In December of 2009 marketers at Accenture, AT&T, Gatorade, General Motors, Gillette, Nike, TAG Heuer and other companies faced a difficult decision. After tabloid reports of infidelity and an alleged altercation with his wife that ended in a car crash, Tiger Woods — who had endorsement deals with those firms — publicly (if vaguely) apologised for his behaviour and announced that he was taking an indefinite leave from golf. The following days brought more salacious stories. Should the companies abandon Woods or stay the course? Over the next few weeks, investors in firms that used Woods in advertisements lost US$12 billion (NZ$18.3 billion) as share prices fell. For managers at those companies, the question became: How to mitigate the damage?
Previous research has shown that firms tend to suffer financially when a celebrity endorser becomes mired in scandal. But the literature offered no practical guidance. "Nobody had ever looked at what firms could do to counter the losses," says Stefan Hock, a marketing professor at the University of Connecticut. So Hock and a colleague, Freie Universität Berlin's Sascha Raithel, set out to do just that.
They found that firms making no public statement and taking no action — the path most follow — generally do poorly. They also discovered a surprise: Companies that engage with a situation and handle it well don't just stanch the bleeding; they come out ahead. "These incidents can be an opportunity," Raithel says. "If a firm shows an appropriate response to the misbehaviour, it can gain market value."
The researchers began by examining news databases for examples of publicly traded US companies whose celebrity endorsers generated negative publicity from 1988 to 2016 while under contract. This yielded 128 incidents involving 230 companies. Fifty-nine per cent of the endorsers were athletes, 24 per cent TV or radio personalities and 17 per cent musicians; 70 per cent were male. (Nike experienced the most incidents — 23.) Despite the 29-year time frame, half the incidents occurred from 2010 to 2016, suggesting that the pace of celebrity scandals has accelerated.
The data illustrates firms' uncertainty about how to respond. Fifty-nine per cent of the companies did nothing, 20 per cent announced that they would maintain their relationship with the endorser, and 21 per cent put it on hold or ended it. Some firms responded differently to the same incident. For example, after a photo of the swimmer Michael Phelps smoking marijuana went viral, Visa publicly supported him, Kellogg let his contract expire and some other companies stayed silent. "These numbers and reactions highlight that many firms have no clue what the best reaction is," Hock says.
Next, the researchers explored factors that might affect public reaction to celebrity misbehaviour, finding four that played a significant role. First, does the celebrity really deserve to be blamed? Someone who commits domestic violence, say, is more clearly culpable than someone whose nude photos were circulated because his or her computer was hacked; in fact, the latter person might be seen as more a victim than an offender. Second, does the scandal directly relate to the celebrity's profession, as when an athlete is caught using performance-enhancing drugs, or is there no link, as when the person has an extramarital affair? Third, is the celebrity's profession closely tied to the product being endorsed, as when a musician touts a guitar brand, or is the relationship a distant one, as when an actress shills for a liquor company? Finally, has the celebrity made a public apology?
For each incident, the researchers determined how the firms in question responded (if they did), how quickly, and whether they curtailed or maintained the relationship with the endorser. They coded whether the misbehaviour was related to the celebrity's profession and whether the endorser apologised. They surveyed more than 300 marketing professionals about how much each celebrity was to blame for the incident and the extent to which the endorser's profession was associated with the product being promoted. To assess the financial impact of each scandal, they analysed stock price movement in the 20 trading days after news of it broke, looking for abnormal returns. And they controlled for a variety of factors, including firms' ad spending, the amount of media coverage an episode received, and whether the misbehaviour was rumoured or proven.
In every case, firms that responded to events instead of staying silent saw a positive impact on their stock, and firms that did so within three days of the news performed better than their slower counterparts. (The researchers say that's because prompt announcements reduce uncertainty, which can hurt share price.) In fact, fast responders saw their stock rise by 2.1 per cent, on average, during the four weeks following the event. Whether a firm stood by its celebrity mattered less than whether it did something.
