In recent years, sports sponsorship has become an increasingly popular marketing strategy for companies looking to build or alter their brand awareness and reach a wider audience. However, with the rise in popularity of sports sponsorship comes the need for careful due diligence to ensure that companies are making informed decisions when selecting sports properties to sponsor and vice versa. Broadly, due diligence comes in two distinct but not mutually exclusive categories.
Financial due diligence involves assessing the financial viability of the sports property that a company is considering sponsoring; or vice versa. This includes analyzing the counter-party's financial statements, revenue streams, and future growth prospects to determine whether it is a sound investment.
Reputational due diligence, on the other hand, involves evaluating the reputation and public perception of the sports property. This includes analyzing the property's history, social media presence, and any past controversies to determine whether it aligns with the values and image of the sponsoring company.
Both financial and reputational due diligence are routine in the commercial world with most companies adopting a graduated risk-based approach to determine the appropriate level of due diligence depending on the risk factors in play and the organization's risk appetite/tolerance. For example, a deal with a well-established and respected counterparty might only warrant a check with the likes of Dow Jones Sports Intelligence alongside the commercial assessment. Deals with organizations in novel sectors - i.e. a crypto – exchange, would warrant a thorough, bespoke examination with firms experienced in navigating legal and reputational risk considerations in a deal context.
Due diligence is a key requirement within the internal controls of a corporation, often ensuring third-party relationships are free from conflicts of interest and reputational risks and that deals represent sound financial judgment. Indeed, in some sectors, due diligence programs are mandatory and regulated, such as Know-Your-Customer schemes in the financial sector. So why then is the sports sector littered with deals which have gone wrong?
There are perhaps several reasons why this is the case that merits examination. There are: optimism bias, confirmation bias or groupthink, a distain for spend on compliance, and an associated lack of checks and balances creating a commercial naivety.
Optimism Bias?
Optimism bias is the tendency for individuals and teams to overestimate the likelihood of positive outcomes and underestimate the likelihood of negative outcomes. In the context of commercial teams, optimism bias can lead to poor deals because it can cause teams to overlook potential risks and weaknesses in a sponsorship opportunity. When teams are overly optimistic, they may focus too heavily on the potential benefits of a deal and not give enough consideration to the potential risks and downsides. This can result in teams making deals that are not financially viable, or that damage their brand reputation. By being aware of the potential for optimism bias, commercial teams can take steps to mitigate its effects and conduct more thorough due diligence before entering into sponsorship agreements. Many companies offset this bias with mandatory due diligence overseen outside the commercial team.
One example of an optimistic sports sponsorship deal that went wrong due to a lack of due diligence is the partnership between Nike and Lance Armstrong. In 1996, Nike signed a sponsorship deal with Armstrong, a professional cyclist who went on to win the Tour de France seven times. However, in 2012, Armstrong was stripped of his titles and banned from cycling for life after he was found guilty of doping. As a result of Armstrong's doping scandal, Nike was forced to terminate its sponsorship deal with him, resulting in a loss of millions of dollars1. If Nike had conducted proper due diligence before signing or renewing the deals with Armstrong, they may have been able to identify the risks associated with sponsoring a cyclist who had long been suspected of doping, including numerous high-profile allegations as early as the 1999 Tour de France.
More recently, Italian soccer giant Inter Milan announced in September 2021 an optimistic multi-year, €85 million product partnership with Zytara Labs that would see the DigitalBits blockchain network become the club's sleeve sponsor. As part of the agreement, DigitalBits served as the official global cryptocurrency of Inter, with Zytara becoming the official global digital banking partner of the then-reigning Serie A champions2. However, less than a year later Corriere della Sera, an Italian news outlet, was the first to break the news that the plunge in crypto prices had impacted DigitalBits' ability to follow through on its $100 million partnership with the team3. In March 2023, it was reported that Inter had not received any payments for their shirt sponsorship deal with DigitalBits during the 2022/23 season. The collapse of the revenue stream had a major impact on Inter-Milan. Inter's recent public accounts show significant losses, with the loss of sponsorship revenue a major concern4. It is not known what due diligence, if any, was carried out on Zytara, but most, if not all, was discoverable. For example, a 2021 report by InsightX highlighted a series of major issues with Zytara, its governance, its ethics, its financials, and the track record of its founder, Al Burgio.5
Given that warnings and alarms had been sounded on both Zytara and Lance Armstrong which should have raised yellow or even red flags at Inter Milan and Nike one can only assume that both deals are examples of optimism bias that saw little if any due diligence undertaken.
Confirmation Bias?
