Thursday, September 18, 2014

Are the NFL's Billionaires Actually Bad Businessmen?

-- Posted by Neil H. Buchanan

As of this writing, the commissioner of the National Football League is Roger Goodell.  Given the controversies that have recently embroiled the league (spousal abuse, child abuse, and the ongoing litigation regarding how the league concealed medical evidence regarding brain injuries), predicting Goodell's expiration date has become a bit of a parlor game.  I confess to being interested in that question on its own merits, but here I want to use that issue to discuss some questions about how leaders of organzations are evaluated, and what can get them fired.  Finally, I will ask whether the NFL's owners are showing themselves to be bad businessmen.

One theory regarding Goodell's job security was offered last weekend by the Times op-ed writer Joe Nocera.  To regular readers, I promise that this post is not primarily about Nocera's own puzzling ability to keep his job.  At some point, it just becomes sad.  There are bigger issues here, and Nocera is certainly not the only person to offer the following explanation: The NFL's owners are keeping Goodell on the job because he made them all rich (or, more accurately, even richer than they already were).  There is a certain casual appeal to that argument, but ultimately it makes no sense.  More interestingly, if the owners really are driven by that illogic, it would tell us some surprising things about their business acumen.

Allow me to offer two reasons why the explanation above -- that the owners are loyal to Goodell because he made them richer, which I will call the Simple Theory -- makes no sense.  The first reason is simply that Goodell might no longer be useful to the owners.  They might decide that they need a fall guy, even if he was doing exactly what they wanted him to do until now.  They also might suddenly be realizing that he was not, in fact, doing what they wanted him to do, and that they trusted him too much.  Or, they might conclude that Goodell, even if he was great at his job until now, is not equipped to handle the new environment in which the league is operating.  Certainly, Goodell's fidgety interview on a major network last weekend suggests that he is not good at what currently needs to be done.

All of that, I think, is pretty obvious, even for people who are initially drawn to the Simple Theory of job tenure.  Things change, and personnel needs might change.  The other reason that the Simple Theory makes no sense, however, has nothing to do with changed circumstances.  The Simple Theory wrongly assumes that Goodell is the reason that the NFL thrives.  We are told, for example, that the top three franchises by value in the league could now sell for two (New England) or three (Dallas) times what they could have fetched when Goodell took over in 2006.  Even the embarrassing Washington franchise has gone from $1.4 billion to $2.4 billion in resale value.

That is surely impressive.  But why is that proof that Goodell should stay in his job?  Why assume that he caused the growth?  (Again, even if he did cause it, his continued presence might begin to erode it.  In fact, even if he did not cause the league to prosper in the first place, he could nonetheless now cause the league to wither.)  The commissioners who preceded Goodell, Pete Rozelle and Paul Tagliabue, also presided over impressive expansions of the league, with Rozelle in particular presiding over an era in which the league doubled its franchises and far surpassed any other sport, including baseball, to become the one true national pastime.  Even if we think that Rozelle was a genius who is a but/for cause of the NFL's success, which is a plausible argument, that does not rule out the possibility that Tagliabue and especially Goodell were simply caretakers who are being given credit for other people's achievements.  To quote President Obama out of context: "You didn't build that."

Still, there is something to be said for not screwing up, right?  Maybe, but the question is why anyone would assume that only Roger Goodell could have done for the league what he did over the past eight years, and why other people are incapable of taking over for him now (even if circumstances have not otherwise changed enough to make Goodell an outright liability).  Is Goodell the only non-screwup out there?  The blurb for Nocera's column on the Times website reads: "Roger Goodell is very good at doing exactly what his owners want."  Again, maybe.  But why assume that no one else could be that good.  He received $44 million in compensation this year.  I would imagine that an awful lot of talented managers would be willing to give it a try.

As I noted above, the Simple Theory is obviously wrong, or at least incomplete.  No one who took even Econ 101 should be convinced by it, because it focuses on the wrong question, and it defies the basic logic of competitive markets.  Just because something works should not stop profit maximizers from seeking to increase revenue and decrease costs.  No sensible capitalist would keep Goodell in place for the reasons that the Simple Theory proposes, because those reasons are backward-looking, which is not how one maximizes profits.

