The NFL is a nonprofit corporation. That should be no surprise when you stop to think about it. Many--indeed, most--trade associations are nonprofit, because their point is to create benefit for their members, not to create profits at the trade association entity level. IRC 501(c)(6) exempts from taxation for chambers of commerce (and professional football leagues) for just this reason.
For years, the NFL's tax-exempt status has been the subject of scrutiny and ridicule. To many people, the fact that a league headed by a commissioner making $44 million a year was categorized as a nonprofit was absurd.
This is not absurd, it's fuzzy thinking. Each NFL teams individually still pays tax on all its profits, since each is a for-profit entity. They teams pay taxes on any money the NFL distributes to them. But as an entity, it's not supposed to make a profit. Just because you're a nonprofit doesn't mean you can't make a profit. Harvard's endowment was $36.4 billion on June 30 of last year. It's doing quite well.
It's unclear exactly how much the NFL will save per year by forgoing its 501(c)(6) status--this WSJ article has estimates costing from $10.9 million to $91 million annually--this for a $10 billion-a-year organization. Commissioner Goodell's letter to the owners characterized the NFL's tax-exempt status as a "distraction,"--but even at the low-end estimate of costing $11 million per year, wouldn't you put up with the distraction? Reading between the lines, the reason is clearly that Goodell doesn't like the public disclosure attendant with 501(c)(6) status. Particularly the disclosure of his salary, which totaled $35 million in 2014.
Costing your organization $10 million a year because you don't like having your salary being public? Now that strikes me as absurd.
Congratulations to the Giants on winning the World Series, one of the two least statistically inclined teams in baseball, the other, of course, being the Royals. Indeed, with the possible exception of the Red Sox, the teams that have won the World Series since the sabermetric revolution have all been rich (as are the Red Sox, so it is hard to characterize them as solely stats-driven), traditionally strong in scouting, or random.
What does this tell us about baseball analytics? Over the next week, I predict you'll hear:
- It tells us nothing, short series are random, and the fact that a moneyball team has never won the World Series is a product of chance.
- It tells us nothing, everyone uses statistics now, and therefore teams that say they are not moneyball teams are, in fact, moneyball teams.
- What about the Red Sox, doesn't that show that moneyball works, even though short series are random?
I like looking at sports through stats. It is way more thoughtful than "he wanted it more," or "you gotta make that play." I'm actually not positive it's much more predictive than just looking at net spends or surveys of experts. But what do I know? Everyone uses moneyball now.
For our last guest post, Robert and I would like to share our experiences using the five pathways in the classroom to teach legal strategy to business students. Overall, applying this research in the classroom has been a rewarding experience that has challenged us to improve the framework’s conceptual foundation and demonstrate its relevance in the business world.
When we first experimented using the five pathways in our respective graduate business courses three years ago, we were unsure about how well it might be received. To our relief, the framework was well received from the start. In a recent end of year survey that I give to my MBA students, several of them mentioned that the framework was one of the learning highlights in their required business law course. Various students mentioned that the framework allowed them to view the law in a different way and also helped them appreciate the opportunities and benefits of engaging attorneys to help solve business problems. This is in contrast to the viewpoint, held by some managers, that law is an external, dense and static force that constrains business behavior as opposed to enabling value creation.
Robert and I introduce the framework early in our courses, and then apply it to examples and cases throughout the term. To drive home the framework’s applicability, we created a specific team-based homework assignment (Download HW 1) that asks students to choose a recent news story involving a business law issue that follows the prevention, value or transformation pathway, and to analyze the issue from a law and strategy perspective. The articles that students recently have chosen to analyze include stories about NFL contract negotiations, the FCC’s review of the Comcast Time Warner merger, and Airbnb’s legal fight against the New York Attorney General. These cases provide plenty of material for discussion in class, and serve as potential research topics.
Although the framework has yet to be applied in the context of a law course, we think it could potentially engage law students and attorneys who seek to understand how the law strategically relates to their clients’ business.
Ultimately, we’d like to see the framework applied in diverse learning environments, so we encourage you to make use of the framework and contact us if you have any questions or ideas about how to apply it. If you decide to use the five pathways in your classroom or company, we’d love to hear about your experiences.
