The business of sports

Directors of sports bodies run on a different track, one that some describe as too much of a business to be a sport and yet too much of a sport to be a business. Domini Stuart reports on the many hurdles they have to jump.

Between 2005 and 2010, Melbourne Storm boasted some of the most sought-after players in the National Rugby League (NRL). Unfortunately, the club was paying them at least $1.7 million more than the salary caps put in place to prevent the wealthiest teams from having an unfair advantage.

When the situation came to light, the NRL stripped the club of its 2007 and 2009 Telstra Premierships, the Minor Premierships of 2006-08 and all points in the 2010 season. The Storm was also fined $500,000 and forced to return $1.1 million in prize money. Two major sponsors withdrew their support, while tearful fans burned their memorabilia in the streets.

"When governance breaks down, it creates a culture of mistrust among members," Simon Hollingsworth, CEO of the Australian Sports Commission, told the Australian Athletes’ Alliance conference on sports governance earlier this year.

"Additionally, it results in inefficiencies, duplication of resources, conflicts of interest and those sports with a fragmented business model are often less attractive to outside investors. Ineffective governance practices not only have an effect on the sport where they are present, but also undermine confidence in the Australian sports industry as a whole."

Signs of change

Recently, Jacquie Hey GAICD, the former managing director of Ericsson Australia and New Zealand, made history when she became the first female director to sit on Cricket Australia’s board in its 107-year history.

She was one of three high-powered business people to join the Cricket Australia board as an independent director following a cricket governance review by Lend Lease Corporation chairman David Crawford AO FAICD and Colin Carter AM FAICD, president of the Geelong Football Club.

The review recommended Cricket Australia’s state-based board of 14 directors be replaced by a new, nine-person board comprising three independent directors and one appointed by each of its six state associations.

Cricket Australia is not the only national sporting body to undergo a review.

In September, for example, the Australian Sports Commission and Swimming Australia appointed former federal sports minister Warwick Smith AM to chair a swimming review panel following the Australian swimming team’s lacklustre performance at the London Olympic Games. Its focus is on high performance, governance and administration. And, the Australian Rugby Union recently released the results of the Arbib Review, which looked into the game’s corporate governance structures. It also recommended establishing an independent board of directors and promoting greater accountability and transparency.

An unfortunate legacy

Significant efforts like these to improve the standard of governance on the boards of sporting organisations have unfortunately been largely at a national level. As the sporting sector encompasses professional and amateur organisations down to tiny community organisations, this represents a very small tip of a very large iceberg.

"Many sports boards continue to operate according to an old culture in which representative structures dominate decision-making," says Professor David Shilbury, chairman of the sport management program at Deakin University.

"In the 1980s, we saw sports boards with between 20 and 50 delegates appointed by the six states or competing clubs. Today, it’s rare to find national or state sport organisation boards with more than 10 or 11 directors, although some are still lagging in this regard. Many sports boards remain organised according to a representative model where delegates are appointed by the states and populated by directors who see themselves as largely ceremonial in nature."

There are still directors who sit on the boards of both national and state organisations.

"This can lead to conflicts of interest," says Claudia Fatone FAICD, a director of Cricket Victoria. "How can these directors make independent decisions on a national board when they’ve got a state or club hat on as well?"

Sports governance has also been shaped by Australia’s licensing laws.

"A club can’t have a liquor licence if some of its members are minors so, years ago, clubs created a separate licensed entity," explains Bruce Hatcher FAICD, a partner at BDO Chartered Accountants, director of Queensland Rugby League and deputy chairman of the Queensland Academy of Sports.

"These licensed premises provide the bulk of the funding for the sporting organisation, but the sporting organisation controls the board. As a result, you get people on the boards of multi-million-dollar organisations who lack the sophistication to understand either their role or purpose as a director; their only qualification is some involvement in the sport."

"Typically, sporting organisations have treated a seat on the board as a badge of honour, either for a past player or someone who had spent years working for the organisation," adds Catherine Harris FAICD, a former trustee of the Sydney Cricket Ground Trust and a current director of the Australian Rugby League Commission.

"Some people are amazingly generous and worthy but, unfortunately, that does not mean they will make good directors."

Lack of diversity

Not surprisingly, sporting boards have been notable for their homogeneity; one rugby union players’ association actually limited directorships to former Wallaby captains. These days, there is a trend towards greater diversity – for example, in its Good Governance Tool Kit, VicSport states that boards which are diverse in gender, age and background and have the right mix of skills and abilities function more effectively and are more successful in achieving the best outcomes for the organisation.

"Historically, all sports have struggled with the desire to have former athletes sit on boards and yet have within their board the necessary governance skills," says Kristina Keneally MAICD, CEO and former chairman of Basketball Australia.

"Basketball Australia’s independent board does include former Olympian Andrew Gaze, but he has a range of corporate and media skills. It’s very beneficial to us to have a former player on the board, but it is most important to have people with financial, risk-management and strategic skills as well."

A lack of diversity can limit a club’s potential for growth.

"A predominantly Anglo-Saxon sport may want to broaden its appeal to other cultures," says Fatone.

"If the board is made up of one particular cultural group, it might struggle to develop strategies and govern the sport in a more inclusive way."

And, while the majority of volunteers across all sports are women, sports boards are still predominantly male.

"Women do a lot of the hard work but they can’t get on to the boards," says Hatcher. "Some sports seem to consider themselves too ‘manly’ to be governed by women."

However, as Harris points out, sport is as much about the fans as the players – and 50 per cent of the fans are female.

"When people have busy lives, they like to do things as a family at the weekend, so it’s not surprising that the most successful sports are family-based," she says.

"Also, it’s often the mother who decides which sport her five-year-old will play. For me, diversity is a reflection of a good selection process. If everybody looks the same, the selection process has been shocking."

