Science of Sponsorship Series

This series takes a look at the academic literature on sponsorship and offers a condensed summary and managerial implications.

By Hakim Azrour, M.Sc.

For the past few years, morality clauses have been cropping up in a lot of endorsement contracts, enabling companies to end their association with a celebrity and distance themselves from a negative event should it occur. That’s how endorsement contracts came to an end between McDonald’s and Kobe Bryant, Kate Moss and Chanel, and H&M and Burberry, not to mention Tiger Woods with Accenture, Gatorade and Gillette.

Because of the extravagant nature of celebrities—or maybe just because they’re human—endorsement scandals are inevitable. Unfortunately, such scandals are also totally unpredictable, and a company generally has no advance warning when its highly paid spokesperson decides to stray from the script. The one thing a company can control is its reaction when the media is in an uproar about its association with an offending celebrity.

The most striking case in recent imagination is no doubt the nearly $100 million investment Nike had to extend, not just once but twice, to attract Tiger Woods.

It’s important to remember that some companies invest to such a high degree in endorsements that the spokesperson becomes the very essence of the brand. Nike does that quite well in fact, as we’ve seen with its Air Jordan shoe line or its Tiger golf collection. It’s well known that the Nike golf line is a brand of considerable value today, thanks to a substantial and sustained investment in R&D and in brand equity. So Nike had to take all of that into consideration when it decided not to cut ties with Woods during the infidelity scandal, and but rather to throw their support behind him during the media storm.

It’s important to keep in mind that a scandal coming to light in the media isn’t an end in itself, but the beginning of a time of upheaval both for the celebrity and for the company being endorsed.

It’s difficult to identify what exactly a brand should do when it’s mixed up in a celebrity scandal. What would you have done if you had to answer on behalf of the Accenture consulting firm and you were told that the best golfer in the world, who also happens to be your marketing ambassador, has had extra-marital relationships with more than a hundred women? Or maybe you would have preferred to handle the Subway story when a photo of Michael Phelps smoking marijuana from a bong surfaced only a few short days after you offered him a lucrative endorsement contract to represent you. Or if golfing and swimming aren’t your thing, why not try your hand at baseball… ah yes! Unless you’re MasterCard, and your ambassador Barry Bonds—a bigger-than-life, all-time home run record holder—swears up and down that he never took steroids from the BALCO lab.

History has shown that companies that find themselves in these situations can take different tacks. Should they support the celebrity, abandon ship, or simply do nothing?

An analysis of 60 real cases of endorsement scandals representing 23 sponsoring firms and 32 celebrities confirmed one thing: companies pay big for the scandals of the celebrities who represent them. When studying a scandal, you see that there are two “moments of truth”: First, there’s the announcement of the scandal in the media, then, usually a few days later, the announcement of the company’s reaction to the scandal. Results have shown that, when you add up the financial losses of those two announcements on the day they’re released in the media, the market evaluates the average financial impact of the scandal at 0.75% of the company’s market capitalization. When you consider that the value of some companies reaches into the millions and even billions of dollars, you quickly see that the repercussions of such endorsement scandals take on a dimension that fully justifies the firm’s concerns.

What’s more, studies have also established clear guidelines for brand managers who are confronted with an endorsement scandal. When the time comes for a company to react to a scandal, whatever the contest or the gravity of the situation, the position to adopt in order to protect the company’s share value is to simply keep quiet. That can be attributed to the fact that if the company decided to react, either by supporting or renouncing the celebrity, the market would interpret the gesture unfavourably, thinking the company was trying to curb potential financial disaster. By staying quiet the company keeps from sending a signal to the market that could be seen as a desperate attempt to limit financial losses.

In practice, opting for silence isn’t the most intuitive path for any manager to take, as the powers that be in the company tend to expect some kind of response, and they could interpret a passive reaction as the lack of a reaction. Fortunately, the current study empirically confirms, for the first time ever, the favourable effects of silence on the value of a company. Managers can now abstain from making waves in the media—which could be negatively interpreted—in total confidence.

However, it’s important to remember that this recommendation is made with one thing in mind: optimization of the company’s market value. We advise managers to keep an overall vision of the scandal so they can make decisions based on ethical judgment, market conditions (e.g. the risk of another company picking up the celebrity) or clauses in the endorsement contract (e.g. the monetary consequences of terminating the contract).

In summary:

• Scandals implicating brand endorsers are more and more frequent today, which is why morality clauses have cropped up enabling companies to cut ties with the celebrity in question.
• An endorsement scandal is very hard on the sponsoring company, costing approximately 0.75% of its market capitalization.
• If a firm wants to minimize the negative impact of a scandal on its market value, its reaction should be to stay quiet and to abstain from issuing a press release or a statement to the media.

In spite of everything, an informed manager should consider every aspect of the situation before reacting to the scandal (support, renouncement or silence).