We’d like to conclude by extending a warm thanks to The Conglomerate and its readers for allowing us this opportunity to share our ideas related to law and strategy. We’ve greatly enjoyed participating as guest bloggers in such a distinguished collaborative space.
David and Robert
After the US exited the World Cup, many of the wrapups have evinced optimism about the future of the team. Here's one reason why not: our best players - Michael Bradley, Clint Dempsey - have found that they can make more money as designated players in MLS than they can in the European leagues. Indeed, MLS has been actively pursuing the best American stars with big paydays. Perhaps for this reason, the national team has more MLS players now than it did in the last World Cup. As the league gets stable, there's some risk that American stars will have to choose between getting guaranteed starts in a country they know well for the same kind of money they would make in a foreign land where they might not prosper. For the leading soccer leagues - England, Germany, Italy, Spain - the interest in national team players staying at home is not so important for the health of the national team, as those players that do stay home (and this includes the vast majority of them) face elite competition when they play for their native clubs. For countries with only okay, but well-heeled leagues - Mexico, Russia, and now, maybe, the United States - the fact that the best players can make the best money if they stay at home arguably retards progression, rather than encouraging it.
The ugly Donald Sterling episode seems to be moving to resolution with a pending sale of the L.A. Clippers to Steve Ballmer. The sordid story makes for a great case study in a Contracts course, not least because of the wealth of material that is publicly available, particularly one of the central contacts – the NBA “Constitution and Bylaws.” Often the key contracts in the most notorious disputes are kept confidential, with only snippets of the agreements available even via court dockets.
Under the terms of the Constitution and Bylaws, the NBA Commissioner position that Sterling could be forced to sell his team was strong but not (pardon the pun) a slam dunk (see Michael McCann’s early analysis here and an analysis of Sterling’s response here).
The Commissioner and Sterling each were aiming to persuade a motley group of NBA owners, who may have been concerned with, among other things, the outrage of players and fans towards Sterling, the damage to their league of having Sterling continue as owner, and the precedent of forcing an owner to sell.
Layered on top of this were the family law and tax considerations of Sterling transferring ownership whether to his estranged wife or to a buyer.
In the end, economics pushed Sterling to sell. He was faced with a stark choice of trying to hang on to an asset that was damaged goods just by remaining in his hands versus over a billion dollar profit from selling.
In teaching this episode, students should be cautioned against jumping immediately to the “of course he will sell” conclusion. The hard work of analyzing the contracts helps explain the negotiating positions of the NBA commissioner, the various NBA owners, Sterling, and his wife as they bargained in the shadow of the law. The contractual language also will help prepare for any post-sale litigation;Sterling has already initiated one suit and threatened more . Sterling's wife apparently agreed to indemnify the NBA against legal challenges by her husband, which adds yet another teaching wrinkle. One puzzle for students: what was the strategy behind declaring Sterling incompetent?
Too bad I am not teaching Contracts in the fall.
I’m helplessly drawn to soccer and have been for nearly sixteen years. The sport has shown me countless moments of transcendent genius, like that goal by Arsenal’s Thierry Henry, and it continues to inform my thoughts on issues ranging from globalization to personal fashion.
One of the biggest stories in the footballing world this week comes out of the German Bundesliga, Germany’s top professional league. Sunday’s match between Werder Bremen and Nürnberg saw Bremen’s captain Aaron Hunt deny his team a penalty—and a near-certain goal—by admitting to the referee that he had not been fouled after seeming to “trip” over an opponent’s foot. Werder was leading at the time and eventually won the game 2-0. Afterwards, Hunt told the media that he had tried to provoke the penalty “out of instinct” but then thought that doing so “was wrong.”
Most are treating this as an example of good sportsmanship. My reaction is slightly different. I see Hunt’s conduct as a potential teaching tool for discussing social enterprise.
When I first started looking into social enterprise, it felt like the movement’s supporters saw it principally as a response to concerns about shareholder wealth maximization. Their worry was that an undue corporate emphasis on profit making was to blame for the financial crisis, climate change, and other problems. Social enterprise was seen as the antidote, since it captures firms that seek to go beyond profits in order to do “well” (financially) while doing “good” (socially).
