08.18.2020

World Wrestling Entertainment, Inc. (WWE) is currently facing lawsuits filed by shareholders alleging that the company intentionally made misleading statements to investors and omitted material information causing shareholders to buy the company’s Class A common stock at inflated prices. This article examines the corporate governance practices of WWE in the wake of its crisis and how governance risks could have been reduced.

A Revealing Lawsuit

Named in the WWE lawsuit are Chairman and Chief Executive Officer, Vincent K. McMahon, Chief Brand Officer, Stephanie McMahon (McMahon’s daughter), and former wrestler and current Executive Vice President of Global Talent Strategy and Development, Paul “Triple H” Levesque (Ms. McMahon’s husband).

Shareholders allege that WWE’s executives intentionally misled investors about the success to secure media rights deals in the MENA region, and that the company failed to disclose the true reasons behind declining merchandise sales and subscriptions to its streaming service, WWE Network.

Unlike typical incidents that Vince McMahon and WWE have to deal with, this lawsuit is not part of an on-camera storyline and raises serious concerns about the company’s financial condition and governance practices.  Additionally, this lawsuit raises an interesting opportunity to explore the inner workings of the leading company in an industry that has traditionally operated as a closed society.

World Wrestling Entertainment, Incorporated

Corporate governance has its own definition within WWE.  WWE, characterized by many as a “one-man operation”, has been centered around its Chairman and Chief Executive Officer Vince McMahon since McMahon took over the promotion (then known as the World-Wide Wrestling Federation) from his father, promoter Vincent J. McMahon, in 1982.  True, the company has an independent board of directors, much the same as any other publicly-traded company, yet those who have worked under McMahon have never shown any hesitancy in claiming that Vince McMahon runs the show, both literally and figuratively.  For context, longtime wrestling manager, promoter, and commentator Jim Cornette recently commented in an interview with Vice News that “to this day, they run the lunch schedule by Vince McMahon.”

Whether it be a company-wide restructuring or designing the minute details of a particular wrestler’s “gimmick”(on-screen character), anecdotal stories of McMahon’s micromanagement of the WWE number in the dozens and illustrate the depth of his involvement at nearly every level of the company’s operations.  While this approach may have led to the WWE becoming the undisputed champion of the wrestling industry, McMahon’s dominance over the company may present a problem as it enters its third decade on the stock market.

WWE’s Board Expertise and Skills Matrix

WWE's Board expertise
Source: CGLytics Data and Analytics

An analysis using the CGLytics Board Effectiveness software tools illustrates how WWE’s board lacks financial expertise and has no governance expertise among its members.  Considering the nature of the class-action lawsuits filed against the company, the lack of financial and governance expertise presents both a significant problem and also a valuable opportunity for the company to strengthen its board in these fields.  What remains to be seen, however, is if and/or how the famously iron-fisted McMahon will proceed as the lawsuits work their way through the legal system.

Mr. McMahon

WWE’s entry into the stock market revolutionized the professional wrestling industry.  Never had a “booker” become the Chairman and CEO of a publicly traded company, much less a wrestling promotion into the stock market.  Due to Vince McMahon’s reputation for never “breaking kayfabe”, countless current and former personalities in the industry have questioned where the line ends between Vince McMahon and his “Heel” on-screen character, the cartoonishly-evil-billionaire-boss, Mr. McMahon.

WWE Goes Public

Interestingly, it was not the wrestling itself that allowed the WWE to go public in 1999.  That particular part of WWE’s success can be traced back to the 1997 King of the Ring pay-per-view when “Stone Cold” Steve Austin cut a promo on Jake “The Snake” Roberts after winning their match and uttered the now immortal (and quite lucrative) line “Austin 3:16 says I just whooped your [rear end].” What followed was a virtual avalanche of sales of “Austin 3:16” emblazoned merchandise that dwarfed the profits previously drawn by 1980’s industry icon and former WWE staple, Hulk Hogan, and led to a dramatic shift in WWE’s business strategy.  In 1999 alone, WWE reported over $400 million in revenues from its various merchandise lines. By contrast, WWE’s live events, TV shows, and pay-per-view specials combined had drawn $170 million in revenue that same year.

No longer purely a wrestling promotion, WWE transformed its entire business around the merchandise sales of its top stars.  From Dwyane “The Rock” Johnson to John Cena to Phil “CM Punk” Brooks, WWE has raked in hundreds of millions in profits off the sales of t-shirts, hats, and an endless list of wrestler-themed accessories.

