One of the struggling NBA franchises, the Philadelphia 76ers, was just sold for 280 million dollars. The owners aren’t the ones strapped for cash. The average NBA salary last season was around 5 million dollars. The players don’t need the money. The people who need the NBA to be played are the ones that place their livelihood on the game. It’s the small business owners who are profitable when customers come in before and after the games. It’s the parking lot attendant who gets paid minimum wage as well as the general staff at the arenas. The owners and the players have been greedy during the NBA lockout and their greed has cost the general public more than just entertainment, it has cost them their livelihood. I would like to analyze the NBA lockout while applying Edward Freeman’s stakeholder theory to determine, through the Doctrine of Fair Contracts, if we the NBA lockout would have been avoided or at the very least settled in a reasonable amount of time. By looking at the recent history of the NBA as well as Freeman’s conceptualization of the stakeholder theory we will determine what force in the negotiations is at fault.
When LeBron James, the two time NBA Most Valuable Player and one of the most iconic athlete to have played any sport, was deciding to leave the Cleveland Cavaliers there was a backlash by not only Cavs fans, but also by the downtown business owners. John Skorburg, an economist at the University of Illinois at Chicago, estimated that Lebron James brought in 1.2 million dollars per home game in fans paying for parking, tickets, restaurants, hotels and drinks. That comes out to 48 million per season and if you include playoff games the number jumps to 150 million (Schoenberger 2010). One player in a small market is bringing in over 150 million dollars to the downtown economy of a basketball city per year. Skorburg estimated that the number would be 500 million in a middle market area and one billion in a place like New York (Schoenberger 2010). If that is just one player, granted that he is one of the most electrifying players in the history of the game, what is the value of a whole franchise to the downtown areas? I don’t know the answer but I’m sure that the people who are no longer working can tell you that it’s a lot. It’s as simple as this, no games means no fans spending money in restaurants, parking, or at bars near the arenas. Because there are no customers there is no reason to have employees working during the normal peak hours. That 150 million dollars a year suddenly drops to zero. How did we get to this point?
When Michael Jordan was playing in the NBA it was a time of great prosperity and it was seen as the “golden era” and owners and players alike thought that the good times would never stop. The owners started to pay premium prices for players to attract the top talent and to win the championship (Edwards 2011). Players took the money that they were being overvalued for and eventually it became common practice to pay millions of dollars for mediocre talent. The bigger market teams were able to stay profitable but the smaller market teams were not able to pay such high prices for the talented players and the league became a bidding war between large market teams and smaller market teams started to lose money trying to stay competitive. Evidence of big market teams being able to pay more than smaller market teams can be found in Skorburg’s calculation of the value of LeBron James in small, middle, and large markets). Currently the NBA generates 3.8 billion dollars of revenue, 2.2 billion of that goes towards player’s salaries. 22 of the 30 teams in the NBA are losing money due to the high salaries of players at an average amount of 300 million dollars a year (Edwards 2011). When the NBA owners told the public that they are losing money it became apparent that the salary system in the NBA is broken and that some teams just do not have the money to pay players and stay competitive. In an attempt to achieve change and scale back player’s salaries so that teams would not lose money in an attempt to stay competitive, the owners locked out the players. After a few weeks and no progress made from negotiations between the owners and the players, the owners started to cancel games which leads to a loss of revenue from players, owners, and most importantly, the local community. What is Edward Freeman’s stakeholder theory and how would it apply to this situation?
For whose benefit and at whose expense should the firm be managed? That is the question that Edward Freeman decided to answer when he thought of the stakeholder theory. The prevailing answer from both scholars and managers was the stockholders! Stockholders are the ones who have put their money into the firm so it must be the firm’s duty to compensate the stockholders. Firms who were profitable and had the highest stock prices were considered to be the best. Freeman challenged the assumption that stockholders were ultimately the ones that the firm needed to answer to and instead suggested that stakeholders were indeed the groups that firms, and managers, had the duty to protect. The major stakeholders who are vital to the survival and success of the corporation are the owners, employees, suppliers, customers, and the local community (Freeman 42). In Freeman’s theory each of these stakeholders should have the right to participate in discussions of the future of the firm. The reason for the inclusion is because firms try to internalize the benefits they create while externalizing the costs. When the firms reap the profits, the local community has to suffer through the pollution caused from the firms operations. To help determine equal rights and participation from the essential stakeholder Freeman created the doctrine of fair contracts.
This doctrine is comprised of six principles; the principle of entry and exit, the principle of governance, the principle of externalities, the principle of contracting costs, the agency principle, and the principle of limited immortality. The principle of entry and exit is a rule that states that any contract with the firm must have clear language about the creation, termination, and renegotiation between the firm and the other party. This sets a baseline understanding for every stakeholder what is expected of them and if a contract exists. The principle of governance states that any change to the normal procedure or symbiosis must be unanimously consented by all the stakeholders. This ensures that the stakeholders are not cheated out of any participation rights that they have. The principle of externalities states that if there is a contract between two stakeholders that negatively affects a third stakeholder, the third stakeholder has the right to enter negotiations to ensure that an agreement exists that does not harm them. The principle of contracting costs states that all participating stakeholders must contribute to the cost of contracting. The agency principle states that any agent used for a stakeholder must have work towards the interest of all stakeholders. The principle of limited immortality states that the continued existence of the firm is in all of the stakeholder’s interest. When all of these principles are adhered to the firm’s actions and contracts are fair and equal to all stakeholders. If the NBA owners and players thought about the different stakeholders involved would the lockout last this long so that games are being canceled?