I’m a fan of social enterprise, and I think social enterprise law can add real value. Yet I’d caution against placing it in direct opposition to traditional corporate behavior. Social enterprise is growing at a time when notions of shareholder prioritization continue to evolve. While it is true that courts generally hold that directors must act for the benefit of the “corporation,” what this means as a practical matter is open to debate. Some managers probably do see the singular pursuit of wealth as their obligation, but many others now see a strong relationship between a firm’s social footprint and its impact on shareholder value.
This brings me back to Mr. Hunt. I like to imagine that something similar to his phantom foul situation plays out in corporate decision-making. Even if traditional corporate managers often start with a view toward maximizing profits “out of instinct,” I’m not ready to concede that many won’t still pull back to consider the wider social effects of their decisions. The difference between corporate managers and professional footballers is that not every ethical quandary in the C-suite happens in front of a live worldwide audience. But that’s not to say that every manager needs or wants to check her ethical sensibilities at the door, or that existing corporate law is not already flexible enough to permit most social/economic tradeoffs.
Whatever the justifications are for supporting social enterprise—and I believe there are many—they should not include a wholesale rejection of the traditional corporate model. Generating meaningful social impact is always going to be less about form and more about management’s sense of purpose, virtue, and ideals. So where does that leave the role of social enterprise and social enterprise law? That’ll be the subject of my next few posts.
I hope that you having been enjoying the last 3 days of Olympic fever and that life hasn't made you so crusty and cynical that you dismiss it at all worthless, expensive hype.
I love the Olympics!
My favorite moments so far:
hearing my son say "they look American" no matter which country's team was walking in front of the camera, no matter if the persons were from Asia, Europe, Africa or the Americas;
being about the 200,000th person to watch the USA swim team Call Me Maybe video on Friday, and today being about the 3,000,000th;
buying two "I HEART TYLER MCGILL" t-shirts from Tyler's mom here in Champaign to get ready for Thursday's 100 meter fly event;
watching Ryan Lochte win on Saturday night and lecturing my children on how every once in awhile, the person who wins is the person who works hardest and wants it the most; and
watching Misty May-Treanor and Kerry Walsh-Jennings keep their undefeated Olympic beach volleyball streak going.
Following Gordon's post yeseterday on the Penn State "nondeath penalty," I started thinking more about whether NCAA sanctions against Penn State are a good idea.
Now, I don't mean whether the sanctions are too harsh or will have collateral effects on innocent Penn State programs, students and alumni. Of course sanctions will have collateral effects, just as disclosure of the events at the heart of the sanctions did. The decline in the reputation of Penn State hurts employees, students and alumni. The financial penalty as well as lost revenue will result in a different academic budget that will affect the same groups. These effects are not super great reasons not to punish an organization. Many folks in our field think a lot about the merits of organizational sanctions, and the Penn State scenario is no different from the SEC levying fines against an investment bank or any other large firm that employees folks and has shareholders.
Here is why I'm concerned that NCAA sanctions aren't a great idea. What Sandusky did and his colleagues covered up was categorically different and categorically worse than having a slush fund for players (SMU); letting agents pay a player (USC); letting students trade autographed jerseys for cash (Ohio State); or letting boosters lavish players with cash, prostitutes and entertainment (Miami). All of those things are against the spirit of amateur sports, but they aren't things that require the devil to grow a new mouth for the accuseds to rot in. Giving someone money isn't per se a horrible thing; giving someone money in the context of collegiate athletics is. The heinous acts that occurred in and around the Penn State locker room are heinous in any context.
Let's picture this. SMU was banned from playing for 1987 and hosting home games for 1988 and lost 55 scholarships over 4 years for "X." Penn State was not banned from playing, was fined $60 million, banned from bowl games for 4 years and lost 40 scholarships over 4 years for "Y." Does that mean that the NCAA thinks that "X" is worse than "Y"? USC lost 30 scholarships over 3 years and was banned from bowl games for 2 years for "Z." Does the NCAA think that "Z" is 3/4 or 2/3 as bad as "Y"? Miami is still awaiting its sanction for allegations made in 2011 of "W." What if Miami gets a harsher penalty than Penn State? It has to get a harsher penalty than USC, and there's not a lot of real estate between USC's penalty and Penn State's penalty.
