Magazine article Risk Management

The Human Factor Risk of Athletic Scandals

Magazine article Risk Management

The Human Factor Risk of Athletic Scandals

Article excerpt

Lots of high-profile professional athletes have been in the news lately--and not for the right reasons. The NFL's domestic abuse cases are probably the most notable examples, but several others are worth mentioning as they highlight human factor risks, a unique form of third-party risk that businesses must account for in their broader risk management strategies.

Take legendary golfer Phil Mickelson, whose name was raised in association with an insider trading investigation. Imagine the discomfort for KPMG, his lead sponsor, when Mickelson wore a hat emblazoned with its logo at a press conference discussing the situation. Although many risk management professionals have begun to question just how severe reputational impacts really are, for an audit firm, the guilt-by-association factor was potentially deadly.

Going back a few years, Nike faced fairly serious fallout when Tiger Woods and Lance Armstrong--both of whom had long associations with the brand--were in the news for different kinds of cheating. The controversy about "sweatshop" conditions at its contract manufacturing plants was another source of unwanted attention. In fact, in light of several recent NFL player scandals, it is no surprise that shareholders brought up the risks of associating with such athletes at Nike's most recent annual meeting.

The bottom line is that companies face specific and highly unpredictable risks when they make big investments to partner with human beings. Those risks extend beyond the realm of celebrity endorsers. The decision-making of CEOs and other important employees can present equally serious threats. American Apparel's controversial CEO Dov Charney and JPMorgan Chase's rogue trader, nicknamed the London Whale, remind us of that lesson.

So how do companies do a better job in planning for and managing unique third-party and human-factor risks? There are a range of steps companies can take--from a strategic "rethink" of these relationships to specific tactical actions--to help ensure they avoid or minimize damage. The critical components of any plan are to have a clear exit strategy defined in the beginning of the relationship, and have the courage to execute that strategy based on pre-defined criteria.

Strong exit strategies require thinking about the good, the bad and the ugly before entering into relationships. Companies must understand their risk appetite for experiencing the ugly, in particular. This can be a difficult task, because the euphoria of a sponsorship deal often clouds more grounded, risk-informed thinking about what happens if and when things go wrong. It is a situation analogous to marriage: while rice is being thrown and celebratory toasts are being made, no one wants to think about the statistically valid possibility of divorce. In business, where entities get hitched for money rather than love, prenuptial agreements are a critical risk management best practice.

A deep understanding of whom you are marrying--gained through a formal and robust due diligence process--helps reduce the risk of things getting ugly. The right approach must be designed to carefully assess and anticipate risk for all types of suppliers. Companies need to go beyond financial details, regulatory standing and the background of the executive team. For example, risk managers should take advantage of social media to gain real-time insights into their potential partners.

The process does not end when deals are signed. Human factor risk management is not a "one and done" proposition. Rather, it is an ongoing activity that requires risk appetite to continually be recalibrated throughout the course of such relationships. …

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