Notes on a scandal

Insurance and Reinsurance, Legal, Maritime Fraud — By on November 25, 2012 at 7:03 PM

A dramatic fall from grace can be expensive for brands that align themselves to celebrities

It is one of the biggest sports doping scandals in history and the fallout continues. Lance Armstrong received a lifetime ban from taking part in competitive cycling and was stripped of his seven Tour de France titles in October after being found guilty of using performance enhancing drugs.

In this age of celebrity, a growing number of organisations are opting to align themselves with individuals in the public eye in an effort to build brand awareness. The difficulty comes when those stars fall off their pedestal.

“It is seductive to think that a particular celebrity is a safe choice – there is no such person, ” says Phil Ellis, chief executive of Willis Global Solutions. “Because we’re dealing with human beings there’s a real risk that a company – if it depends on a single personality – will be the victim of a fall from grace. They need to recognise that’s the case and either be careful not to completely identify a product with a single person or, if they do, do so for discrete periods of time.”

Doping scandal  

The United States Anti-Doping Agency (USADA) accused Lance Armstrong and the US Postal Service Pro Cycling Team of running “the most sophisticated, professionalized and successful doping program that sport has ever seen”.   The cycling star subsequently stepped down from his role as chairman of Livestrong, the cancer charity he founded in 1997 after his recovery from testicular cancer. And on 12 November he cut all ties with the organisation in an effort to preserve it from being tainted by his tarnished reputation.

“Lance Armstrong has chosen to voluntarily resign from the board of directors of the Livestrong Foundation to spare the organisation any negative effects as a result of controversy surrounding his cycling career, ” said new chairman Jeff Garvey.   Other sponsors have dropped Armstrong from fronting their products, including Nike, RadioShack Corp and Anheuser-Busch. Nike was quick to drop Armstrong from its stable of sports celebrity endorsers, but continued its support of Livestrong initiatives.

“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, ” said the company in a statement.

Multi-media world  

In an interconnected world where news travels fast, one person can make a big difference to a company’s share price. There are plenty of examples in recent history. Tiger Woods and his misdemeanours, the suicide of Alexander McQueen, illness and subsequent death of Apple boss Steve Jobs and the untimely death of Michael Jackson ahead of his comeback tour.

“Whenever there is an over-reliance on a particular feature of the business, whether a single supplier, particular geography, product, technology or a sports star or celebrity that has become a kind of symbol of the corporation – whenever there is a reliance on a single factor your company is brittle – it is in a vulnerable condition, ” says Ellis.   Various insurance products exist to protect companies that have a strong affiliation with one or more individuals. One is death, disgrace and disability cover, which has traditionally been used to cover the cost of advertising campaigns. Another is key-man insurance, which is designed to protect a company against the financial impact of the death or illness of a senior director.

Whether the actions or demise of one person is enough to cause a severe crisis for a company depends on how closely their fortunes are tied to the fortunes of the organisation. Boards need to consider the potential impact of putting all their eggs in one basket, thinks Ellis.   “The first natural thing to do is to diversify the risk, ” explains Ellis. “So don’t over-rely on a single geography, a single technology, a single product or a single person that personifies the brand. It’s a natural progression companies tend to go through and the best insurance possible is to make a business more robust by giving it more than one dimension.”

(Source: Lloyd’s of London website)

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