Do we really want to put the bad acts of the Penn State officers on the same spectrum as recruiting violations and payouts to players?
I don't mourn the fallout at Penn State due to the NCAA sanctions, but I am concerned with the symbolism.
When news of the NCAA sanctions against Penn State was leaking last night, commentators largely split into two camps: those who believed that penalties were justified, but were worried that the speculated penalties were not harsh enough, and those who believed that the NCAA had no business penalizing Penn State.
The actual penalties announced today were even more dramatic than most people anticipated: Penn State was fined $60 million, stripped of 10 scholarships per year for the next four years, banned from bowl games for four years, and had all of the football program's wins from 1998 to 2011 vacated. In addition, all current and incoming players are allowed to transfer immediately. Wow!
The Big Ten Conference decided to pile on, banning Penn State from any conference championship and adding an additional $13 million in fines.
The money is not the big story here. (According to the NCAA, $60 million is about the average annual revenue of the football program.) The future of Penn State's football program is not the big story. (This worse than the death penalty, but outside of State College, who cares about the future of Penn State football?) The big story is the NCAA's effort to work a cultural change, not only at Penn State, but throughout college athletics: "These events should serve as a call to every single school and athletics department to take an honest look at its campus environment and eradicate the 'sports are king' mindset that can so dramatically cloud the judgment of educators."
The NCAA seems a bit late to the culture party, and I suspect that it will be rightly accused of hypocrisy on this one (has anyone written that column, yet?), but I like the move today. Will the events at Penn State have an effect on university administrators and athletics departments? Maybe. Will it have an effect on the NCAA? No doubt. I am curious to see where this leads.
Over the past several months, Joe Paterno's family and their proxies have been busy attempting to protect his legacy. After the Freeh Report was released earlier this week, the family continued to assure us of his fundamental goodness and integrity, but the facts uncovered in the Freeh Report portrayed a man driven by his own selfish interests, even when those interests endangered young children.
Today, the NYT added another layer of shame on Paterno: shortly after receiving a subpoena to testify in the Sandusky scandal, Paterno contacted the University to negotiate his departure. While still in a position of great strength, Paterno negotiated for a $3 million severance payment if he left his position at the end of the 2011 season. He also wanted forgiveness of $350,000 in loans from the University, the use of the University’s private plane, and a luxury box at Beaver Stadium for him and his family for 25 years.
The contract was signed in August 2011, but the board of trustees was not told about it until November, when Sandusky was arrested. According to the NYT:
Board members who raised questions about whether the university ought to go forward with the payments were quickly shut down, according to two people with direct knowledge of the negotiations.
In the end, the board of trustees — bombarded with hate mail and threatened with a defamation lawsuit by Mr. Paterno’s family — gave the family virtually everything it wanted, with a package worth roughly $5.5 million. Documents show that the board even tossed in some extras that the family demanded, like the use of specialized hydrotherapy massage equipment for Mr. Paterno’s wife at the university’s Lasch Building, where Mr. Sandusky had molested a number of his victims.
Of course, Paterno was fired before the 2011 season, but in the face of a threatened lawsuit for defamation, the board of trustees gave Paterno's family the compensation provided for in the contract. One last thought from the NYT story:
The details of Mr. Paterno and his family’s fight for money seem to deepen one of the lasting truths of the Sandusky scandal: the significant power that Mr. Paterno exerted on the state institution, its officials, its alumni and its purse strings.
After he was fired as the head coach of Penn State's football team, Joe Paterno wrote a column about the Sandusky scandal in which he stated "in no uncertain terms, that this is not a football scandal."
Today, a reporter asked Louis Freeh, "was this a football problem?" Freeh's response:
The rapes of these boys occurred in the Lasch Building. Mr. Paterno had his office in the Lasch Building, steps away from Mr. Sandusky. Mr. Sandusky was one of his chief defense coaches.... ][W]e don't have the benefit of having spoken to Mr. Paterno ... however, we have a statement that he made [about his conversation with former assistant coach Mike McQueary when the then-graduate assistant coach reported the February 2001 shower incident] and Mr. Paterno’s quote was: "You did what you had to do. Now it’s up to me to decide what we want to do." I think that’s a very important, critical and telling statement.
