Does the Sexual Harassment Verdict Against Isiah Thomas and the Knicks Demonstrate the Perils of Corporate Management Unconstrained by Shareholder Democracy?

Last week, a federal court jury in New York City delivered a resounding verdict in favor of Anucha Browne Sanders, and against the New York Knicks. Browne Sanders had charged that Knicks President and former NBA great Isiah Thomas sexually harassed her during her tenure as a Knicks executive. Among other things, Browne Sanders claimed that Thomas called her a "bitch" and that James Dolan--CEO of Cablevision, the corporate parent of Madison Square Garden and the Knicks--was both indifferent to the charges and fired her in retaliation for her complaint.

An already-emotionally-charged case involving sports and sexism became racially super-charged when Thomas stated that he thought that the use of the term "bitch" by a black man directed at a black woman was less objectionable than the same epithet if used by a white man towards a black woman. Nonetheless, Thomas denied that he had called Browne Sanders a "bitch," and Dolan denied that he fired her in retaliation for her charge of sexual harassment.

The jury believed Browne Sanders, awarding her $11.6 million in punitive damages from Dolan and Madison Square Garden. The jurors could not agree on whether to assess damages against Thomas himself, and so a mistrial was declared on that question.

The defendants continue to maintain their innocence and have vowed to appeal. Although it is possible that an appeal could result in a somewhat reduced damages award, it is unlikely that the verdict for the plaintiff will be thrown out in its entirety. Judge Gerard Lynch (who also happens to be my Columbia Law School colleague) did not appear to err in any of his legal rulings, and the jury's conclusions on the facts were sufficiently supported by the evidence to receive substantial deference on appeal.

Meanwhile, the trial confirmed the suspicions of longtime critics of the management of the Knicks. In addition to the charges brought by Browne Sanders herself, the case surfaced the fact that point guard Stephon Marbury had sex with a Knicks intern, apparently without any sort of reprimand from management. Is it any surprise, jaded Knicks fans have been asking, that a team with losing records despite the NBA's highest payroll, would also do a poor job of protecting employees' rights?

And that question, in turn, has fueled the frustrations of those who believe that James Dolan should be replaced as corporate overlord of the Knicks. If either the Knicks, Madison Square Garden, or Cablevision were a corporation with widely dispersed voting stock, then shareholders could object to management's wasteful policies and, if necessary, wrest control of the company via a proxy fight.

However, the Dolan family owns what is effectively a controlling stake in Cablevision, and thus the Knicks. This past May, the Dolans agreed to pay $10.6 billion to take the company private, although the deal is not yet final. But even as a publicly traded company, Cablevision remains under the Dolans' effective control.

Can we learn any general lessons about the perils of private control from the Knicks case? Perhaps, but as I explain in the balance of this column, no ownership mechanism comes without costs.

The Vices and Virtues of Close Control

The Knicks saga shows the dangers that can arise when a sports franchise (or perhaps any corporate entity) escapes the disciplining force of widely-dispersed ownership. Shareholders who care about a company's value would not typically tolerate a company or a corporate division that consistently wastes its resources.

Yet there can also be advantages to private ownership or its equivalent, especially for sports franchises. Sports teams can turn profits, but business competitiveness does not always translate into competitiveness on the playing field (or court or rink). A team with a loyal fan base can sell tickets even when the team has a mediocre record. To be sure, teams can usually increase revenues by winning, but the cost of fielding a winning team--as measured by the higher salaries commanded by star players--may exceed the revenue gains.

Thus, from a strictly dollars-and-cents perspective, the smartest play may be to field a mediocre team, one just good enough to keep the fans paying, but not so good that the players' salaries eat into profits. And since shareholders need not be fans, fiscal discipline is no guarantee of--and, indeed, may contravene--fan interest.

Accordingly, fan interest in a team's success may be better served by owners who regard their team more as a hobby than as an investment opportunity. Mark Cuban and George Steinbrenner--who are the dominant owners of, respectively, the Dallas Mavericks and the New York Yankees--are good examples. Each spends lavishly to field a winning team, and each appears to be motivated more by ego than by financial returns. With fortunes from other ventures to cushion any effect of sub-par financial performance of their teams, they can try to maximize team wins, rather than profits.

Newspapers provide a more consequential example. The sale of Dow Jones and thus the Wall Street Journal by the Bancroft family to News Corp. occasioned considerable uneasiness for those who worried that News Corp. CEO Rupert Murdoch would seek to increase the Journal's profits at the expense of journalistic excellence.

Private publishers like the Bancrofts and the Sulzbergers--the family that controls the voting stock of the New York Times--have understood ownership of a newspaper as being a public trust, one that obligates them to place the values of journalism ahead of the values of the market. Especially as competition from the Internet has squeezed newspaper advertising revenues, some owners interested in running newspapers simply as a profit-maximizing business have cut corners that family-run newspapers have chosen not to cut. In this climate, shareholder demands for the best return on investment have worked against the public's interest in vigorous reporting.

The Non-Profit and Government Ownership Alternatives

Private ownership or control of a corporation--whether a sports franchise or a newspaper--can thus sometimes serve the public interest better than diffuse public ownership by shareholders looking to maximize return on their investment. However, as the Knicks and other sports franchises illustrate, a wealthy owner will not always do a good job, even if he spends freely. Moreover, wealthy individuals who acquire sports franchises as a hobby have a tendency to intervene in personnel decisions that are often better left to professionals.

Two alternative structures are the non-profit organization and the government-owned one. In some areas--such as the healthcare field--non-profits enjoy a better reputation than their for-profit competitors. However, non-profit organizations do not consistently outperform for-profit entities and can fall victim to their own pathologies. It is probably no accident that without the cost-cutting incentives of the profit motive, the price of university education at non-profit universities--which, until very recently, were virtually the only kind of private universities in the United States--has long been increasing at a much higher rate than the background inflation rate.

Government ownership of newspapers would be profoundly problematic, given the role that the press is supposed to play in checking government power. Government ownership of sports franchises, however, is viable, as the municipally-owned Green Bay Packers illustrate. Beloved of their fans, the Packers have been competitive on the field for many years (although given the NFL's revenue-sharing formula and salary caps, it is substantially easier for a small-market football team to attract top talent than it is for teams in some other sports, especially baseball).

Despite the Packers' success, government ownership of sports teams does not eliminate the potential for conflict between the financial interests of the owners and the interests of fans. Suppose you are a citizen of Green Bay who likes football well enough, but likes government services such as police and fire protection even more. You might think that the Packers ought to be run so as to maximize their profits, which in turn should become part of the city's general revenues, rather than simply plowed back into the Packers. If so, then you would be acting no differently from a shareholder in a sports franchise with widely-diffused ownership.

Inevitable Tradeoffs and Foolish Decisions

Some of the tradeoffs I have identified here are inevitable. Sports franchises, newspapers and, indeed, all complex organizations serve multiple constituencies. The Knicks have players, fans and owners; the Wall Street Journal has reporters, readers and owners; and universities have faculty, students and alumni. A governance regime that provides voice to any one of these constituencies will thereby undermine the voice of one or more of the other constituencies, where the interests of those constituencies conflict.

Conversely, even a governance regime that does a fairly good job of apportioning the votes of various constituencies can fail badly when those constituencies elect less than competent leadership. One need look no further than 1600 Pennsylvania Avenue for confirmation of this limit.