Effective Corporate Governance, application of King IV: The answer to sports administrations problems
Sports administration has always taken the bad headlines in the media. Year after year we constantly and consistently see the same headlines about maladministration and misuse of funds. Are there any lessons to be drawn from the constant mistakes, or is it wilful disregard for the industry as a business like any other? These are the questions that I am left asking myself, and now I think I have an answer that I am not saying is the blueprint of what must happen, but at least let us make this the starting point. As the saying goes, a fish starts to rot from the head. As sports administrators, the problems in the business of sport all begin with us, we are the head. The most unfortunate thing is that those who suffer the most are the athletes. We as stakeholders of their interests and lives have a fiduciary duty to ensure that they can perform at their ultimate best and not have to worry about the administration side. The lockdown because of COVID-19 has shown that the most important people in the sports industry are the athletes, it is them who still must perform under these restrictions and provide some joy to our now mundane lives, we are just the support system. They take centre stage. So, what is the solution that I believe will work?
When we speak of effective corporate governance, we are talking about providing practical solutions to real-life problems. It is the way in which we as administrators of governing bodies act. Before we even look at how to define what is effective corporate governance in the context of the business of sport, we must understand that corporate governance systems are organic — they develop in a piecemeal manner over time in an evolutionary manner. Many of the corporate governance mechanisms we are applying in the sporting industry now are ineffective, inefficient and a lot of the behavior is also now downright unacceptable. It is helpful to understand this evolutionary process so that we as administrators stay ahead of the evolutionary curve and take charge as effective leaders, leading sports organisations that are operating in the 21st century. That is why I believe that the King IV Report on Corporate Governance is the best tool to use as the start of working on “best practices” for sports organisations. The aim of this article and the King IV Report is not to dictate what is good for your organization, it is to help you understand your role as an administrator so that you can make meaningful contributions to the debates that aim to provide practical ways to improve the quality of external governance but also build successful internal governance systems. Success can only be measured by how the organization meets its desired outcomes from its activities which will include ethical and social performance standards as well as fan satisfaction, athletes’ morale, economic return, and efficient use of every resource.
So, what is King IV? In summary, King IV is structured as a report that includes a code, with additional, separate sector supplements for SME’s, NPO’s, State-Owned Entities, Municipalities and Retirement Funds. The King Code contains both principles and recommended practices aimed at achieving governance outcomes. Whilst King IV is voluntary (unless prescribed by law or a stock exchange Listing Requirement) it is envisaged that it will be applicable to all organisations irrespective of their form or manner of incorporation, which then includes sports organisations. The King Code principles of good governance are presumed to apply, whilst the practices should be applied on a ‘proportionality’ basis depending on the nature, size, and complexity of the organization. In an era when trust in business is at a premium, and scrutiny from stakeholders is ever wider and more intense, it has never been more important for organisations to behave in accordance with their core purpose and principles in order to protect reputation and trust. The Code is not voluntary unless you are a listed company. The reason is because of the public funds involved, and this requires more transparency and accountability. I would argue that the same principle must be applied to the sporting industry as well, there is a lot of public investment and interest in sport, be it through the purchase of merchandise, attendance to sporting events and use of public funds to supports national teams. I would further argue that the emotional investment by fans and the ties to the communities of sports teams requires a greater level of accountability.
Corporate governance is a vital mechanism through which governing bodies can ensure that the behaviours of their workforce are aligned to the organisation’s purpose and principles — and those corporate goals and values are translated into their people’s decisions and actions. The sporting industry has been plagued by scandal after scandal relating to maladministration. A genuine effort to rebuild trust through accountability is the only way of saving the industry and for it to be sustainable. The era of sports organizations having to go out and seem as if they are looking for handouts and donations and not creating valuable partnerships for all those who want to invest in it through sponsorship and other forms of investment needs to be behind us.
Why then, King IV? The first thing we need to establish is that King IV is not a law. It is not prescriptive but provides recommended practices. King IV aims to be outcomes-based, reflecting what would be achieved through the effective application of the governance principles. Its objective is to reduce the “tick-box” approach often applied to the administration of sports organizations. The King IV outcomes that the principles lead to are:
I. An ethical culture.
ii. Good performance and value creation.
iii. Adequate and effective control; and
iv. Trust, good reputation, legitimacy.
