Q1: SPORTING CLUBS AND SCANDALS

Commercialisation and Growth of the Sport

NRL is one of the most popular and highly anticipated annual sporting events in Australia,
with a total of 1.3 million participants in 2014 (NRL Annual Report, 2014). Slack (2005)
claimed that one of the most prominent features of modern sport is its presence in
commercial enterprise. The need for income from broadcasting, merchandising and
sponsoring, led to a high commercialization of professional football (Krabbenbos, 2013). In
the past decade, the football industry transformed from a utility maximizing to a profit
maximizing consumer-oriented service (Dejonghe, 2008). The commercialization of football
has changed the income structure of clubs. Traditionally, sales from the match days are the
clubs’ primary source of income. In modern days, revenues are mostly from generated from
broadcast rights, commercial sources, sponsorships and merchandising. Logos of sponsors
can be seen in mostly anything that is associated with the sport, such as on the equipment,
player’s uniform and venue of the play. A 30 second advertisement during NRL or AFL
grand final in 2017 is estimated to cost up to $175,500 (Bandt 2015). Star players are traded
through million dollar contracts. Today, almost all sport clubs are involved with commercial
aspects. Forster (2006) suggests that many governance issues existed before
commercialization, but it only starts arising in an intensified manner because of the embrace
of commerce.

Approaching 2000s, Australian football experienced massive growth and attention within the
nation. People began supporting their favourite team by following up the matches. As shown
in Appendix A1 below, there was a huge spike in attendance of NRL finals in 1999 as it was
a highly anticipated sport. In general, more people have been engaged to AFL and NRL.
Australian Rules Football (AFL) came in first as the sporting even with most spectator
attendance, while rugby league (NRL) came in fourth (Refer to Appendix A2).

Also, the salary cap of every club in NFL had increased more than 100 percent over the past
ten years (as shown in Appendix A3 below). This increase in salary cap will be a huge
burden to the club. Cronulla Sharks had been constantly making a loss from 2007 to 2013 and
had been struggling to generate a positive cash flow (Refer to Appendix A4). According to
the expense breakdown analysis (Refer to Appendix A5), Cronulla Sharks spends a vast
amount of money on football expense as compared to other expenses. This vast increase of
expense is because the growth and commercialization of the sport. However, its service
revenue, i.e. gaming revenue and match revenue, suffered a constant drop every year due to
poor management (Appendix A6). ABC’s TV’s national flagship current affairs program,
7.30, found out that Cronulla’s coach, Shane Flanagan, runs another bank account outside of
the club’s record to fund a unit called High Performance Unit (HPU). It was operating
without the knowledge of the board and CEO until it was ordered to shut down. Not only
that, a sport scientist and biochemist by the name of Dr. Stephen Dank allegedly injected
players of Cronulla Sharks with horse drugs. However, according to the investigation by
7.30, Dank was never on the payroll of the club and there were no records of purchase for the
supplements (Meldrum-Hanna 2013). With the lack of accountability and transparency, we
could throw in the question, ‘Was the money really spent on football expenses?’

The club faced a number of challenges in 2009, where its net loss hits its lowest peak.
Cronulla Sharks finished second last in the 2009 Telstra Premiership and also lost one of its
long term sponsors – LG Electronics (Byrnes and Phelps). Foreman suggested that the
popularity and growth in commercial management practices in sports club placed an
immense pressure on the board of directors. Secondly, clubs will be under huge debts due to
development of new sports facilities, which leads to the third factor, burdens are placed on
sponsors and fans to generate income and fulfil debt obligation. Also, NRL has to compete
with other major sports like Rugby Union and Cricket Australia. Coaches will also have an
incentive to win every match because they are underwritten by winning bonuses. Players are
also rewarded with win bonuses and appearance fees for appearing in or winning a game.
Their poor financial performance will put the club under pressure to win matches. The
pressure to win matches might lead to consumption of performance-enhancing drugs.

