When the news broke that Los Angeles Clippers Owner Donald Sterling had made horrifically racist remarks that were taped by his former mistress, one of the first responses was sponsors fleeing the team.
Within days companies including used car seller CarMax (NYSE: KMX ) , State Farm Insurance, Kia Motors (NASDAQOTH: KIMTF ) , Virgin America Airline, AQUAHydrate (P. Diddy's water brand), Red Bull, Yokohama tires and Mercedes-Benz cancelled or suspended their ads with the team. Though NBA Commissioner Adam Silver banned Sterling for life and intends to take steps to force him to sell the team, as of Tuesday no companies had come back on board. This forced workers at the Staples Center, the Clippers home arena, to cover up advertising banners and posters.
And since Sterling appears likely to take legal steps to hold onto the Clippers, it's possible many of those sponsors won't be back anytime soon, which hurts the team financially.
For advertisers the questions are complicated -- there is significant public relations value to staying away from the team, which might even be more beneficial than the original value of the ads they would have purchased.
It's about more than money
"Much more than the dollar amount these companies will gain from severing their association with the Clippers, these companies gain the infinitely more worthwhile advantage of being seen as socially progressive organizations," Villanova University's Maurice Hall, PhD, told the Fool. "People like to think that they patronize companies that reflect their own cherished values, and if a company seems willing to put principles ahead of profit, that sends a very powerful social message that builds the appeal of that company's brand."
It's important to note that Sterling's racial views were not a secret before the current scandal, yet the team had sponsors lined up to support it. This, says Hall, the chairman of the communications department at Villanova, is because while companies are praised for what seems to be an ethical and courageous stance, these decisions are also the result of peer pressure. It's possible that some of these companies were truly in the dark on Sterling and pulled their ads when they found out. It's more likely that the sponsors realized quickly that staying with the Clippers made them look insensitive at best while leaving might enhance their image. And as soon as one sponsor jumps others have to follow or risk being the bad guy who supports racism.
"It may not be a stretch to argue that it is as much fear as any other motive that drives these companies' responses," Hall told the Fool. "Put another way, there may be less of a cost in the long run for staying than the cost in the short run for leaving. These companies know that protest groups have learned that a very effective pressure point for companies is to use the threat of targeted boycotts against companies perceived as being tolerant of or indifferent to offensive speech."
The NBA had to act
Though Sterling's racism was not a secret from his fellow owners the public nature of this episode forced Silver to take drastic action. Had he not the league's players may well have revolted and sponsors may have pulled out on a national level in protest of a league that lets a confirmed racist own one of its teams. That could have caused huge problem for the NBA and its television partners -- once pressure mounts from paying advertisers it becomes almost impossible to reverse the trend. A recent example would be radio host Don Imus' racially insensitive comments about the Rutgers women's basketball team. Imus was making a joke (or trying to) on a comedy show but when advertisers started feeling pressure from the public they dropped the show and the host was fired (only to be rehired into a similar job by another company fairly quickly).
"Sponsors pulling out is understandable and expected, but unfair," Aaron Kwittken, CEO and managing partner of Kwittken + Company, told the Fool. "It is a misplaced protest and anger against the team when they should find a more creative way to condemn Sterling. Now the fans and the players become collateral damage."
Sterling is a very rich man and while I'm sure he wants to be richer, losing a few ad dollars (or tens of million of ad dollars) is not likely to stop him from fighting to keep the team. The people affected by the loss of sponsor dollars are likely to be much further down the chain than the billionaire owner, the players with guaranteed contracts, or even the rest of the NBA. The long-term loss of sponsor dollars will hurt workers who lose their jobs due to the revenue shortfall and others who had nothing to do with Sterling's offensive remarks.
The return should be just as grand
Sponsors got lots of free publicity for leaving the Clippers and they likely created some goodwill with their non-racist customers by dropping support of team. Once the legal issues around the franchise are resolved -- assuming the NBA can force Sterling to sell -- those teams should benefit from making a grand return to support the new, presumably non-offensive, owner. The only real problem comes if Sterling digs in his heel for a long fight leaving the team in limbo for years.
If that happens the Clippers remain damaged goods despite the strong steps taken by Silver and the NBA. In that scenario there will be lots of people caught by friendly fire as the sponsors are forced to stay on the sidelines despite the league's best intentions.
Are you ready to profit from this $14.4 trillion revolution?
Let's face it, every investor wants to get in on revolutionary ideas before they hit it big. Like buying PC-maker Dell in the late 1980s, before the consumer computing boom. Or purchasing stock in e-commerce pioneer Amazon.com in the late 1990s, when it was nothing more than an upstart online bookstore. The problem is, most investors don't understand the key to investing in hyper-growth markets. The real trick is to find a small-cap "pure-play" and then watch as it grows in EXPLOSIVE lockstep with its industry. Our expert team of equity analysts has identified one stock that's poised to produce rocket-ship returns with the next $14.4 TRILLION industry. Click here to get the full story in this eye-opening report.