I used to think that governance was a tediously dry topic that didn't warrant my attention until the banking crisis highlighted just how important it is. Previous corporate scandals (Polly Peck, BCCI, Maxwell, WorldCom, Enron, Alan Bond in Australia - in sports the IOC, FIFA and I think the EPL.) had highlighted the need for proper corporate governance and in in most developed economies goverrnance standards have become very tight in principle, albeit still far from perfect.
Aplogies for a bit of an essay here - but I think it's really important to understand just what all this is about, although I'm sure most of you intuitively know already.
Context:
Just in case some of you don't know, governance is the process through which companies and organisations are directed and controlled. In limited liability joint stock companies (plc's), shareholders (or principals) own companies but managers run companies as "agents" of the principals. There is an inherent conflict of interest here. This conflict is known as the "principal-agent problem".
Shareholders (should) want long-term gains but managers have an incentive to take as much out of companies as they can get away with. Therefore, in business it is well established that a Board of Directors should police this conflict of interest. Directors have to appoint and interact with management to ensure that shareholders' interests are protected. Directors also have a key role in determining strategic direction. In many institutions the Directors and Management have a good, harmonious relationship but this is not always the case. Standards of Corporate Governance are typically established by the accounting profession.
I found it interesting that Adam Smith, the doyen of right-wing free market economic philosophy was profoundly disturbed by the advent of the joint-stock company 200+ years ago (as was Karl Marx - two unusual ideological bedfellows in this context). He correctly identified that a new breed of capitalist would emerge - the professional manager who would extract as much as he could from good companies at the expense of owners. Smith far preferred partnerships, where owners and employees were largely the same and hence were aligned. The last 30 years saw growth in stock-options being awarded to managers in order to achieve similar alignment but it's generally agreed now that this had the unintended consequence of managers embarking on risky strategies (or economically useless share buy-backs) to inflate share prices in search for personal gain. Another modern breakdown of this model is the proliferation of investors (e.g., high frequency traders, some but not all hedge funds...) who actually have only a short-term investment horizon, with no interest in sustainable long-term growth.
Governance problems arose in the run up to the banking crisis. Banks' managements were making lots of money, but so too were their shareholders, so nobody complained. Directors were also doing very nicely. The principal-agent "policing" mechanism broke down. In most cases, shares were owned by investment companies on behalf of individual savers. These investment companies also paid their staff very handsomely so nobody was incentivised to cry foul. Even non-financially interested parties benefited: consumers whose asset prices were rising and who had easy access to credit, government whose tax receipts were rising and were overseeing a feelgood period…
So nobody other than financially astute naysayers were placing any pressure on the process to stop. The banking crisis can be seen as a failure of corporate governance on many accounts.
Commonly suggested means of ensuring Directors steer their companies properly is to ensure that their term of office is limited and that they are openly held accountable by a re-election process, and also that effective boards should have independent non-executive directors (NEDs) whose role it is to challenge the prevailing wisdom, ideally from the perspective of experience gained in other industries.
So, if shareholders were unable to police the conflict of interest what can be done? Well, recently shareholders have become more activist. At AGMs many banks and companies' CEOs have had their pay packages refused. This is the so-called "shareholder spring". Others argue that the conceptuial framework is wrong. Companies are also accountable to a broader set of stakeholders, i.e., people affected by a company's actions. These include shareholders but also stretch to employees, local communities, suppliers, government, regulators etc. This school of thought is known as "stakeholder theory". But, an organisation would be wasting its time focusing on anyone who has some kind of tangential stake in an organisation's activities, so it has been recommended that organisations identify and profile their key stakeholders and prioritise those with most legitimate, urgent and powerful claims on the organisation.
But are sports organisations different to companies? In some respects no. They are organisations set up towrads achieving a goal on behalf of stakeholders. But in many other important respects, yes. For a start they may not even be profit-seeking enterprises. They may not even have full-time professional staff, instead relying on volunteers. They may be more reliant on government funding and they may be heavily embedded in local communities, so their stakeholder universe may be more diverse (also including athletes, member clubs etc.). They may even have no owners per se. This is key.
If they are not owned by anyone then there is no obvious set of people to whom an organisation can be held accountable to in performance or financial terms. Shareholders of a profit-seeking company should always try and focus on keeping costs down to an appropriate level. After all, all residual income (profits) are ultimately owned and distributed to shareholders. But what about big global sports organisations such as the IOC and FIFA? It has been proposed that the combination of huge political power, huge revernues and the lack of a "residual claimant" (a shareholder with a claim on the organisation's residual income) all create an climate for opportunism and corruption to prosper. Institutional reform, most notably an internal ethics committee and limiting members' tenure, addressed this at the IOC to a fair (but far from ideal) degree of success but as yet FIFA's moves towards a similar solution appear only to have been a bit of lip service in the face of massive criticism.
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