Confirmation bias is the tendency for individuals and teams to interpret information in a way that confirms their existing beliefs and biases. In the context of commercial teams, confirmation bias can lead to poor deals because it can cause teams to selectively seek out and interpret information that supports their preconceived notions of a sponsorship opportunity. Perhaps one of the clearest forms of confirmation bias is that others have done the same or a similar deal engendering a Fear of Missing Out (FOMO) or that the subject of the deal is a well-established global brand with many other sponsors, such as a major sporting property.
A recent example of this would be FTX. FTX was a Cryptocurrency exchange run by Sam Bankman-Fried based out of the Bahamas. FTX filed for bankruptcy at the end of 2022 due to what looks like making high-risk bets with client money through a sister company that led to large losses and illiquid positions6. FTX's involvement in sports sponsorship was prolific: FTX had done at least twelve very significant deals with major league franchises, stadia, eSports games, and high-profile sports stars such as Tom Brady. These included: a $135m, 29 year deal with the Miami Heat which included naming rights for their stadium; a $210m, 10-year deal with eSports Team SoloMid; and $90m for Riot games esports tournaments. Numerous high-profile crypto trading firms, including Genesis and Wintermute, suffered substantial losses due to their exposure to FTX, alongside a large number of sophisticated institutional investors7. In the immediate aftermath of the collapse, many of the affected firms reported that standard due diligence procedures were followed prior to any engagement with FTX. However, in hindsight, the glaring gaps and missed "yellow flags," in particular around the lack of available audit reports, were readily apparent and should have merited enhanced due diligence into the company's governance and oversight mechanisms.8
Cost Adversion or Commerical Naivety?
In the examples quoted and many others, the organizations had the means to instruct appropriate due diligence on a risk-based approach. These were not lower league teams on the verge of bankruptcy desperate for a deal, any deal, that might keep them afloat. No, these were national or global brands worth hundreds of millions if not billions of dollars. So, either a risk-appropriate level of diligence was not undertaken because of the biases discussed above or there was an unwillingness to spend the money on compliance measures such as due diligence. Many sports organizations are run by ex-athletes who have a culture of minimizing overheads to ensure maximum spending "on the field," or sentiments to that effect. After all, no International Federation President gets re-elected for spending money on compliance programs! This and other factors can result in an unhealthy disregard for common business practices such as competitive and open tenders for contracts or transparent senior appointment processes. These, combined with the above biases, can create a naivety that makes the sports sector more likely than most to make costly errors in everything from delivering capital contracts (where cost/time overruns are second only to the nuclear industry9) to counter-party risk management. Some governments are even considering regulating some high-value sports, largely to protect them from themselves.
Sealing the Deal
In the era of increased scrutiny of sustainability and societal issues, due diligence and ensuring that a deal reflects the values of both parties is becoming increasingly valuable. Identifying risks within that process does not necessarily mean a deal can not be reached; however, organizations should ensure that the launch of more novel deals is well planned and executed. The 2022 British Cycling and Shell tie up as an abject lesson in how not to launch a novel partnership. The governing body claimed the agreement would "help our organization and sport take important steps towards net zero," but Greenpeace was among those to offer swift condemnation. The debacle cost the CEO his job and the partnership remains controversial.10
Contracts should include provisions that protect the parties from negative events or controversies. For example, companies may include "morals clauses" in their sponsorship contracts that allow them to terminate the contract if the sponsored property engages in behavior that is detrimental to the company's reputation. In 2016, for example, Adidas and Nestlé pulled out of deals with the International Association of Athletics Federations (IAFF) following doping allegations.11
There have been plenty of examples of the importance of having an 'out' recently from misogynism and sexual abuse in sports. Recently ESSO said it would withdraw support for Hockey Canada's men's programs for the 2022-2023 season and World Junior championship until it sees "meaningful accountability, transparency and change" in the sport after its mishandling of sexual assault allegations.12
Conclusion
Risk based financial and reputational due diligence should both be essential components of sports sponsorship transactions. Those that fail to conduct proper due diligence are at risk of suffering significant financial losses and damage to their brand reputation. By careful and ongoing evaluation of the financial and reputational risks associated with sports properties, thoughtful launch communications, and including provisions in sponsorship contracts that protect them from negative events, the sector can improve on its investment and partnership decisions with maximum benefits to all parties.
Footnotes
1. https://www.theguardian.com/sport/2012/oct/17/nike-lance-armstrong-misled-decade
5. https://insightxintel.com/digitialbits-and-inter-milan-warning-signs-were-there-last-year/
7. https://decrypt.co/114975/crypto-sports-marketing-deals-crumbling-cancelled-failed-ftx
9. How Big Things Get Done; Bent Flyvbjerg and Dan Gardiner, Random House, 2023.
11. Due diligence best practices for corporate sponsors. Venable. 21 February 2018. https://www.lexology.com/library/detail.aspx?g=81d93aed-62f3-4ffb-9a6d-5453d04513b8
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
