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Costs related to reputation insurance are difficult to estimate, variable-dependent and vary greatly, but coverage can be affordable even for smaller businesses because it can be designed to be triggered by specific events or revenue values.

What the Fitness Industry Can Learn from the Equinox, SoulCycle Political Controversy

In the wake of the controversy surrounding Equinox Holding's owner's support of President Trump, health club owners need to consider how expressing their personal and political views can have financial repercussions. Club Industry examines reputation risk insurance solutions as well as the experiences of a prominent health club operator who has been long scrutinized for his political leanings.

The negative backlash was palpable when news first surfaced in August 2019 that Stephen Ross, chairman of Equinox Holding's parent entity The Related Companies, was hosting a fundraiser for President Donald Trump's 2020 re-election campaign. For days, Ross' name dominated headlines from major American media outlets, while the #BoycottEquinox social media hashtag generated thousands of posts and reposts from critics, unhappy club members and celebrities, including model Chrissy Teigen and "Queer Eye" TV star Jonathan Van Ness.

Representatives from Equinox and sister brand SoulCycle quickly issued statements that attempted to distance the brands from Ross' political activities. In an Aug. 8 statement to Club Industry, an Equinox spokesperson said the brands had no involvement in Ross' Aug. 9 fundraiser, that no company profits are used to fund political campaigns and that Ross is a passive investor and does not directly manage either brand.

Additionally, Ross issued a statement in which he said he has known Trump for 40 years, isn't shy about voicing his opinions and will continue to support politicians from both major parties.

However, in this era of so-called cancel culture—when everyday Americans can seemingly down-vote the reputation of businesses and public figures whose allegiances clash with their own—it was evident that Ross' loudest critics weren't appeased. Protesters gathered outside of Equinox's club in West Hollywood on Aug. 9. And New York City Councilman Keith Powers proposed reactive legislation that would allow customers of New York City-based businesses to instantly cancel their memberships online.

Equinox is a privately held company, and company spokespersons have declined to provide data on whether or not Equinox's memberships have decreased since August, or if SoulCycle's class attendance has been negatively impacted. However, data from Earnest Research released in early September showed that attendance at SoulCycle had decreased by up to 7.5 percent in the four weeks after the calls for boycotts. Whether these effects will be sustained depends on who you ask with experts in this Market Watch article stating the effects could be long-term while experts in this Yahoo Lifestyle story doubting their lasting impact. 

What is clear is that today's fitness businesses are not immune to experiencing reputational risk crises, according to Nir Kossovsky, CEO and director of Pittsburgh-based Steel City Re, a firm that specializes in corporate reputation measurement and risk transfer. And this recent episode with Ross can serve as a limited case study of sorts for club operators who are concerned about protecting their business from similar fallouts—which can cause real financial ramifications.

Understanding Reputation and Risk Management in a Health Club Context

Kossovsky told Club Industry that the Ross-Equinox episode, as it played out in the public eye, is best categorized as a reputation risk management scenario, not as a public relations or public image crisis.

"We define reputation risk from a behavioral economic perspective, and it is simply the peril of economic damage from angry, disappointed stakeholders," Kossovsky said. "It doesn't require a media element, although certainly many stakeholders may realize they should be angry or disappointed by learning about something through the media—and whether or not it is true is a separate issue. The critical element is that stakeholders who have certain expectations, whatever they might be, find themselves not having that experience as expected and become disappointed. And the degree to which they are disappointed and the degree to which it is an emotionally intense response translates to the degree of economic damage.”

For health clubs, economic damage could mean cancelled memberships, rejected product price points or negative word-of-mouth messages. It is important to remember that stakeholders are not only members but can also include creditors, vendors, investors, regulators and non-government organizations.

Another way of conceptualizing reputation risk is to consider the dynamic between promises and consequences. Expectations surround any product, even a relatively abstract product such as fitness. Businesses leverage outcome-related promises to shape their consumers’ expectations, and all is well and good as long as those promises are fulfilled. But there is real potential for stakeholder disappointment as soon as a promise is made that cannot be fulfilled. That potential is risk.

Any club owner could constructively ask him or herself: “Are my members’ experiences consistent with their expectations? And what is my role in shaping those expectations?”

Kossovsky said today’s cultural landscape could be described as one of “total business,” meaning that every aspect of a business has become publicly relevant beyond its core activity or service. For example, in a health club context, who are your trainers and managers? Who are your financiers? Who owns the building in which you operate your business? Most importantly, what are the values of all these people?

Senior executives must give special consideration to franchisees or licensees who may be innocent and uninvolved yet negatively and unexpectedly affected by a crisis that has engaged the brand at large, he said.

“One might argue Stephen Ross was naive in not appreciating that many of his stakeholders—managers, employees and customers of many of his facilities—have a very strong, almost ardently passionate left-wing perspective and would be very much offended by believing that in some way their participation in SoulCycle or Equinox would produce capital that would eventually flow into the president's re-election program,” Kossovsky said. “I think it is naive, but I don't think it's unique for many corporate leaders, board members and senior executives not to quite understand that this notion of climate change [in the business world] that we’re going through is a cultural kind.”

Today’s Reputation-Related Insurance Solutions for Businesses

Reputation has long been thought of as a byproduct of marketing, but that presumption is only partially accurate, Kossovsky said. Marketing plays a role in setting stakeholders’ expectations, but so do non-verbal symbols such as a high-end piece of equipment or a refurbished locker room. Ideally, marketing experts should collaborate with risk management experts to be stewards of a business’s reputation. For most club operators, this could mean contracting a reputation risk management consultant to work with club staff on a routine or as-needed basis.

