Monday, July 28, 2014
As many readers (and all of my friends) know, I am a bit of a sports fan. Having been a college athlete (field hockey, at Brown University, for trivia buffs), I focus most of my attention on college games. I even served on The University of Tennessee's Athletics Board for a few years. But my Dad and I used to watch professional football and baseball a lot together when I was a kid (still do, when we are in the same place at the right time), so I also maintain a casual interest in professional sports.
I also have an interest in fashion, especially women's fashion (maybe less well known, except by close friends). I have friends in the industry and find aspects of it truly fascinating. I even used to subscribe to Women's Wear Daily, the fashion industry trade rag. I am the faculty advisor to the College of Law's Fashion and Business (FAB) Law student organization.
This personal background is prelude to my interest in two current events stories that I see as parallels. I am trying to sort them through on a number of levels. Maybe you can help. Here are the top lines of each story.
- Last Thursday, the National Football League (NFL) suspended Baltimore Ravens running back Ray Rice for two games, fined him $58,000 dollars, and asked him to seek counseling after its investigation of an incident relating to a video in which Rice was depicted dragging his then-fiance, now wife, by her hair after punching her in the face (allegedly rendering her unconscious).
- The very same day, American Apparel (AA) announced a new slate of directors who will assume positions on the AA board in early August as a result of investor intervention and a boardroom blood bath following on lagging profits and continuing investigations of allegations of sexual misconduct (most of it, as I understand it, not new news) against AA's founder and former CEO and director, Dov Charney, whose management roles at the firm were suspended by the board back in June.
One might point out that the risks to the respective governance bodies are different in these two cases. Among other things, based on the publicized facts, Rice's actions were wholly personal activities, and Charney's may have involved conduct in connection with his managerial activities. Also, Rice is one among many key players in the NFL, while Charney is a unique, even iconic, figure at AA. These differences likely play into the risk management assessments of the two entities.
But non-legal risks, including reputational effects, also should be considered in an institution's risk calculus. I find it sad and hard to swallow, but the NFL's actions may just be a signal (despite the current negative press) that the NFL's leadership has determined that its reputation and profits will not be significantly negatively impacted by Rice's alleged actions--while AA's leadership, especially when pressed by key investors, came to a contrary conclusion with respect to Charney's alleged actions. In this regard, I note with favor the recent comments, published by The Guardian, of my co-blogger Marcia Narine.
Perhaps applicable governance rules also play a role here. Leaving aside any governance actions that may occur at the team level (based on publicly available information, the Ravens team is owned and operated by a limited partnership), it seems important to note that the NFL is an unincorporated non-profit association and AA is a publicly traded Delaware corporation. Accordingly, the governance rules applicable to the NFL and AA come from different legal traditions and sources.
As I understand it (and I am no sports lawyer, so please correct me if I am wrong), each NFL team must agree to be bound by the terms and provisions of the NFL's Constitution and Bylaws. The NFL's authority to discipline league team players is exercised by the Commissioner (or, in certain circumstances, the NFL Executive Committee) and derives from the NFL's Constitution and Bylaws. Absent any provision articulating fiduciary duties in the Constitution and Bylaws, specific contracts or agency law would be the source of any fiduciary duties that the Commissioner and Executive Committee would have. Unless a particular contract governs the matter (and without an in-depth analysis), the NFL member teams (for which the NFL has been organized and is operated) are the likely primary beneficiaries of any agency-law-based fiduciary duties applicable in connection with the NFL's formal disciplinary actions. Unless I am missing something, the NFL teams are unlikely to assert a breach of fiduciary duty claim against the NFL Commissioner or Executive Committee based on the failure to stringently punish a key player on a league team. If anything, the teams may believe that they suffer more financial hardship when key players are ineligible to play than they do by fielding players who are sexually violent. That belief may be accurate, at least in the short term. But the long-term effects of these types of incidents on the NFL are harder to assess and benchmark. Perhaps it's time for consumers to rise up and speak, as they did when Michael Vick's dogfighting allegations surfaced back in 2007 . . . .
By contrast, AA's governance rules derive primarily from the General Corporation Law of the State of Delaware (as well as any relevant provisions in AA's certificate of incorporation and bylaws). The board of directors of AA owes fiduciary duties to AA that benefit AA's stockholders (and potentially others). On the corporate governance part of its website, AA states as follows: "American Apparel takes very seriously the responsibility to observe high standards of ethical conduct to protect the interests of the corporation, its shareholders, and its stakeholders. The officers and board of directors of American Apparel are dedicated to overseeing the operation of the business and affairs of the corporation to promote long-term shareholder value." Stockholders did complain about Charney's alleged indiscretions and engaged AA in serious conversations about the governance of the firm in that context (among others).
Neither the NFL nor AA comes out of these incidents with a real victory. Both entities face ongoing issues relating to these stories in the press and internally. If one had to pick a winner in this race to the bottom, however, it would have to be AA. For now, I score the match AA 1, NFL 0.