Harris is just one example of the fact that you don’t need to have played the sport in question to be a good director. Technically, you don’t even need an interest in the sport – although, on a personal level, that could be something of a challenge.

"Quite simply, I think you’d be bored witless, particularly as you have to go to a lot of the events," says Carter, co-author of the Cricket Australia governance review.

"But that doesn’t mean you need to be obsessed. In football, people talk about ‘liniment sniffers’, those who get vicarious thrills by hanging around the players. This would be a very dangerous trait in someone who’s supposed to be making independent decisions."

A unique set of challenges

While a sporting board has much in common with a board in any other sector, a number of factors work together to make the environment unique.

Few sporting clubs could exist without volunteers; even those at the highest levels are dependent to some extent on their support.

Funding, sponsorships and, for the bigger clubs, broadcasting and naming rights, can all present ongoing challenges, while competition from online entertainment is placing increasing pressure on gate receipts.

Children also need to be encouraged into the sport, both to provide funding and also to ensure a steady flow of talent, and many clubs are struggling to clarify what their corporate social responsibility entails.

There are also growing demands around occupational health and safety.

"The days when players seriously injured themselves and boasted about their war wounds are long gone," says Harris.

"In the US at the moment, the National Basketball League is claiming that the rules allow people to get hurt. These kinds of issues present a really interesting challenge for boards."

Directors must also deal with much greater pressure from external stakeholders.

"Most of the stakeholders feel they know a lot about the business and that they’re very close to touching it," says Carter. "Also, the results are unambiguous. In most organisations, it’s not immediately obvious whether you’re succeeding or failing, but the sports results are there for all to see."

Balancing the risks

The boards of clubs, large and small, operate under the provisions of the Corporations Act 2001 and, in some cases, the Co-operatives Act, Registered Clubs Act, Gaming Machines Act and their associated regulations, as well as many other laws. Their directors have the same fiduciary duties and financial responsibilities as any others and they may be held personally liable for any breaches.

It stands to reason that people considering joining a sporting board should do at least as much due diligence and research as they would in any other situation – but sport has the power to make the heart rule the head.

"Often, the motivation to be a member of a sports board is grounded in a director’s desire to be close to the action of high-profile sport and the star athletes," says Shilbury.

"These ‘star gazing’ traits can, and do, have an effect on the quality of sports governance and the ability of directors to fulfil their role. Normally sound decision-makers in the corporate world can become, in the sports governance setting, irrational, short-term decision-makers reacting to the weekly on-field success or failure of their teams or athletes."

Some people will go to any lengths to win a premiership. They might exceed a salary cap or might be tempted to break the budget to pay for the best players and the right coach.

"There are still people who think ‘let’s get the premiership first and we’ll work out how to pay for it later’," says Hatcher. "They justify it by arguing that, when they win the premiership, they’ll get more sponsorship or more generous benefactors, or that a state or national organisation will bail them out. But what if you don’t win the premiership? Or what if you spend five million dollars to win a premiership that ends up being worth one million to you?

"The spectre of trading while insolvent is very real if you don’t have guaranteed funding and particularly where, as here, the business is seasonal. There might be a real temptation to spend the money as it comes in but then, of course, you’ll find yourself struggling to meet the fixed monthly costs when it doesn’t."

Directors would be well advised to shun a poorly governed sports board, but a good director could be a struggling club’s best chance of survival.

"One of my first experiences in this area was being asked to help a club that was in a terrible financial position," says Hatcher.

"I had to make a call, and I based my decision to join the board on the fact that I had been associated with the organisation for many years and I knew the directors were reputable people who were simply lacking in financial expertise. I was confident I could bring the board along with me, and I also had the backing of the bankers.

"In the end, I had a very strong influence in setting the club on the right track by putting good governance procedures in place and bringing in good management. In this situation, I’d say look around the table and satisfy yourself you’re comfortable with the calibre of the people. If you’re not, don’t go there."

A sporting paradox

Directors of sports boards need to be familiar with the legal framework of the club and their duties and responsibilities. Education and training can help directors to do their job more effectively and resources are readily available from the Australian Sports Commission and state sporting organisations as well as the Australian Institute of Company Directors.

So why are so many directors content to stay uninformed?

"I think one problem is that the majority of sports board members are volunteers," says Hatcher. "In some instances, everyone but the board is paid, yet they still expect to attract directors of the highest calibre."

Once they have signed up, less experienced directors can be shocked to discover how much more there is to being a director than turning up to monthly board meetings.

In smaller clubs, they may even have been press-ganged into joining the board to make up the numbers. It’s easy see why they might lack the motivation to expend yet more time and energy on ongoing education.

There isn’t even a direct link between good governance and funding.

"If you’re receiving funding regardless of what sort of governance structure you have in place, there’s often no imperative to change unless there’s a crisis or, at best, people within the sport recognise the value of moving towards best practice," says Fatone.

"When a board is made up of volunteers, they may not be willing to drive change or even understand what’s needed."

Ironically, without education, directors might overlook the real motivation for taking the job seriously – that, in law, their ignorance would be no defence.

"There are people sitting on boards who are passionate about the sport and desperately want the club to succeed but don’t understand their roles and responsibilities and have limited financial knowledge," says Carter.

"They’re the ones who get caught up almost subconsciously and then find the club has been trading while insolvent or failed because of poor decision-making and now they’re liable for the debt. They could lose their house and any other assets in their name – and some financial institutions require directors’ guarantees, which, in most cases, are unlimited."

Like any other organisation, sporting bodies need to generate revenue to survive.

"I think some directors struggle to remember they are running a business as well as running a sport," says Keneally.

But, as Shillbury points out, they are also navigating unique terrain that might be described as too much of a business to be a sport, and too much of a sport to be a business.