Most club operators associate insurance with fires, flooding and equipment failures, but reputation in and of itself is also insurable. However, Kossovsky said it should be regarded as a last line of defense.

“Insurance for reputation would be sort of like going to a dentist after your teeth have rotted and having them pulled out,” he said. “It's all fine and good but misses the point. Abraham Lincoln put it a bit more elegantly: Reputation is like fine China. If it breaks, you can certainly glue it back together, but everyone will notice the cracks.”

Below are four types of general reputation insurance as outlined by Kossovsky.

  • Public relations support
    • This covers a business’s unexpected need to produce an excessive amount of marketing and promotion materials. In some cases, relying on this kind of strategy can feel like playing catch-up because consumers may have already made up their minds about your brand and, as a result, could even reject your messaging as fake news.
  • Business interruption solutions
    • This may be the most familiar type of insurance to club operators and could incorporate reputation coverage into a broader plan that protects against any type of interruptive event such as fires or floods.
  • Parametric insurance
    • Parametric plans are based on a triggering event that is previously agreed upon by the insurer and business owner and generally relates to abstract loss versus financial loss. Negative media coverage is an example of a triggering event. Business owners may require strategic foresight before adopting this type of insurance.
  • Alternative parametric insurance
    • A second form of parametric insurance, such as that offered by Steel City Re, is tied to an independent measure of a business’s reputational value. That value is related to the cash flow associated with the behavior of a business’s stakeholders. This can be offered to public companies whose revenue data is easily accessible, as well as any stock-issuing company owned by private equity. This kind of insurance can also be provided to smaller private companies with a captive insurance vehicle.

Costs related to reputation insurance vary greatly, are difficult to estimate and are variable-dependent, but Kossovsky said coverage can be affordable for smaller operations because it can be designed to be triggered by specific events or revenue values.

Today, however, reputation insurance is primarily reserved for large companies, according to Jennifer Urmston Lowe, national accounts manager for Sports & Fitness Insurance Corp., Madison, Mississippi.

“These policies cover an actual loss in sales resulting from a brand-damaging incident, which could be a product recall or a company scandal and can cover the cost to repair the incident,” Lowe said. “At this point in time, the cost for reputation insurance is prohibitive for most small businesses who are concerned about negative online comments. Larger companies that are beholden to stock holders already consider including this coverage in their insurance strategy. But costs are determined by so many factors that it is difficult to give premium dollar estimates."

Navigating Public Scrutiny as a Modern-Day Club Operator

In recent years, Newtown Athletic Club (NAC) owner Jim Worthington has faced significant public pushback to his personal political activities, according to the NAC’s Director of Marketing Linda Mitchell.

Worthington is an industry veteran and a former board chair of IHRSA. His southeastern Pennsylvania club is a mainstay on Club Industry’s Top 100 Health Clubs list, ranking No. 49 in 2019. However, in some circles, he is more associated with his political lobbying and affiliation with the Republican Party, particularly President Trump.

In June 2019, Worthington was the subject of a 5,800-word feature published in Philadelphia Magazine titled “Trump, Sex, and G-Strings: The Juicy Story Behind Newtown Athletic Club” that was critical of Worthington’s lifestyle, family, club and employees.

Worthington was a delegate at the 2016 Republican National Convention where he supported Trump on behalf of his congressional district, and he currently sits on the President’s Council on Sports, Fitness and Nutrition. In October 2016, he hosted Trump at the NAC for a rally that prompted at least three people to cancel their club memberships in acts of opposition. (Worthington spoke at length about his politics and career in a recent episode of The Club Industry Podcast.)

The NAC’s management staff regularly receives comments from members who disagree with Worthington’s political affiliations, according to Mitchell, who has worked at the NAC for three decades. She said members still occasionally terminate their membership after they learn about Worthington’s background.

Today’s political polarization and a perceived resistance to free speech is unfortunate, Mitchell said, but she added that Worthington shouldn't hide under a rock.

From experience, we have come to believe that one should express one’s true feelings, even politically, but temper that expression with an open mind to hearing the other side,” she said. “That is a difficult tightrope to walk. What we have found is that 50 percent of the people respect you for standing up for your beliefs, and the other 50 percent just revel in denigration and disrespect.

“If the consumer agrees with your viewpoint, then they will be more attracted to your company,” she continued. “More and more companies are finding that they want to stand for something. Some stats indicate that this increases a company’s credibility by 20 percent or more. On the flip side, there is always the danger of alienating some current or potential customers. You must be in a position to be able to weather that potential storm.”

Mitchell recommended that club operators do not post political comments to their social media accounts, and that political campaigning on club property should only be permitted for private, invitee-only groups. Your club staff may have strong political views, but that doesn’t mean your members need to be converted.

Mitchell also noted that she directly addresses most member complaints at the NAC, and that she makes a point to respond to members with care. An explanation is given that Worthington’s opinions are personal and unrelated to the club’s bottom line, and that the NAC’s 500-plus employees all likely have varying worldviews. To further diffuse the situation, Mitchell refers complaining members to the NAC’s charitable giving program and highlights its success—the exchange of millions of dollars in monetary donations, goods and services with no overaching political influence or agenda.

Mitchell concluded: “The bottom line of our experience is that most people can separate the club from the owner’s personal political views and respect his desire to stand for something while appreciating the value of the product and service he provides.”

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