Human Risk at the movies

A Business Week article entitled “How Hollywood insures against actors behaving badly” caught my eye over the festive period. It explains how, following the allegations made against Harvey Weinstein and others, film studios are having to make contingency plans for when stars reputations are so tarnished that they threaten the prospects of a yet to be released movie.

What’s interesting about this, is that unlike other situations where an individual’s bad behaviour is likely to have such a negative impact on their employer that action is required, is that once a movie is released, you’re stuck with the actors in it.

If a TV or radio host misbehaves then you can take them off air. Which is what happened with NBCs Matt Lauer after allegations of sexual harassment forced his employer to act. Netflix reacted similarly to the scandal surrounding Kevin Spacey by taking his character out of all future series of House of Cards. Arguably timing played in their favour as the news didn’t break just as they were about to release a new series.

It’s a well worn tactic deployed by corporates when their senior management become more of a liability than an asset; take Uber’s founder and former CEO Travis Kalanick who was removed by investors once it became clear that his behaviour and the culture within the Firm had a downside.

New management can sometimes rescue a firm’s reputation. However, if you’re about to release a movie and one of your stars’ reputations becomes tarnished, then you probably have little choice but to reshoot it without them or write the project off. Both are expensive, though throwing more money to potentially achieve some form of return (arguably “good” money after “bad”) probably makes sense given the economics of the film industry. Which is what the article explains happened to a movie starring none other than Kevin Spacey; his scenes were re-shot entirely with another actor at some cost.

Hollywood is having to adjust to this dynamic: after all you can’t predict with certainty which of your stars might fall from grace; the excuse of “it happened in another era” long having worn thin. One way is to re-design completion bonds, in essence insurance policies designed to bridge funding shortfalls when films can’t be completed within budget.

Another is to actually seek redress from the actors themselves.This is akin to the mechanisms which financial services regulators put in place after the crisis to ensure that bankers incentives were better aligned to those of shareholders. Many countries now require a proportion of bonuses to be deferred so that there is no payment if it subsequently transpires that things that looked profitable in the short term, turn out not to be in the longer term.

Malus

One idea that was floated by Andrew Bailey, a former head of one of the UK financial services regulators and the current head of the other one, was the idea of “malus”; a negative bonus. In effect, they’d require repayment of bonuses in circumstances where, with the benefit of hindsight, they shouldn’t have been paid out in the first place. That’s hard to do when people can spend what you pay them. Which is why deferrals and a tougher regime which, in extremis, could see people go to jail, was deemed a more practical solution.

The challenge that both Hollywood and banking have in common is that the behaviour of one individual can have an impact that goes way beyond their own pay packet. We’ve seen individual bankers take down entire Firms (step forward Nick Leeson) and one toxic movie star could sink an entire movie. So punishing the individual financially, won’t necessarily adequately compensate other stakeholders. Which is why jail, or at least the threat of “you’ll never work in this industry again”, probably works as an ultimate deterrent in the former.

I suspect it will be a lot harder to find something workable in the film industry. For very obvious reasons, insurance tends to be forward looking at the point at which it is underwritten. Pricing insurance against Human Risk is going to be challenging ,especially when the risk may already have crystallised years ago.

Hollywood is going to need to be at its creative best to solve this one.

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