A company's handling of a scandal-plagued endorser should be guided by the four factors cited above. Firms are likely to benefit by severing ties with endorsers whose misbehaviour is closely related to their profession and those whose work is only distantly related to the brand. Investors react more favourably when firms drop unapologetic endorsers than when they drop ones who voice contrition. Regarding blame, investors seem to consider it only in cases of suspension, reacting negatively when a low-blame endorser is punished.
The Tiger Woods episode illustrates some of these points. Most firms whose products are directly related to golf, including Nike, stood by him; companies in nonsports industries were more likely to bid him farewell. The researchers say that Woods's attempts at atonement — a series of statements that stopped short of a full mea culpa, followed months later by a heavily scripted TV apology — didn't help; a quicker and more authentic apology would probably have served him better, their work suggests.
The research has clear takeaways for endorsers and firms alike. Celebrities who are to blame for an incident should always apologise, quickly and sincerely. Firms should recognize that silence is their worst option; they should respond one way or another, ideally within three days. And companies that use celebrity endorsers should be aware that scandals seem to be arising more frequently. "Firms need to be ready," says Raithel. "Even if you can't prepare for specific types of misbehaviour, develop scenarios so that you have some type of response plan for when these things happen."
Not so squeaky clean
For more than 20 years Bob Williams, the CEO of Burns Entertainment, has matched brands with celebrity endorsers. (Among his deals: securing the actress Mila Kunis for the liquor brand Jim Beam and signing the NBA star Steph Curry with Degree antiperspirant.) Williams recently spoke with HBR about how companies react when an endorser is caught up in a scandal. Edited excerpts follow.
Q: How much do companies worry about endorser scandals?
A: Twenty years ago the level of worry was one on a 10-point scale. Today it's eight. I mark the change at 2003, when Kobe Bryant was charged with sexual assault. [Editor's note: The charges were dismissed; Bryant publicly apologized and settled a civil suit.] Until then A-list celebrities had an aura of invincibility. Afterwards, advertisers began looking differently at the endorsement genre. Morals clauses for new endorsers went from being very general, if they existed at all, to being highly detailed. And brands began performing much more due diligence when selecting celebrities, to minimize their risk.
Q: When a scandal breaks, how do advertisers typically react?
A: First they evaluate whether the accusation is true. If it might be, they try to assess the impact. Different events will affect a brand differently. An extramarital affair might not be as damaging as a criminal offence. While this evaluation is underway, advice is coming in from the marketing team, from us and from ad agencies, insurance carriers and lawyers. That's one reason brands tend to react slowly — they want to avoid a rush to judgment.
Q: What factors can lead a company to stand by the endorser?
A: Some are specific to the firm. For instance, Nike likes to hire controversial celebrities, and when something happens with one, it's much more patient. A brand that doesn't rely as heavily on a celebrity — say, a financial services firm — is much more likely to cut and run. These decisions are also relationship-driven: Although there are contracts in place, friendships develop too. And the endorser's personality can play a role. Lance Armstrong was extremely likable, so when he was accused of doping, people didn't want to believe it. That slowed the process.
Q: Have any companies been particularly adept in their responses?
A: Many firms handled the Tiger Woods scandal well. AT&T and Accenture cut ties very quickly and probably saved themselves some negative impact. That made sense — their businesses are unrelated to golf, so it was easy for them to run different ads. Nike had a lot to lose by dropping Woods, because he'd been essential to boosting its golf equipment and apparel businesses, so it retained him. A decision that's right for one company isn't necessarily right for another.
Q: Has social media changed things?
A: It's made bad news travel more quickly, and it's made it very easy for people to go back to see what someone said and identify an area of controversy. Take Kevin Hart: He lost the chance to host the 2019 Oscars because of homophobic tweets he sent several years ago. Looking at a celebrity's social media history is one-way companies perform due diligence. It's impossible to completely avoid the risk of scandal; few celebrities are squeaky clean. The best approach is to invest in the selection process and then draw up a contract with a very strong morals clause and the ability to exit quickly if necessary.
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