Stakeholders, being the investors, sponsors, governments, and fans want to know how the sporting organization is demonstrating these principles. To achieve these outcomes, as administrators our task is to produce practices that are backed by our organisations' principles. The principles thus serve as a guide to direct organisations on what they should set out to achieve by implementing a practice. The Governance outcomes will then become the positive effect, and benefits that an organisation can reap if the principles are properly applied and fully achieved. As stated in the opening paragraph, it all starts from the top. The tone from the top must be infused and embedded at all levels of the organisation through structures that ensure it is translated into everyday behaviours. Mechanisms for achieving this include monitoring by the board and its various sub-committees, assurance through functions such as Internal Audit and Compliance, and contingency plans for crisis management. One of the benefits of a well-developed structure and effectiveness is that they enable the business to communicate in an open, accurate, and timely way with all its stakeholders. This means, interested parties ranging from shareholders to regulators, and from employees to fans can gain a clear understanding of the business unifying purpose or ‘mandate’, how its chosen strategy aligns with this purpose, and how it is pursuing this strategy. Because King IV is not the law, some may argue that it is not very important. However, that is where the measurement of ethical and effective leadership comes in. An administrator who is committed to the development of good corporate governance will be committed to applying the principles of King IV.
How do we apply King IV? An important aspect of King IV is that it requires an “apply and explain” approach. This means that an application of the principles is assumed, and the governing body now needs to explain how they have implemented the practices to achieve the governance principles and outcomes in a way that is practical to their organisation. The apply and explain approach results in greater stakeholder engagement, critical thinking, and application of the principles which increase the transparency and accountability of the governing body. In an article titled Why King IV’s “apply and explain” is so important, Parmi Natesan gives illustrations as to why applying and explaining the application of the Code is important. She argues that it is not what you do, but why it matters in corporate governance. King IV’s disclosure regime compels governing bodies to take actions that have the right results. In poker, as in so much of life, bluffing can take you very far, but sooner or later you must show your hand. Disclosure is the ultimate litmus test: are you doing what you said you would do, and are you getting the desired results? For that reason, disclosure has become a very significant element of corporate governance.
The intention is to move beyond a simple “tick box” approach to corporate governance, and to task companies with showing precisely how practices achieve compliance with the designated principles. Essentially, governing bodies are asked to take a proactive approach to corporate governance and are required to deliberate on how their actions help the organisation achieve its goals. The ‘apply and explain’ model provides the most effective method of transitioning in view of the unique factors that characterize the sporting industries corporate sector. Governance in the sporting industry has mainly focused on getting money from sponsors and power struggles relating to the ownership of entity assets, which are difficulties that can be solved by the ‘apply and explain’ model. This works in two ways: first, by giving fans and institutional investors — who are largely passive in the sporting context — a better window into the internal workings of companies, and second, by bolstering enforcement as regulators and the government get a clear picture of how governing bodies are complying with the relevant rules. The apply and explain method also allows the organization to question itself and see if they understand what their mission and goals are.
The benefits of better governance reinforce my argument and underline the business case for investing in successful governance. They include strategic advantage, greater resilience both to sudden shocks and long-term change, and higher confidence among all stakeholders in the business’s ability to generate value in the future. Ultimately, all these benefits come together in a single, invaluable asset: higher trust. An organization that is demonstrably and visibly well-governed will generate stronger trust both internally and externally — and will enjoy an inherent competitive advantage over its less trusted counterparts, in the ongoing battle for better relationships, revenues, talent and investment. From setting the right ‘tone from the top’ to maintaining and monitoring business controls — and from rewarding the right behaviours to communicating openly and transparently with all stakeholders — the board plays a pivotal role in all aspects of corporate governance. These activities can sometimes be disconnected, so it is the governing body's role to apply the right risk lens to every decision and action. For this to be a success, organizations need to have the right people on the board — challenging, experienced, inquisitive and with the time to understand both the risk landscape and their legal and ethical responsibilities.