Corporate Governance and Failure in Management Process

Corporate Governance is a system in which every party who is concerned on the well-being
of the firm attempt to make sure that the manager is taking appropriate actions that benefit
the stakeholders. In a wider definition, corporate governance is the framework of procedures
by which the board ensures transparency, honesty and accountability in a firm’s relationship
with its stakeholders (Business Dictionary 2015. However, the governance of a business
corporation and a sporting club is slightly different. The comparison of key governance
factors between a major business corporation and a successful AFL club can be summarized
in Appendix A7. The standard of corporate governance of football clubs is below those of
listed companies (Michie & Oughton 2005). The stakeholders of Cronulla Sharks are
individuals who are able to influence the success of the sports team, i.e. members of the club,
fans, NRL, players, bank lenders, community, players and other sponsors (Dorgham 2008).
The primary interest of these stakeholders is to see Cronulla Sharks winning matches fairly.
After the exposure of the drug scandal, the club has failed their supporters and players in
protecting their names.

The first principle of the Australian Sports Commission Sports Governance Principles is
Board composition, roles and powers A diverse board in respect to gender, ethnicity, age,
personality and skill is essential. In 2009, there was an imbalance in gender as 9 out of 9
directors of Cronulla Sharks were male. A good dynamic of board will lead to better decision
making and performance (Siladi 2006.). A key aspect to have good governance is to have
successful professional managers to key positions in the board (Hamil, S, Walters, G &
Watson, L 2010). However, 2 of the appointed directors of Cronulla Sharks, Craig Airey and
Dane Sorensen do not have any qualifications (Cronulla-Sutherland Sharks 2014). There are
several empirical studies on the size of the board in relation to the firm’s performance. Before
the scandal, there were 12 directors in the board, of which 3 resigned in august 2011.
Yermack 1996 argued that smaller boards will lead to higher profitability as compared to
large boards that are more likely to have poor decision making and judgment. Therefore, it is
better for Cronulla Sharks to have a smaller board with not too many directors as conflict
could potentially arise. It is also common for club directors to be more focused on self-
promotion and short-term on-field success, rather than long-term interests of the members
and club as a whole (Foreman 2001).

Princple 3 talks about Governance Systems. Cronulla Sharks failed in this aspect in which
they failed to identify and monitor legal, compliance and risk management requirements.
NRL chief executive David Smith said that players were put on risk as the coach had failed to
ensure a safe working environment. The club is faced with plenty of risk in terms of sports
supplements that are being injected into players. The board should be more involved in what
is going in the club and have sufficient knowledge and access on what is being injected into
the player. They have exposed players to possible breaches of NRL anti-doping rules and
potential risks to health.

The sixth principle talks about Ethical and responsible decision making.
The board should ensure and promote ethical behavior and decision making within the club.
However, Cronulla Sharks had obviously failed to do so when they failed to take appropriate
action when they were aware of the unsafe practices that were going on in the administration
of supplements to players. They even allowed a person without necessary qualifications and
training to administer supplements to players. The use of performance enhancing drug in
competitive sports is considered ‘a common secret’ and was a normalized practice even
though users knew they were unethical (Mazanov 2008).

Throughout 2008 to 2013, governance was never once mentioned in the annual reports of
Cronulla Sharks as it was not their main concern. However, there any many other failures in
management process that contributed to the chains of events in Cronulla There is a lack of
accountability as every cent that comes in and out of the club should be recorded and
accounted thoroughly. Cronulla Sharks did not abide by the fourth principle of the sports
governance principle, which states that it is essential to provide with timely and accurate
financial accounts.

Sports Governance Literature

The issue of governance has sparked interest in many first world countries over the past
decade. Forster defined global sport organisations as “the supreme organs of governance in
sport whose authority is global’, e.g: International Federation of Football Association (IFFA),
International Olympic Committee (IOC). Forster (2006) also argues that self-governance
issues arises within these organisations. A study by Andreff (2007) suggests that weak
governance structure at league and club levels is an induction for management to be
inattentive and neglectful towards a club’s financial behavior. Therefore, cronulla shark’s
poor financial performance might be related to the club’s weak governance structure.
According to Hoye and Auld’s (2001) study of the performance of Australia sport
organisations , they found that effective boards are better at accountability than ineffective
boards, in areas like financial management, monitoring performance, setting and reviewing
objectives. Moreover, Dietl and Frank (2007) conducted a study on the corporate governance
of German football clubs and concluded that some management of the german football clubs
have strong motives to pursue their own interests at the expense of other stakeholders.