Over the past few months, people have debated Joe Paterno's legacy, but with the issuance of the Freeh Report today, public sentiment has taken a dramatic turn against Paterno, and the question of consequences for Penn State's football program is taking center stage. Mark Schlabach captures the views of many today:
During the previous seven months in which the Sandusky nightmare unfolded, I wasn't sure the NCAA should get involved. In fact, I didn't know if I even wanted the NCAA involved because the unimaginable scandal seemed so far out of its league.
But after Freeh's report revealed Paterno and others failed to notify the police about Sandusky's assaults of young boys in three separate incidents from 1998 to 2001, I think the NCAA should punish Penn State.
And the Nittany Lions should get hammered more than any other school in NCAA history.
Agreed. If you Google "penn state death penalty," you will find that this view is fairly widespread. Schlabach makes the case rather concisely:
Protecting Paterno's legacy and the reputation of his once-unsullied football program was paramount at Penn State, so much so that university officials ignored the well-being of children, the least protected among us.
"Taking into account the available witness statements and evidence, it is more reasonable to conclude that, in order to avoid the consequences of bad publicity, the most powerful leaders at Penn State University repeatedly concealed critical facts relating to Sandusky's child abuse from the authorities, the Board of Trustees, Penn State community, and the public at large," Freeh said.
The Nittany Lions need a hard lesson to remind them of what really matters.
Football fans, I'm talking about the Securities and Exchange Commission, not the other SEC. Yesterday the NFL denied the appeal of several key players in the New Orleans' Saints bounty scandal. I'm not surprised that some commentators are debating the fairness of the punishment to the fans, or wondering whether the Saints are unfairly being scapegoated. I don't follow football closely enough to opine on these matters (although, like Stephen Bainbridge, I am now part owner of an NFL franchise, but that's a topic for another day).
Rather, I see the bounty scandal through the eyes of a corporate law scholar. To generalize (acknowledging, as my father always used to say, generalizations are dangerous--even this one), we worry about two big kinds of dangers in corporate law. First, we talk a lot about agency costs, an economist's fancy way of describing the risk that the cashier is stealing from the till or sleeping on the job. Pulling a fast one on management. We think that's bad.
But then there's the other danger--the employee who isn't stealing, but rather is breaking the law in order to further his employer's interests. These actions produce a social cost--if one company profits from a government contract secured by bribery, society as a whole is worse off, even though the company employees approving the bribe were genuinely acting in their employer's best interest. What the Saints coaching staff was doing was perfectly logical and perfectly loyal to the team's interests--winning at all costs. But if each team pursued this strategy, the league as a whole would fail because the system as a whole would lose credibility and players would suffer too many injuries. And here's where the NFL is the SEC--it has to come down hard on the Saints precisely because each individual team's incentives are to crush its opponents at all costs, to injure, to destroy.
Michelle SIngletary makes the Greg Smith connection, observing that "In and out of sports, we should expect people to play fair and, if someone is hurt, it shouldn't be intentional. If it is, the perpetrators deserve to be thrown out of the game." She's right, although you don't need the moral opprobrium of the word "deserve" to get there. The point is, the game itself requires that this kind of agency be punished. Otherwise, everything falls apart. On Wall Street, on Main Street, and on Bourbon Street.
I think that this profile of Harrison Barnes, North Carolina basketball star and would-be brand manager, is meant to critique the idea that a 20-year-old might talk about his future with reference to the idioms that a CEO probably uses when talking to a stock analyst. Barnes obviously wants a sneaker deal, but he'd probably take something with Indonesian Airways, and I suppose one of the takeaways from the profile is that those kinds of desires just aren't very old school.
