go only because it is free or only go to playoff or championship games.

Posted by James | Report as abusive
 

It is amazing that some of you do not understand the need for marketing. It’s what defines success for most corporations. Sponsorship isn’t to blame and is in place to succeed in serving business objectives. This class warfare has created a “mob mindset” that enjoys listening to the sharpening of the guillotine. There are successful sponsorships and not-so-successful sponsorships. Just like advertising and other marketing mediums. Those of you who stereotype naming rights deals are not privy to the ROI/ROO measurements. The aforementioned Advisor Perspective study of financial success tied to naming rights is irresponsible. It’s like saying those companies that invested in television advertising are wasting their money. Please do not get caught up in this irrational line of thinking – you advancing the chaos.

I agree and despise excess, but most of the sponsorships by financial corporations are necessary for them to compete. For every $1 Bank of America spends on sports sponsorship, it receives $3 back.

The U.S. government spends hundreds of billions of dollars from taxpayers and yet wants to curtail some of the country’s major industries including sports & entertainment, hospitality, travel, food & restaurants, hotel, conventions, media. Not very smart to follow this line of thinking.

If you are unhappy with ticket prices, don’t pay them – but don’t blame sponsors. 90% of the International Olympic Committees revenues from the last quadrenium came from corporate support (50% advertising & 40% sponsorship) – do you want to cancel the Olympics because you don’t appreciate sponsors?

Posted by Terry | Report as abusive
 

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