During our Foundations period, we’ve done an initial study on whether corporations have a social responsibility outside of profits. More often than not, the typical comment coming from the idealistic HBS student was that corporations need to be extremely concerned about the decisions they make and how these decisions affect outside stakeholders. I agree that in all the cases we reviewed, there was an easily distinguishable demarcation between right and wrong, good and evil. However, as the “leaders of tomorrow” we know that such relatively simple decisions of right versus wrong will not be the ones in which we will test our moral compass. Instead, it will be the decisions where the choices are between right and right that will determine our mettle as business leaders.
After reading the case on the Kansas City Zephyrs, it was sickening once again to see the disgusting underbelly of baseball economics. For so long, I’ve tried to dismiss the fact that our national pastime was no different than Big Business hiding its ugly face and disguising itself under the name of entertainment. I am saddened by the fact that with rising ticket prices, many children won’t have the opportunity to see players such as Alex Rodriguez, Barry Bonds and Pedro Martinez play. I am extremely disappointed that 80% of the teams do not fulfill what I perceive to be their obligation in providing consumers, their fans, a good product, as these teams have no chance in ever winning a World Series. But most of all, I am resentful of the fact that it is undeniably clear that teams are acting in a socially responsible manner by being terrible in the world of baseball.
Winning at All Costs
The Florida Marlins are an expansion team created in 1993. The Marlins made their only postseason trip to the playoffs in 1997 when they (via Wayne Huzienga) “bought” themselves a world championship. “Bought” is important here, because in baseball, those who spend the most money tend to have a better record than their counterparts who spend the least amount of money. The Marlins expended enormous amounts of capital to build a team of All-Stars including Kevin Brown, Livan Hernandez (in his pre-weight days), Al Leiter, Antonio Alfosenca, Robb Nen, Charles Johnson, Bobby Bonilla, Luis Castillo, Jeff Conine, Craig Counsell, Edgar Renteria, Moises Alou, Cliff Floyd, Devon White and Gary Sheffield. Let’s also not forget that they were also managed by the incomparable Jim Leyland. However, the price for their single day of championship glory was quickly dismantled as Huzienga put his team up for sale the following year. Why?
Wayne Huizenga claimed that in 1997, the Florida Marlins lost $30 million. (Granted, the number is quite inflated because Huizenga claimed that the millions he received from luxury box rentals shouldn’t count because it was used to pay off the bonds issued to finance the park. If this could be applied to daily life that would mean your home mortgage and car payments shouldn’t count against your income, either.) Regardless of discretionary accounting tactics, it was still safe to assume that Huizenga did in fact lose a substantial amount of money in building his team for a championship. So why did he spend so much money? The first and most obvious reason was that Huizenga was looking to inflate the value of the Marlins after a championship run. It can be argued that Huizenga was thinking about selling the team long before their championship run began. But let’s also try to assume that Huizenga had some decent business instincts (considering he was the mastermind behind Waste Management and Blockbuster) and think of other potential reasons for spending the money that he did.
Heading down a “slippery slope”
In a recent article on ESPN.com, acclaimed sportswriter Rob Neyer argued that “You build a winning team and the fans will show up. The receipts at the gate will then take care of itself.” Following this basic logic and general common sense, it is easy to see that by bringing in better talent, the Marlins will eventually improve their financial position. As the Marlins put a better product on the field, they assumed that the would have eventually earned more money through increased attendance, additional media coverage through cable television and radio broadcast deals, sale of luxury suites and concessions, and finally through the licensing of Marlins’ apparel. Assuming continued strong financial management and some good fortune, the Marlins sought to serve all stakeholders by simply spending a bit more to improve their product, make the fans happy by winning, and also earn more money for themselves and their shareholders. It is very logical to see why Huizenga made the decisions he did.
What Huizenga failed to realize then was that by simply doing the “right thing,” it did not automatically mean that he was making the right decision. Huizenga spent the money and built the Marlins to mirror the financial structures of teams such as the Los Angeles Dodgers and Boston Red Sox who have spent close to $100 million each year on salaries alone. It can be argued that both teams have been very competitive despite the fact that the Dodgers have not come close to winning a championship in over a decade and the Boston Red Sox have not won since 1918. But here’s the real kicker: according to Major League Baseball, both teams combined to lose nearly $70 million in operating profits last year. $70 million!!!! In essence, the Red Sox and Dodgers have been trying to follow some basic business theory, please their fans, and yet are paying a very hefty price for it.
Choosing the harvest option
So maybe spending money isn’t the right thing to do. Assuming that a baseball organization runs no differently than a Fortune 500 company would, one may argue that instead of increasing expenses to increase revenues, one could also maximize profits by simply reducing expenses.
This is what the Marlins of today have decided to do. Looking at the latest financial figures for the Florida Marlins, we can see that they currently have the sixth lowest salary expense in the Major Leagues at $42.0 million. By cutting expenses, the Florida Marlins were only one of seven teams to be profitable last year, according to Major League Baseball. The only problem is that the Marlins are a terrible team and consequently have one of the worst attendance numbers ever in the history of baseball. Nevertheless, it appears that the Marlins, as a corporation, have picked an economically sound business model.
So here’s the long drawn-out dilemma. Does a sports organization have a social responsibility to at least provide their fans a decent product? Or should a sports organization serve their shareholders and be profitable?
Obviously, there are examples, such as the New York Yankees and Atlanta Braves who have shown that you can spend lots of money and still make a profit, but given the fact that only 20% of the league is profitable, these examples are few and far between. You can do right, but still be wrong, unless…
There are a few teams such as the Oakland Athletics and the Minnesota Twins who have spent very little money (less than the Marlins), and yet have produced outstanding teams and won many games. The Atheltics and Twins also have some of the worst attendance figures in the league. Yet, both teams are profitable. Recognizing this fact, is it right for the general public to demand that the Marlins’ organization spend more money? Why not just spend the bare minimum, be profitable, and hope you become like the A’s or Twins? Maybe sometimes it’s better to be lucky than to be right.
“I Love this Game”
Social responsibility – it’s a tough thing to grasp. It’s easy for those of us in the Sky Deck to shout down the good word of being ethical, moral, and perfect citizens of the business community. However, everything isn’t always about profits or about making the general public happy. For the faithful that love baseball, such as myself, and those who live in Florida, we have
no choice. In order to watch our national pastime, the game we grew up with, we have to watch a poor, dilapidated version of it. We can only hope that we live in a city where we have owners of baseball organizations who feel a “social responsibility” in putting a good product on the field for us fans to watch, yet deal with the fact that they will most likely lose money. But every night, I’m relegated to hoping that maybe one day there will be a business leader who will be able to dive into the world of grey where there is no demarcation of right and wrong, and figure out how to save the game I love.