But, given that I share a home town with Barnes, I'd like to remphasize the refreshing nature of his ambitions. If you'd like to get into Wharton's MBA program, it is excellent to have served time at a name brand financial intermediary or consultancy. But it is also excellent to have tried to build a business on your own. Harrison Barnes seems to want to build his own business, and if his focus at age 20 is somewhat terrifying, his instincts are not atypical. My school looks for people like Barnes, and the only strange thing about his profile was that he really isn't going to have to be a smart businessman if he wants to earn dynastic wealth. That will come from the basketball alone. The fact that Barnes wants to do more than just play for a high salary makes me think that Gordon should be rooting for North Carolina as much as he intends to root for his alma mater.
While I'm in Europe and complaining about soccer, enjoy the sport though I do, I thought I'd issue a little rant about soccer sabrmetrics, or the lack thereof. It could be that the gap tells us something about sports or soccer more generally, or only that there's a gap in the market that would be incredibly easy to fill. Some observations:
- My preferred team, Liverpool, is in 7th place, seven points off the pace in the race for a place in the all-important Champion's League, with a game in hand and eleven to play. In America, it would be easy to find people who could tell you how often such a gap has been overcome, the percentage likelihood of doing it, updated every week as the end of the season draws closer. You could have it done if you think of this year's English Premier League as comparable to the others that preceded it, to English top division football, to European top division football, to English leagues, etc. But as far as I can tell, journalism is more, "eh, I don't see it." Or "maybe!!!!"
- This goes for almost every team related metric you'd want to know about. How often does a team with the highest wage bill as a percentage of the league wage bills win? What is the value of an extra euro in team revenues, expressed in wins? An extra pound in salary +
transfer payments? This stuff is easy! It doesn't depend on evaluating how "good" a midfielder is, which is much more tricky.
- There is some sabermetrics out there, done through the mysterious Opta (follow them on Twitter, not bad). Opta makes money selling data to teams. But a lot of the science in soccer is about heart rate, meters travelled, and tackles won. That stuff IS about evaluating how "good" a midfielder is, and one does wonder if it is unobserving a great deal of relevant facts.
- Some people think that soccer is unquantifiable, and sometimes I think there may be something to it. Liverpool has hit the woodwork way more than any other team in the Premier League this year, and scored less than most. To an American sabermetrician, the implication would be easy: Liverpool is about to start scoring, and you should bet on them to do it, collecting money from afficianadoes of "winner sauce" and "that last bit of quality in the final third of the pitch." But I actually wouldn't really be inclined to bet my bottom dollar on Liverpool finding the back of the net. It really does seem like four guys take all the shots for the team, and three of them love to sky it into row 37 when they aren't hitting the post. More generally, could it be the case that a fluid, statistics-free game like soccer really is, despite its simplicity, too complicated to reduce to quantifiable metrics, and in this way is more like real life than is baseball? That's what some soccer fans would tell you.
I'm in London, and yesterday I saw this, in a nice little concrete-and-corrugated metal stadium near Shepherd's Bush. Good atmosphere, fans close to the pitch, and the soccer was okay too, which you certainly can't count on with QPR and Everton.
There are generally between four and six London teams in the the Premier League, and they all have their own grounds. Everyone in Britain does, as this story makes clear, and the question is why. Liverpool and Everton are both looking for new grounds in their rather small city, while teams in Milan, Munich, Rome, and in the US, almost every professional basketball and hockey team, share stadia. It seems like a total waste, as these pictures illustrate.
This is Liverpool and Everton, two really famous clubs.
This nonsense is too really not-so-famous clubs in Nottingham (one had some very good days, though):
And this insanity is in Dundee, a really small Scottish town with one biggish (for Scotland, which means tiny) club, and one small one:
It's not the most pressing sports business question, but why don't the London clubs play out of three massive, ritzy, loaded with luxury box stadia? Why don't Liverpool and Everton do that, desperate as they are to grow their revenues? Twenty years ago, you might have worried that the fans of the rival clubs would set fire to the place at the end of every game. But today, it just seems like the difficult issues would involve working out how to divide the money for stadium tours, corporate events, and EU concerts. If the Flyers and the Sixers can manage that not so difficult juggling act, I would think that British soccer could leave the concrete and corrugated days behind. And dividing growing pies, we business law scholars have been taught to believe, shouldn't be hard at all.