McMahon is noted to have pressured Steve Austin to remain with the company after the latter suffered a career-shortening spinal injury in 1997 due to the weight that his name carried and the unprecedented success of his merchandise line.  Austin, after all, would be an integral part of McMahon’s initial pitch to investors.  Indeed, his name can be found alongside those of The Rock, The Undertaker, and several other prominent wrestlers in the company’s S-1 registration statement.

Flash forward twenty years and WWE has again adjusted its business model to not only include merchandise lines, but also other forms of entertainment, including WWE-produced feature-films and reality tv shows starring WWE talent.  The company’s most recent success appears to be linked to the 2014 launch of the WWE Network, an online streaming service and digital TV network that offers access to WWE live events, TV shows, WWE-produced films and documentaries, and the company’s expansive digital library (known to be the world’s largest collection of professional wrestling video content).

WWE’s Financial Evolution

WWE's financial evolution
Source: CGLytics Data and Analytics

Shareholders “Take the Book”

These class action lawsuits present a new dilemma for the WWE. Historically, it has taken relatively earth-shattering events to cause WWE to respond to shareholders in a meaningful and lasting manner.  The first prominent event to occur after WWE’s IPO was the tragic and sudden death of wrestler Eddie Guerrero in 2005.  Guerrero died of heart failure that was believed to have been a result of previous steroid abuse.  The circumstances surrounding Guerrero’s death led WWE to reimplement its current strict drug testing policy that had previously been suspended in 1996.

The second and more tragic event that caused a dramatic change within WWE was the Chris Benoit double murder-suicide in 2006.  Benoit’s actions had reverberations across the entire wrestling industry and caused WWE to relaunch its programming under a new “TV-PG” rating in a very public attempt to decrease the violence shown on WWE shows.  The entire tone of WWE programming shifted to a more “family-friendly” atmosphere, placing an emphasis on more comedic storylines and wrestler gimmicks, and heavily restricting the wrestling portions of its shows.

For example, one of the more controversial restrictions (among wrestlers and large swaths of fans) was the banning of the decades-old practice of “blading”.  In order to bleed for dramatic effect during a match without actually being hit over the head with a blunt object, wrestlers would use small, hidden razor blades to make shallow cuts in their foreheads that bled profusely but rarely caused actual injuries.  Under WWE’s PG policy, blood has almost vanished entirely from its programming, apart from accidents that draw blood (wrestlers term this bleeding “the hard way”).  In these instances, WWE TV shows will only broadcast those portions of the show in black-and-white to deemphasize the appearance of blood.  Former wrestler and Guardians of the Galaxy actor, Dave Batista, was fined $100,000 by the company after he “bladed” during a match in 2008.  The size of the fine was to no-doubt send a message to both the public and shareholders that WWE has taken its new turn seriously.

The Impact on Share Prices

The lawsuits appear to have already begun to cause damage to WWE’s share prices.  Forbes reported a 13% drop in the company’s share price on April 25th, 2019, after the initial news of WWE’s troubles in the MENA region began to leak.  This trend continued as the company underperformed in Q3 of 2019, leading a number of investors to openly question whether WWE leadership was being truthful about the nature of its relationships in the MENA region, most importantly with the Kingdom of Saudi Arabia.  The final straw appears to have come in a January 2020 disclosure when the company again underperformed due primarily to its failure to secure a favorable deal with Saudi Arabia and ceased to include the deal in financial forecasts.  By February 6th, 2020, WWE stock closed at USD 40.24, representing a 60% decline in share price from its previous year’s high of USD 100.  WWE filed a motion to dismiss the lawsuits in late June and the case is still winding its way through the legal system, however, it is safe to say that the company faces a new challenge the likes of which it has yet to encounter.

To navigate through difficult times, such as a lawsuit, it is of utmost importance for a company to show governance oversight and understand how their company is perceived by shareholders, investors, proxy advisors and the media. Deficiencies in board expertise such as finance, technology and governance can be clearly seen in the CGLytics platform and reveal governance risks to stakeholders and activist investors. Software tools, such as CGLytics, highlight governance red flags allow companies such as WWE to gain control through proactive insights and make smart data-based decisions.

CGLytics provides access to 5,900 globally listed company profiles and their governance practices, including their CEO Pay for Performance, board composition, diversity, expertise and skills.

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