Thursday, September 13, 2018
Nike's Kaepernick Ad Is the Most Business Judgmenty Thing Ever
On Sept. 4, it was reported
Nike just lost about $3.75 billion in market cap after announcing free agent NFL quarterback Colin Kaepernick as the new face of its “Just Do It” ad campaign. It’s the 30th anniversary of the iconic TV and print spots.
At the time of this writing, the sneaker company’s intra-day market capitalization was $127.82 billion. On Friday, that number had been $131.57 billion.
Market capitalization is the market value of a publicly traded company’s outstanding shares.
Shares of NKE stock dropped about 4 percent on Tuesday morning, as #NikeBoycott has been trending on Twitter. The company’s valuation has since recovered a bit.
In light of the market cap loss, friend and co-blogger Stefan Padfield asked, via Twitter, "How much & what kind of information regarding projected backlash losses did Nike need to review in order to satisfy its duty of care to shareholders here?" My answer: very, very little and very, very limited.
How much & what kind of information regarding projected backlash losses did Nike need to review in order to satisfy its duty of care to shareholders here? "Nike Loses $3.75 Billion in Market Cap After Colin Kaepernick Named Face of 'Just Do It'" https://t.co/UIuZanOUon #corpgov— Stefan Padfield (@ProfPadfield) September 6, 2018
Now, it is worth noting that here it is Sept. 13, and as I write this, Nike is at or near its 52-week high. As such, the question is less pressing than it may have seemed a week ago. But even then, I maintain, this is not really even in the realm of a duty of care concern. Or, at least, it shouldn't be. (Also of potential interest, friend and co-blogger Ann Lipton provides a good overview of the varying takes on the ad here.
A while back I wrote, This I Believe: On Corporate Purpose and the Business Judgment Rule, which provided my thoughts on how director )ecision making should be viewed (short answer: "I believe in the theory of Director Primacy"). The business judgment rule provides that absent fraud, self-dealing or illegality, directors decisions cannot be reviewed. "Courts do not measure, weigh or quantify directors’ judgments. We do not even decide if they are reasonable in this context. Due care in the decisionmaking context is process due care only. Irrationality is the outer limit of the business judgment rule." Brehm v Eisner, 746 A.2d 244 (Del. 2000)(emphasis added)(footnote omitted).
Under this lens, regardless of the market cap impact, Nike's advertising falls within the scope of the business judgment rule. Did the board even know this ad was coming out? I don't know. Probably. But I also think it is clearly proper for the board to delegate duties to CEO to handle day-to-day operations. And it is customary and proper for that CEO to delegate to a marketing VP and/or marketing agency the role of designing and placing advertising. Could the CEO and/or marketing VP get fired for their choices? Sure. Or they could get bonuses. Either way, that would be the call of the directors.
I can come up with lots of reasons why Nike should not have done that ad, and I can come up with a lot of good reasons why it makes sense. The biggest reason it makes sense? Nike knows marketing. They won't get everything right, but they have been taking calculated risks for a long time. In 1992, the Harvard Business Review noted that
in the mid-1980s, Nike lost its footing, and the company was forced to make a subtle but important shift. Instead of putting the product on center stage, it put the consumer in the spotlight and the brand under a microscope—in short, it learned to be marketing oriented. Since then, Nike has resumed its domination of the athletic shoe industry. It commands 29% of the market, and sales for fiscal 1991 topped $3 billion.
Phil Knight, Nike founder, futher explained how Nike looked at using famous athletes:
The trick is to get athletes who not only can win but can stir up emotion. We want someone the public is going to love or hate, not just the leading scorer. Jack Nicklaus was a better golfer than Arnold Palmer, but Palmer was the better endorsement because of his personality.
To create a lasting emotional tie with consumers, we use the athletes repeatedly throughout their careers and present them as whole people. So consumers feel that they know them. It’s not just Charles Barkley saying buy Nike shoes, it’s seeing who Charles Barkley is—and knowing that he’s going to punch you in the nose. We take the time to understand our athletes, and we have to build long-term relationships with them. Those relationships go beyond any financial transactions. John McEnroe and Joan Benoit wear our shoes everyday, but it’s not the contract. We like them and they like us. We win their hearts as well as their feet.
Read in this light, it all makes sense. This is part of Nike's plan, and it always has been. Presumably, they expect that any business they lose because consumers are upset by the ads will be made up and then some by creating a "lasting emotional tie with consumers." That is, creating what we might call brand loyalty.
Not that is should matter to a court. While these explanations may be correct, they aren't necessary. The business judgment rule exists to allow companies, via their directors, to take these kinds of risks. It's how you create companies like Nike (and Apple, for that matter). And that's why there should be no question that this ad is beyond the scope of review, not matter how the public responds. If consumers don't like it, they can buy other products. If shareholders don't like it, they can vote the board out. And that's it. That's the recourse. It just doesn't get much more "business judgmenty" than who you pick for your ads. And that's exactly how it should be.
I’ve enjoyed hearing people’s different perspectives as they’ve responded to my Tweets on this topic, and now there’s an entire blog post featuring one of those Tweets, so thanks for that, Josh. As I’ve mentioned elsewhere, these exchanges have moved my “duty to calculate the ROI” paper project idea at least into the “next 2 years” pile. In terms of responding to the substance of your post, I’ll just say for now that I believe your statement that “the business judgment rule provides that absent fraud, self-dealing or illegality, directors decisions cannot be reviewed” is incomplete, and that you in fact acknowledge that to some extent with the Brehm quote that follows your statement of the law, which adds “process due care” and “irrationality” to the list. I would also add bad faith, which can overcome the 102(b)(7) waiver when it consists of a conscious disregard of a known duty, and which seems to be directly in play when you suggest that a decision-maker could know they have a duty to become informed of all material information reasonably available, but nonetheless decide to gather “very, very little” information of “very, very limited” scope.
Posted by: Stefan Padfield | Sep 13, 2018 7:35:09 PM
Thanks very much for the great comments. EricSG, for now, I will simply say that a founding member establishing a culture that is continued by hired staff hardly concerns me as taking something for personal image. I agree there could be a time when decisions could be a "pet project" that could be problematic, but I without very specific allegations, I am hard pressed to see how that becomes a concern when that very behavior at issue is consistent with the primary reason the company is successful (and public) in the first place. Not that Nike should have to make such a case, but I think that’s a simple defense.
Stefan, I don’t dispute the role of “process due care” and “irrationality” on the list, but I don’t see how this issue rises to the level of either. I am not even clear that specific marketing decisions are necessarily board-level decisions. Even when it’s raised with the board for informational purposes, trusting the judgment of your marketing executives seems imminently reasonable to me. I have limited, but real, experience in proposing marketing ideas that were run by a large entity board, but questioning whether they agree or exercise a veto, if and when they do weigh in, still seems clearly within the BJR, regardless of their decision. As for bad faith, I also agree it could be a concern in some case, but the fact that even a large number of people are upset by a marketing program does not rise to that level for me.
Posted by: Joshua Fershee | Sep 13, 2018 7:53:55 PM
"If shareholders don't like it, they can vote the board out." Well...the three (of 11) directors that the Nike public shareholders elect.
While not necessarily the case here, a famous controlling shareholder like Phil Knight (Bezos, Zuckerberg, etc.) might weigh the impact of a certain marketing campaign on his *personal* brand. If he caused the controlled company to select a value-destructive campaign that nonetheless benefited his personal image, wouldn't this be a non-ratable benefit sufficient to trigger entire fairness?
Posted by: EricSG | Sep 13, 2018 6:41:55 PM