Money Smart Athlete Blog

Reputational risk and loss of sponsorship/endorsement contracts

Jul 18, 2018 | Risk Management

Even though many people think that a professional athlete just gets paid to do what he or she likes, reality shows that this is far from the truth.  Being a professional athlete requires being dedicated to your goals and sacrificing things that other people your age would normally enjoy.  In order to become an Olympian or an NBA super star, you have to spend hours of training and hard work from the early days of your career, usually in your teens. In addition, public image is highly important for a professional athlete and thus, every action of a famous athlete can become an issue for public discussion.

It is very common for athletes with a high playing ability to be approached by companies that want them to endorse their products.  Many companies and brands consider athletes the most suitable individuals to act as their brand ambassadors and advertise their products or services.  Nowadays, high performing athletes are followed by millions of people on social media and thus everything they post influences an enormous amount of people.

The sports celebrity image, like all brands, is vulnerable in being dependent on such intangibles as people’s perceptions of them.  Closely linked to the commercial value of the celebrity image is the opinion of society. A celebrity’s good name or reputation is the regard which he/she enjoys within the society.  The opinion of a celebrity held by a society has a definite effect on his/her commercial value.  If the society does not approve the actions of a celebrity, his or her reputation would be in a bad state.  If the celebrity’s image fits in well with the society’s convictions, then, his or her reputation would be positive and this would have a direct, positive effect on his or her commercial value.  A number of sports professionals who enjoy world class recognition and an excellent reputation, earn enormous endorsement amounts, in some cases higher than their playing contract! Athletes who have 8-digit sponsorship contracts include Roger Federer, LeBron James, Kevin Durant, Novak Djokovic, Rafael Nadal, Cristiano Ronaldo, Usain Bolt, Lionel Messi, among many others.

The income generating capacity of the sports celebrity is highly volatile though, because it depends on the public perception of the sports star and his/her reputation.  The celebrity is greatly dependent on a positive reputation and it is the celebrity who is the origin, the foundation of the reputation.  A number of athletes have been known not to live up to the public’s expectations thus tarnishing their brand, sometimes overnight, and jeopardizing their earning power.

There are plenty of examples of world-famous athletes who lost dozens of millions from sponsorship contracts, due to their actions outside the playing field. Tiger Woods, one of the highest earning athletes in the world with an estimated net worth of over $1 billion, lost some significant sponsorship contracts due to the public exposure of his marital infidelity.  A car accident revealed his affair with another woman while he was married. This was a blow to his reputation and was immediately reflected on his sponsorship contracts through their abrupt termination or cancellation.

Oscar Pistorius, an athlete who attracted various types of sponsors, shocked the world after it was revealed that he murdered his girlfriend.  Many of his sponsors kept a wait-and-see approach at the beginning, but when details of the murder saw the public light, his commercial agreements with his sponsors were immediately cancelled.  Several athletes such as Lance Armstrong, Maria Sharapova, Ben Johnson and Marion Jones lost large amounts of money when they were found positive to illegal substances. Sponsors would not want to be associated with athletes who are involved in such kind of controversial stories.

Endorser or brand ambassador athletes have the option of insuring their commercial sponsorship/endorsement contracts.  Therefore, when a sponsor decides to terminate the sponsorship agreement with the athlete for any reason, the endorser athlete can still be insured for the amount of the signed contract.  Under these types of arrangements the insurance company will cover the athlete for the resulting financial loss due to the termination of the contract.  It is quite important for athletes to take insurance policies on their sponsorship/endorsement contracts so that they ensure that they will receive the stipulated amounts of the sponsorship/endorsement contracts even if such contracts are unilaterally terminated by the counterparty.

The brand value of athletes, the image that has been etched in our minds over time when we hear their names, best measures their power in the world of sports.  Well-known athletes can influence millions of people and can earn a lot of money as ‘influencers’.  It is therefore vital that they are careful on how they act and that they insure their commercial contracts, to secure the continuation of their ‘influencer’ status and the resulting revenue streams.  For more information on reputational risk and how to best manage it, you may contact us at [email protected].