Which brings me to a more interesting point.  Would the billionaire owners of the NFL's teams make such a basic error, when it comes to their decision about a mere employee, which is what Goodell is?  Certainly, the NFL is a "What have you done for me lately?" kind of place.  Players are dumped unceremoniously every day, used up when their limbs and heads are beyond repair, and they are replaced by willing younger and (temporarily) healthier men.  Even the coaches are on the shortest of leashes, with the day after the final regular season game each year now known as "Black Monday," because eight or so teams fire their coaches on that day.  Some coaches are fired mid-season.

One possibility is that the owners view the players and coaches are mere cogs in the machine, while they view Goodell as one of the elite.  They know him, they like him, they trust him, they appreciate what he has done for them.  The question is why they would view him as an exception.  As I discussed in my Dorf on Law post last Tuesday, there is a tendency even among mainstream economists to attribute profits to the leaders of corporations, in what is essentially a Great Man Theory of executive pay.  Maybe the owners see Goodell as a great man, and thus they defer to his greater expertise.

Surely, however, the owners do not buy into that theory.  There is at least some logic to the idea that coaches matter (although that evidence is weaker in the NFL, whereas one or two college coaches really do seem to bring success with them wherever they go), but why would NFL owners think that a mere commissioner is the source of their success?  Yes, the Dallas franchise is now worth three times more than it was in 2006, but it is impossible to believe that Cowboys owner Jerry Jones thinks that Goodell is the reason why.  Jerry Jones undoubtedly believes the Great Man Theory, but he is the great man.

In a post last month, I suggested that the owner of the disgustingly-named franchise here in Washington was leaving money on the table by fighting against those who have demanded that the team adopt a new name and mascot.  Maybe Snyder is so committed to being in charge, and so besotted with his memories of being a boy attending Washington games at RFK Stadium, that he is willing to lose money.  I doubt it, but it is possible.

One could certainly try to make the case that Snyder and other NFL owners are so detached from reality that they simply do not see what is in their own best interest.  Again, Goodell's continued employment by the league fits that theory well, although it can also be explained by other theories.  Most of the owners, however, became billionaires by running other businesses.  There is little reason to believe that they were more in touch with their employees and customers back then, given the cocoons in which top executives and owners live more generally, than they are now.

In any case, it is difficult to take seriously the idea that Roger Goodell is being rewarded now for his wonderful service in the past.  One would think that the owners, even taking into account any don't-rock-the-boat conservative bias that they might harbor, would be more than willing to believe that the market for managerial talent is just a bit deeper than one man.  If not, then maybe the business acumen that made them rich has now abandoned them.  Someone would need to explain, however, why these men suddenly believe that their buddy in the spotlight is more important than they are, and more important than their sponsors and their customers.

I am enough of a skeptic of orthodox economics to believe that irrationality can rule the day.  But the particular brand of irrationality that drives the Simple Theory of Roger Goodell's job status is truly difficult to take seriously.


Barry said...

In terms of being 'one of them', perhaps it should better be put that the owners think of him as a Real Person - not of of Them, but not the expendable bio-units that all other so-called 'people' are.

Another thing to keep in mind (which you touched upon) is that these guys didn't make their billions running football teams. They became rich through other businesses, and then bought teams, probably 100% for ego reasons. Given that they are pulling down huge and increasing profits on their ego-based sidelines, they might not care too much. In addition, these problems have been around for ever - athletes have always been committing serious crimes. What's changed in the information flow and people's tolerance for - well, tolerating it. The owners are from another era, when they didn't have to care what people thought.

David Ricardo said...

Interesting post, and I think Mr. Buchanan is correct, the owners are not staying with Goodell out of appreciation for his past efforts, however effective they think he may or may not have been. Remember, we are talking abut 31 of the greediest, nastiest, most bigoted, most ego-maniacal men on the planet (Being from Buffalo I am willing to give the new Bills owners a pass for now). Their loyalty is only to themselves.

So why haven’t they canned Goodell? Here are some possibilities.

1. Firing him would be an admission that the NFL did something wrong. These men in their own minds never ever have done anything wrong.

2. The goal of the owners is to make huge amounts of money and win football games, in that order. While decent people might object, Mr. Goodell is willing to allow them to employ morally offensive individuals and in some cases criminals in that cause.

3. The Commissioner absolutely bows to every whim and wish of the owners. Replacing him might result in someone who actually disagrees with them every five or ten years.