When we try to distinguish stakeholders for the NBA we come across a bit of an issue. The NBA is not like a typical business because the product is a service and the main employees, the players, can also be seen as the suppliers and there are no stockholders because the teams are privately held. To make things simple we are going to analyze the lockout situation with the following stakeholders, the owners, players, and local community. When we apply the doctrine of fair contracts to the negotiations between the players and the owners we see that three of the six principles have been violated. The principle of entry and exit, the principle of governance, and the principle of externalities are all violated for various reasons. The principle of entry and exit have been violated because there were no set rules on the renegotiating process between the owners and the players. Both sides knew that the contract they had together was ending, and that both needed the other to survive. They did not come to terms with one another to discuss how they could peacefully negotiate a contact extension that would not jeopardize other stakeholders. In an attempt to gain leverage the principle of governance was violated when the owners locked out the players. They unfairly put pressure on the players to accept a deal that was in the owners favor by taking away most of the player’s only source of income. The players are about to decertify their union that also changes the process that the negotiations are preceding. Neither move was unanimously agreed upon by any of the stakeholders even though it affects all the stakeholders negatively. The most important principle that has been violated is the principle of externalities. The two stakeholders, the owners and the players, have gone about the negotiations only looking to satisfy their needs. They are completely disregarding the local community who is suffering both economically and emotionally. While the emotional part can be supplemented with other college and professional sports teams the economic impact of loosing a major sports team to the local economy is staggering. Sports bars, restaurants, hotels, and stadium staffs are reliant upon the NBA and the 41 home games they play. Because the local community is being adversely affected by the lockout, they should have a say in the negotiations according to the principle of externalities. If the local community were able to provide input they might not be able to help the owners and the players with any technical help but they sure could put the game of basketball into perspective and remind them that there is more riding on the season than just a few more dollars to put a ball in a hoop.
In terms of responsibility of the botched negotiations I believe that the blame has to be placed on the players. While there was no wrongdoing for the players to take the lucrative contracts that the owners offered them, it is wrong for the contracts to cripple the league and jeopardize the livelihood of people who rely on the NBA for economic reasons. The system is broken for the majority of the teams so the players and the owners have the responsibility to offer concessions so that the NBA can get back on its feet.
Critics of the stakeholder theory would point out that the whole theory would change the normal dynamics of the business world. Why would companies give up the control of their firm and give a voice to people who do not necessary have the experience to make business-type decisions? Freeman would claim that this change in business is already happening. “The law has also protected the interests of local communities. The Clean Air act and Clean Water act have constrained management from ‘spoiling the community’. In an historic case, March v. Alabama, the Supreme Court rules that a company-owned town was subject to the provisions of the U.S. Constitution, thereby guaranteeing the rights of local citizens and negating the ‘property rights’ of the firm (Freeman 40). Critics would also claim that sometimes you can’t please everyone and that the inability to appease all stakeholders would get in the way of deals actually being made. Freeman would defend his stakeholder theory by asserting that the theory was made under Rawl’s “veil of ignorance” where all parties involved make the rules based on not knowing where in the social sphere they would end up. Not knowing what position each stakeholder would be in, hence not knowing if the contracts would benefit them the most or the least, ensures that all parties involved would receive a fair deal (Freeman 46).
In the struggle between billionaires and millionaires the owners and players are forgetting that the local community has a stake in the outcome of the negotiations and therefore should have a voice in the discussions. Not only does the local community lose money for each game that is cancelled, the owners are forgetting that alienation of the local community will hurt their revenues once games finally do resume. By applying Freeman’s stakeholder theory it is apparent that there should be more parties involved in the contract negotiation between the players and the owners because the players, owners, and the local community have a lot at stake on the new labor deal. Half of Freeman’s doctrine of fair contracts have been violated in the struggle to find a new contract between the players and the owners, if these principles were adhered to than not only a contract seem more plausible, it would also be more beneficial for all parties that are connected to the NBA.
Edwards, Steve. “Ethics Moment: Gini Says NBA Lockout Calls for Players to Get Back in the Game | WBEZ.” HOME | WBEZ. 13 Oct. 2011. Web. 04 Nov. 2011. <http://www.wbez.org/blog/city-room-blog/2011-10-13/ethics-moment-gini-says-nba-lockout-calls-players-get-back-game-93114>.
Freeman, R. Edward. A Stakeholder Theory of the Modern Corporation. Print.
Schoenberger, Robert, and Teresa Murray. “How Much Is LeBron James worth to Northeast Ohio? | Cleveland.com.” Cleveland OH Local News, Breaking News, Sports & Weather – Cleveland.com. 29 June 2010. Web. 04 Nov. 2011. <http://www.cleveland.com/business/index.ssf/2010/06/how_much_is_lebron_james_worth.html>.