You probably saw the news earlier this month about a Mississippi charity paying NFL Hall of Famer Brett Favre $1.1 million for speeches that he never actually delivered. While Favre quickly agreed to repay those amounts in installments, this scandal illustrates the challenges and risks athletes face in their charitable endeavors.
Whether the entity is their own foundation or a different nonprofit run by others, athletes have three main types of risks as they get involved with nonprofits:
- Reputational risk
- Financial risk
- Legal risk
2/4 I have never received monies for obligations I didn’t meet. To reiterate Auditors White’s statement, I was unaware that the money being dispersed was paid for out of funds not intended for that purpose, and because of that I am refunding the full amount back to Mississippi.
— Brett Favre (@BrettFavre) May 7, 2020
To date, no allegations have surfaced that Favre was directly aware of the source of the funds used to pay for his proposed speeches. (Though it certainly does strain credulity to believe that a payment of that magnitude was made, not only without his knowledge, but without anyone at his organization making him aware of the obligation.)
Unfortunately, as a high-profile athlete, it is Favre’s name in all the headlines on ESPN, Fox Sports and everywhere else across the internet.
Setting up your own foundation
Too often, I see athletes being encouraged by agents, advisors and family members to set up their own foundation. While this may be the right choice for some, many athletes are not well-prepared to take this step.
Especially early in their professional career, athletes are (and should be) focused on their sports performance. Starting a new 501(c)(3) organization is a lot of work. It amounts to a start-up business that needs a lot of time, attention and money. A 2013 ESPN “Outside the Lines” investigation found that few athlete charities live up to an efficient, effective use of money by charitable guideline standards.
Frequently we see advisors “selling” the athlete on the concept that a foundation is important for the athlete to capture the marketing value of his/her brand. Unfortunately, this may mean that the athlete is pushed into creating an entity even when said athlete has not yet taken the time to identify their own passion.
The possibility of shifting interests explains why we see many athletes struggle to determine the focus of their foundation at the early stages. The athlete is feeling his/her way through life and the preferred cause can change as a result of marriage, children, family illnesses or other life experiences. Leaving more flexibility in the athlete’s plans will increase the likelihood of developing a long-lasting foundation.
At the outset, we recommend that the athlete work with existing causes, set up a donor-advised fund or enter into a fiscal sponsorship.
Former NFL kicker Matt Stover co-founded Players Philanthropy Fund specifically to address this need. Along with partner Seth McDonnell, they regularly explain how a fiscal sponsorship can reduce the costs, risks and administrative burden on the athlete.
Realistic expectations must come together with clear vision
Many athlete foundations are launched without having both strong expectations and a clear vision for the future in place. As a result, many of these foundations struggle to generate enough inertia to maintain a sustainable organization after their playing days have concluded.
Unfortunately, the promises many athletes hear about the foundation being a source of “employment” after their career rarely come true. The reasons for this vary, but include:
- Lack of diversification in fundraising efforts (meaning most of the money comes directly from the athlete or fundraising effort associated with their celebrity status);
- Insufficient tangible data to support the growth of the foundation’s programs; and
- Weak infrastructure and staff that will not support a growing organization
Even in the rare cases where an athlete’s foundation is in existence upon career completion, few foundations survive more than five years after their retirement from professional sports. In ESPN’s Outside the Lines report, they found a staggering 74 percent of athlete’s foundations failed to meet nonprofit operating standards and only about one-third of the foundations had total assets of $500,000 or greater.
Hurdle: Business experience
Almost everyone recognizes that athletes are given insufficient education or training in most areas of business. Notable among these areas are post-career necessities such as business management skills, financial planning and financial literacy.
It should then come as no surprise, that few athletes have any experience in nonprofit management, let alone having served on an organization’s board.
Without that crucial experience, athletes frequently fail to understand–and recognize–the potential pitfalls of appointing family members or friends to run their foundation. The Chicago Tribune identified more than 40 charities with boards that either had fewer than five members or included friends, family members or people with financial ties to the athlete, such as agents.
Even when there is no ill-intent, these close ties make it difficult for a board to provide the proper amount of oversight and input into the operations of a foundation.
Too frequently, this “friends and family plan” leads to disaster, as they also have little-to-no tangible experience in those roles; they were selected by the athlete to repay prior considerations or to provide a paying job so they do not become a drain on the athlete’s resources.
Though there are notable examples of family members really stepping up for these roles, in most cases, the lack of experience makes it exceedingly difficult for the organization to reach a sustainable level.
Hurdle: Registration Requirements
Few people realize the burdensome expenses and registration requirements associated with running a foundation.
Just placing a “DONATE NOW” button on your website triggers state registration requirements in 41 states at my last count.
Many athlete foundations ignore these requirements and the tax filing obligations. For great insight into the issues involved with foundation compliance, Warren Harmon from Harbor Compliance recently hosted a Sports Philanthropy Network webinar in which he addressed many of the intricacies of this maze of compliance.
As we noted above with Brett Favre, anything that goes wrong with a foundation will come back against the athlete. Even when there is no actual claim of malfeasance by the athlete, it is their name that is run through the headlines.
In Chicago, we still recall former Notre Dame and Chicago Bears football star Chris Zorich having his name dragged through the media earlier this decade due to questions about funds that were not properly accounted for. In Gotham at basically the same time, the New York Post questioned the activities of famed athletes such as CC Sabathia, D’Brickashaw Ferguson and Osi Umenyiora. The article cited many missed operational requirements, tiny amounts of money distributed and insider transactions which dwarf any benefits created.
Had it been discovered that funds were actually missing, even without his direct involvement, Zorich could have been held liable as one of the officers or directors of the organization. At minimum, fees associated with the audit, legal fees or other activities necessary to defend the foundation may have needed to come out of his own pocket.
Anyone who has been around the legal world understands that the legal risks consist of two primary categories: 1) ultimate liability; and 2) costs of defending the claim. Once investigations start, every single activity and expense goes under scrutiny. This means each expense, large and small, that the athlete charged to their foundation are likely to be reviewed to determine if they were appropriate charges.
Former NBA player Kermit Washington ended up with a six-year sentence in federal prison after he spent hundreds of thousands of dollars in charity donations on shopping sprees, vacations and plastic surgery for his girlfriend.
From the Zorich example earlier, in the end, he agreed to pay back almost $350,000 to state authorities to make up for unaccounted funds. He also pleaded guilty to federal misdemeanor charges for not filing personal income tax returns.
How the sports business community can help
Our experience has established that many, many, athletes have great intentions. As sports business professionals, it is our job to work with them and help them understand where they can make the most impact.
These athletes have incredible stories of dedication, focus and perseverance. They have a strong platform to influence young people and strengthen many organizations.
Let’s make sure that we empower them and protect them so they can continue to give back. With this type of expert support added to their visibility and the right passion project, athletes will be more comfortable encouraging their friends, teammates and fans to build on their impact.