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ARC: WHAT COMPANIES NEED TO KNOW TO PROTECT THEMSELVES FROM REPUTATION RISKS

Lance Armstrong doping scandal highlights endorsement deal risk

Strong due diligence, contract essential

Photo by AP PHOTO The doping scandal surrounding cyclist Lance Armstrong highlights the risks organizations take on when they link with celebrity endorsers.

The fallout from the Lance Armstrong doping scandal for businesses aligned with him through endorsement or sponsorship deals — and for the Livestrong organization Mr. Armstrong formed in 1997 as the Lance Armstrong Foundation — is the latest example of the reputation and brand risks present when such relationships with celebrities go wrong.

But, according to many experts, the Armstrong case should raise additional awareness of the risk management steps businesses can take as they associate themselves with celebrity spokespeople, as well as show how philanthropic organizations can minimize risks they might face from any misbehavior of celebrity supporters.

After the U.S. Anti-Doping Agency released a report this month outlining details of alleged widespread doping by the cyclist and his team, companies associated with Mr. Armstrong began ending relationships with him, and Mr. Armstrong stepped down as Livestrong's chairman, though he remains on the organization's board.

The winner of seven Tour de France titles from 1999 to 2005, Mr. Armstrong saw those victories vacated and was banned for life from the sport by the International Cycling Union.

“Due to the seemingly insurmountable evidence that Lance Armstrong participated in doping and misled Nike for more than a decade, it is with great sadness that we have terminated our contract with him,” Nike Inc. said in an Oct. 17 statement while indicating it would continue to support Livestrong's efforts to support cancer victims.

Brewer Anheuser-Busch Cos. Inc. took a similar approach announcing it wouldn't renew its relationship with Mr. Armstrong when its contract expires at the end of the year.

Any time a company aligns itself with a celebrity endorser, there's a risk that the person might engage in an activity that damages their reputation and that of the brand, said Lori Shaw, executive director, global entertainment group, at Aon Risk Solutions in Charlotte, N.C.

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Mr. Armstrong is “probably the most notable sportsperson who's fallen this far that fast,” and, as such, his story is likely to have an effect on companies' future consideration of using athletes in their marketing efforts, said Paul Swangard, managing director of the James H. Warsaw Sports Marketing Center in the Lundquist College of Business of the University of Oregon in Eugene, Ore.

“What it speaks to is it's a risk/reward business,” Mr. Swangard said. “When done well with the right athlete and the right personality, people will favor your products. The risk of that is if that person turns out to be someone like Lance, that hurts your product.”

“If you are a company that wanted to sponsor Lance Armstrong, you had to know that these doping allegations were out there and that there was the risk that they might be proved true or at least might not be refuted by Armstrong,” said Brian Socolow, a partner at law firm Loeb & Loeb L.L.P. in New York, whose practice includes sports law. “They were putting dollars at risk. In my view, you need to take that into consideration.”

“Really, the next step to that is not only do you do your due diligence, but you need to structure a contract as the company paying the endorsement money that protects you,” he said.

Mr. Swangard said he thinks the Lance Armstrong scandal likely will lead more companies to “tie the contractual obligations to meeting specific business objectives.”

“I think the athletes are losing some of their leverage, that Lance is one of those catalyst moments that shifts the controls back to the brands to say, "Here are the rules you have to live by,'” Mr. Swangard said. “I think that's a good thing for the industry,” he said. “I think that's a market correction that needed to be made.”

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Aon's Ms. Shaw said events like the Lance Armstrong scandal raise companies' awareness of the risks of celebrity endorsement deals. “These marketing campaigns that maybe people didn't think about or didn't hit the risk manager's sweet spot, now they're seeing what kind of impact they can have on a company's bottom line,” she said.

Historically, there has been insurance available to transfer some of the risk associated with employing celebrities in marketing campaigns, she said. “If that person would unexpectedly die, become disabled or they did something that was disgraceful, there was insurance you could buy that would cover the cost of that campaign.”

The Tiger Woods sex scandal that emerged in 2009 and its impact on companies that had marketing relationships with the golfer made businesses aware of additional risks, such as decreases in future income or devalued stock prices when a relationship with a celebrity endorser goes wrong, she said.

Randy Nornes, executive vice president at Aon Risk Solutions in Chicago, said several insurance products have emerged recently to try to address some of those exposures. Generally, those products place considerable emphasis on front-end risk management such as table-top exercises and other sorts of examinations of “what-if” scenarios, he said.

Companies involved with celebrity endorsers are increasingly recognizing the value of such risk management exercises, Mr. Nornes said. “Most companies are realizing they have to think these things through before something happens,” he said.

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