Conclusion
In conclusion, good corporate governance is essential as empirical studies proved that it will
improve club’s financial performance and the club can be managed effectively even during
difficult economic circumstances and situation (MacAvoy & Millstein, 2003). In an interview
with the ex interim chief executive, Bruno Cullen, he stated that Cronulla Sharks’ club was
like a football club of 20 years agao and was just waiting for a disaster to happen (Meldrum-
Hanna 2013). The board plays a massive role in governance system because decisions made
by them can affect the entire club. There were many internal corporate governance and
management processes failures within Cronulla Sharks, hence the unfortunate supplement
controversy. The controversy could be prevented with good corporate governance.
 Q2: CORPORATE GOVERNANCE AND COMPANIES
The chosen ASX listed company is Telstra. Every corporation has stakeholders. Stakeholders
are individuals or groups who gain benefit or are harmed by, and whose rights are respected
or are violated by, corporate actions. Freeman and Reed (1983) separated the definition of
‘stakeholder’ into two categories, a narrow definition and a wide definition. The narrow
definition includes parties who are essential to the company’s continual survival and success.
The wide definition includes any individuals or groups who are affected by or can affect the
organisation. Appendix B1 depicts the stakeholders of Telstra. ASX released 8 principles and
recommendation that should be adopted by entities with the purpose of entities to achieve
good governance outcomes and meet the expectations of stakeholders. Telstra’s annual report
has included and made reference to these 8 principles in their annual report. It is summarised
in Appendix B2.

Principle 1: Lay solid foundations for management and oversight

Telstra has conformed to this principle by disclosing the roles and responsibilities of its board
and management, and also how their performance is being evaluated and monitored. This can
be seen in several sections of their annual report, such as ‘Our Business’, ‘Strategy and
performance’, ‘Governance of Telstra, ‘Full year results and operation Review’ etc. This is in
line with Recommendation 1.1 of the principle which encourages the clear separation of
responsibilies between members to prevent misunderstandings about their roles and
obligations. These disclosures are very important and beneficial to investors of Telstra.
Investors would want to know about the system and governance of the company as the main
concern of an investor is to gain a return on their investment. An insight of how Telstra
evaluate and monitors its performance would be beneficial to them.

Principle 3: Act ethically and responsibly

Acting ethically is very important in corporate governance. There are several sections in
Telstra’s annual report shows that the corporation abides to this principle. E.g. ‘Our
Approach’, ‘Responsible Business’, ‘Governance at Telstra’ and ‘Director’s Declaration’. In
Telstra’s corporate governance statement, they disclosed their governance framework which
promotes ethical and responsible behavior within the corporation. Stakeholders who would
benefit from this disclosure are investors, employees, consumers, suppliers, community
groups, investors and general public. It is important to employees of Telstra as employees
would want to work in an organization that is ethical and conforms to fair dealing and
employment laws. Examples of employment laws include minimum pay rules,
unemployment benefits and annual leaves. Next, investors would want managers of the
Telstra to act ethically and not putting investors’ capitals on risk by engaging in unethical
conducts that could potentially ruin the reputation of Telstra. Moreover, suppliers would also
want to be paid fairly and on time for the goods they have supplied. As for the community
groups and general public, they would not want to support an organization who promotes
unethical actions like polluting the environment. Customers want the business to produce
quality products at reasonable prices. The corporate governance disclosures would make
these stakeholders comfortable with the company they are engaged with.

Principle 7: Recognise and Manage Risk

Reducing or mitigating the amount of risk faced by a corporation is an important aspect of
corporate governance. This can prevent and avoid the happenings of frauds, insolvency and
scandals. Telstra discloses their approach and attitude towards the massive amount of risks
the corporation faces in several sections of their annual report and corporate governance
statement. These disclosures would serve the needs of several stakeholders such as investors,
employees, lenders and suppliers. This is especially important to investors as they have
financial stake in the corporation and are concerned about earning income from their
investment (Freeman). Telstra currently has more than a million shareholders, making it
Australia’s most widely held stock (Walker, 2013). Suppliers of Telstra would also want to
know how Telstra is managing its risk as it would affect their decision whether or not to
continue being Telstra’s supplier. Suppliers would want Telstra to be in business and
continue supplying them with products. Lenders want to be repaid in full and also on time.
On the other hand, employees are interested in keeping their jobs and would want to be paid
consistently.

