Please ensure Javascript is enabled for purposes of website accessibility

Why Nike Inc. Suspended Its Contract With Maria Sharapova

By Motley Fool Staff – Mar 18, 2016 at 3:26PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The company had a difficult decision to make given the odd nature of the athlete's performance-enhancing drug issue.

A few weeks ago, Maria Sharapova called a press conference, where she announced that she had been using a recently banned drug for years, which very quickly led to Porsche and Nike (NKE 3.64%) both suspending their contracts with her.

In this clip, Chris Hill and Bill Barker explain why sports contracts are so harsh on their athletes, why Nike specifically could see its sales suffer from promoting an athlete who took performance-enhancing drugs, and how sports contracts have gotten stricter over the years.

A transcript follows the video.

A secret billion-dollar stock opportunity
The world's biggest tech company forgot to show you something, but a few Wall Street analysts and the Fool didn't miss a beat: There's a small company that's powering their brand-new gadgets and the coming revolution in technology. And we think its stock price has nearly unlimited room to run for early in-the-know investors! To be one of them, just click here.

This podcast was recorded on March 9, 2016.

Chris Hill: No one I know is as big a fan of tennis as you are. And the tennis world crossed over into the business world this week with the news that Maria Sharapova, fair to say one of the five best players in women's tennis over the last decade?

Bill Barker: Certainly.

Hill: Maria Sharapova called a press conference, which, when it was called, a number of people in the sports media thought, "Oh, she's calling this press conference to announce that she's retiring." And, instead, what she announced was that she has been taking, for some period of time, a substance that is now banned, something called meldonium, which is a medicine produced in Latvia that is prescribed for heart disease, which, as best I can tell, she does not have.

And this is the phrase that sends, certainly sports-related businesses running for cover: "performance-enhancing effects." So, Nike and Porsche, two of her sponsors, suspended their relationship with her immediately. And, in the case of Nike, it has less to do with just, "Oh, she's been taking this banned substance," I'm sure that was the case with Porsche. But in Nike's case, that actually hurts them, or could hurt them.

Barker: Yeah, they don't want to be aligned with athletes whose success is derived in any way from cheating. And whether she was taking a performance-enhancing drug with a medical use strictly for medical reasons or for performance enhancement, it doesn't really matter, particularly for Nike at this point. And it doesn't necessarily matter for WADA, World Athletic... something.

Hill: Is this the governing body?

Barker: That is the governing body of, I think, the testing, and I think the ITF or WTA or whatever follows their findings. So, anyway, Nike doesn't want to be associated with that, because they want people to buy their sneakers because the sneakers are what is going to make them, or the various other equipment that they produce -- that's what's going to improve their performance, not that they're aligning themselves with athletes who are using their sneakers and equipment and performance-enhancing drugs. There are plenty of athletes that don't have this hanging over their heads. Nike can easily distance themselves and just be aligned with the thousands of other athletes that they've got as part of their brand. 

Hill: We talked about this earlier this morning. Do you have a sense of when this started? And by this, I'm referring to companies like Nike putting into their sponsorship deals with professional athletes clauses that address this issue, that say, "Look, we're going to include these things, and if you're arrested, if there's anything that would damage the brand ... " I know, when I first became aware of these type of clauses, but I can't think of them from a business standpoint.

Barker: I don't know when they started. I think it's probably been decades, though. You want to get out of being associated with somebody once they have broken the law and are damaging your brand. After the first time somebody started damaging the brand by being associated with them and they were still paying because they couldn't get out of contract, I think the next contracts they started writing, they and everybody else included these things. Previously, performance-enhancing drugs is not where the morality clause would have started, because that's a far more recent innovation than other things that damage somebody's celebrity.

Hill: The first time I remember these types of clauses, it was in the 1980s, Michael Jordan was playing for the Chicago Bulls, I believe it was his second contract that he was negotiating with them. And the Chicago Bulls, realizing they had this transcendent player on their team, and wanted to make sure that he stayed as healthy as possible off the court, because, there's only so much they can do to keep him healthy on the court, had put in the contract a number of clauses basically banning all number of activities. You can't go skydiving, you can't ... they listed all of these different things that he was not allowed to do in his spare time. And one of them was pickup basketball.

You can't go play in a pickup game over the summer wherever you are, and Jordan balked at that. And it became referred to as "the love of the game" clause in his contract, because he and his agent basically made the case, "Look, I love playing basketball, you're not going to stop me from playing basketball. I can get hurt playing in a game for you. Yes, I can get hurt playing a game of pickup ball, but I want to keep doing it."

Barker: Was that Nike or was that the Bulls?

Hill: That was the Bulls. But, that was the first time that I became aware of, "Oh, wait, there are clauses in contracts that are far more complicated than here's how long the contract runs and here's how much we're going to pay you to do x."

Barker: Yeah, and the more money that's at stake, the more things there will be in that contract that you can't do, and ways for somebody to get out of paying, because in the world of sports in particular -- and this differs from league to league, but baseball, you're on the hook for now five, six, seven years, $100 million, way more than $100 million. And if you were taking a risk that somebody would skydive or skateboard or anything like that, it's just not worth your risk.

Hill: So, you're saying the days of the great John Kruk, who played for the Philadelphia Phillies, smoking--

Barker: I'm not sure that (laughs) would be... is that in there?

Hill: I just remember, he's the last, certainly the last major league baseball player, and that's 20 years ago that he was playing for the Phillies. But, in the 1990s, Kruk was a smoker.

Barker: High-profile smoker.

Hill: High-profile smoker. (laughs) 

Barker: I doubt he's the only professional athlete still smoking.

Hill: I was referring to cigarettes. (laughs) 

Barker: Right. But, even so, because of their addictiveness, and, obviously, they don't help your performance, especially over the long term, because they kill you, which always hurts your performance.

Hill: Yeah, that does. Although, not as much as cardio in baseball.

Barker: (laughs) Right, and that was his point. I think that was his response when he was found smoking and somebody said...

Hill: "How could you do that?"

Barker: "How could you do this? You're an athlete!" And his response was, "I'm not an athlete, I'm a baseball player."

Hill: Right.

Bill Barker has no position in any stocks mentioned. Chris Hill has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Nike. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.