4. Being morally reprehensible themselves, they see nothing wrong in torturing a child or beating a spouse.

5. They are too busy trying to fleece taxpayers out of hundreds of millions in subsidies to really pay much attention to all this.

6. They know that while decent and caring people are actually concerned about spousal abuse and child abuse, most of the fans who pack the stadium really are not.

Take your pick.

Neil H. Buchanan said...

Very interesting comments from both Barry and David Ricardo, all of which I take as thought-provoking addenda to my post.

One nit: If we are excusing the new owner of the Bills, the number of sh_thead billionaire principal owners is 30, not 31. I'm on my way to Green Bay for the weekend (NOT to see a football game), so I'm especially cognizant of the odd fact that the Packers are community owned.

David Ricardo said...

Correction duly noted, but Mr. Buchanan does leave us confused about why someone would travel to Green Bay who is not going to a football game.

Also, note that while Green Bay is community owned the NFL prohibits any other community from taking the same steps, so had the new owner of the Bills not been someone who wanted to keep the team in Buffalo (rah)the Buffalo community was prohibited from buying the team themselves to keep it in Buffalo.

One can see how denying a community the right to own a team while at the same time demanding and getting hundreds of millions from that community is indicative of NFL thinking.

DHMC said...

I initially had the same feeling as Barry – that the NFL owners are in it for the ego, that these are vanity projects, in the main. (One need only to look at the execrable Dan Snyder to see how vanity is intimately tied to team ownership.)

But I think it goes deeper, and gets to a question I have long pondered concerning the economics of owning a football team. More precisely, what is the effect of team ownership on the rest of an owner’s portfolio? There are obvious collateral benefits such as a higher public profile, easier access to other power brokers (especially the political class), a great way to schmooze business contacts, etc. But on occasion one reads of owners who do not make obvious investments in their teams to help those team succeed (this happens in other sports as well), owners who seem quite willing to allow their teams to have a tradition of failure, or to have their team run at a loss. Do losses in the team part of a portfolio offset gains in the straight business part of a portfolio, lowing overall tax exposure? Do the benefits and tax breaks given to teams to relocate, or open a new stadium, accrue, in some manner, to other parts of an owner’s portfolio? I think if one could examine team ownership from a comprehensive business perspective, not simply how the team itself is run, either alone or in concert with the rest of its league – for instance, as one would analyze how KFC fits into the overall corporate strategy of Yum! Brands – we could begin better to answer the questions surrounding the importance (or lack thereof) of a particular person running a league.

Neil H. Buchanan said...

My thanks to DHMC for his fascinating comment. I'm likely to take up the perspective that he suggests (which I would NEVER have thought of on my own) in future posts. Even if I don't, however, DHMC provides an important advance in how to think about sports ownership.

Neil H. Buchanan said...

David Ricardo notes that "Mr. Buchanan does leave us confused about why someone would travel to Green Bay who is not going to a football game." Since we're among friends ...

In 1996, my brother and I started an annual tradition of going to an NFL city to see a game and spend the weekend hanging out together. After a couple of years, we concluded that actually going to the games was truly unpleasant, mostly because of the drunkenness in the stands. (Chicago was the worst, but it was a ubiquitous problem.) We then decided to go to NFL cities on game weekends, but not to attend the games.

A few years later, we decided to go to NFL cities on non-game weekends, to avoid the fans entirely. So, we now have an annual "football trip" that has nothing to do with traveling to a football game. Indeed, we deliberately avoid football games. This is what happens as one ages, I suppose.

By the way, Green Bay thus far appears to be a fine place to visit.

Unknown said...

Personally, I think that sports owners generally fall into a rare category of people who see their franchise, accurately, as both a vanity project and a portfolio synergizer.

Media ownership and team ownership seem to be particularly synergistic. But that still seems secondary to the ego part if it.

These people are used to running things their own way and being successful. They see unions, talent, government as adversaries to battle and the public as prey.

I think they simply resist compromise and adaptation as weakness. The outlook seems to be "Give these people an inch and pretty soon they'll be making us run our operation like a Goodwill outlet store."

It's just a power trip. If you can't be the top dog running your own mega-billion franchise increasing in value astronomically, having the best seats in the stadium and people bowing and scraping at your feet - what the hell is the point?

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