Stakeholder theory recognizes the dynamic and complex relationship between stakeholders
and corporations and focuses on the management of these relationship (Friedman, 2002).
Stakeholder theory is defined as a conceptual framework of business ethics which deals with
the moral and ethical value within the management of the corporation (Business Dictionary)..
It also suggests that the purpose of the corporation is to create maximum value for
stakeholders in order to succeed and survive. The disclosure of corporate governance is part
of the dialogue between the corporation and its stakeholders as it gives out information about
the corporation’s activities that legitimize its behavior. Corporate governance disclosure is
part of the strategy to manage the relationship between Telstra and its stakeholders. A study
by Chan conclude that corporate governance quality of Australian companies is positively
associated with the amount of voluntary disclosure of information in the annual report. A
good firm will strategically manage its relationships with important stakeholders through a
strategic plan that involve disclosing corporate governance and CSR activities (Watson,
2013). An organization with a good corporate governance would most probably have their
CSR issues taken care. Corporate Social Responsibility (CSR) is now becoming a part of
corporate governance (Adrian, 2002). The CSR report is a key element of a company’s
stakeholder engagement strategy (Noked, 2013). Perrini and Tencati (2006) suggest that
corporations need to adapt a suitable accounting system to asses if they are responding to
stakeholders’ needs. In short, CSR are viewed as a strategy to manage stakeholder
relationships and corporate governance statement provides information that satisfies the
needs of stakeholders.
 APPENDIX

NRL Finals Crowd Attendance

120000

100000
No. of Attendance

80000

60000

40000

20000

0
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Year

Appendix A1: NRL Finals Crow Attendance from 1998 to 2014 (Cronulla-Sutherland Sharks
2008-2014)
Appendix A2: Spectator attendance at selected sporting events (Most popular sports in
Australia, 2012)

NRL Salary Cap

8000

7000
Salary Cap in thousands ('000"

6000

5000

4000
Salary Cap ('000)
3000

2000

1000

0
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Season

Appendix A3: NRL Salary Cap (Cronulla-Sutherland Sharks 2008-2014)

 PROFIT AND OPERATING CASH FLOW
20000000

15000000

10000000
Profit
Operating Cash Flow
5000000

0
2007 2008 2009 2010 2011 2012 2013 2014

-5000000

Appendix A4: Profit and Operating Cash Flow of Cronulla-Sutherland Sharks from the year
2007 to 2014 (Cronulla-Sutherland Sharks 2008-2014).

EXPENSE BREAKDOWN
12000000

10000000

8000000 Marketing
EXPENSE

COGS
6000000
Football
Admin
4000000
Others

2000000

0
2007 2008 2009 2010 2011 2012 2013 2014

Appendix A5: Expense Breakdown of Cronulla-Sutherland Sharks from the year 2007 to
2014. (Cronulla-Sutherland Sharks 2008-2014)
 REVENUE
16,000,000

14,000,000

12,000,000

10,000,000
Services
Axis Title

8,000,000 Sales
Others
6,000,000
Non-Operating
4,000,000

2,000,000

0
2007 2008 2009 2010 2011 2012 2013 2014

Appendix A6: Revenue of Cronulla-Sutherland Sharks from the year 2007 to 2014
(Cronulla-Sutherland Sharks 2008-2014)
Appendix A7 Comparison of key governance factors between a major business corporation
and a successful AFL Club (Foreman 2006).
 Government

General
Investors
Public

Trade
Creditors
Unions
Stakeholders
of Telstra

Community Suppliers

Employees Customers

Appendix B1: Stakeholders of Telstra

 Principle and
Recommendation
Lay solid foundations for
management and oversight
Promote ethical and
responsible decision making
Recognise and manage risk
Appendix B2: A summary of where the principle and recommendations are disclosed in
Telstra’s annual report and stakeholders who are affected by it.
Section of Annual Report Stakeholders
Our Business
This Year at a glance
Chairman and CEO Message
Strategy and Performance
Full Year Results and
Operation Review
Board of Directors
Governance at Telstra
Financial Statements Investors
Investors, general
Our Approach
public,
Responsible Business
community
Governance at Telstra
groups,
employees,
consumers,
Director's Declaration suppliers
Director's Declaration
Notes to Financial Statements
Our Material Business Risks
Our People Investors,
Governance at Telstra suppliers,
Director's Report lenders,
Remuneration Report employees,
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