Corporate Governance

3.1        In the course of this inquiry, the committee heard concerns about the Australian Rugby Union (ARU) both as a steward of the game and as a corporate organisation. This chapter first examines the way the ARU has managed rugby union in Australia before considering the concerns raised by submitters about the ARU's corporate governance.

Stewardship of the game

3.2        In particular, submitters raised concerns about the decision to expand the Super Rugby competition to include 18 teams, the conduct of the sale of the Melbourne Rebels to Imperium Sports Management Pty Ltd (Imperium) and the level of funding to grassroots rugby clubs.

Expansion to 18 teams

3.3        Some submitters raised concerns that the ARU had been warned that expanding the Super Rugby competition to 18 teams would be financially detrimental to the sport.[1]

3.4        The Rugby Union Players' Association (RUPA) told the committee that it had commissioned a report in 2014 that proposed contracting rather than expanding the size of the competition:

In March 2014, RUPA provided the Australian Rugby Union with a report co-produced by sports media consultancy Global Media & Sports. The report analysed key commercial trends and performance metrics within the sports industry, and rugby specifically, before drawing a number of key recommendations. This was headlined by concern for the sustainability of the proposed expansion to an 18 team Super Rugby competition and advocating strongly for the adoption of a smaller Australasian or trans-Tasman competition.[2]

3.5        Another submitter was more specific about the contents of the report. Mr Angus Tibbits advised the committee that the report concluded that the decision to expand to 18 teams may end Australian Super Rugby:

It is likely that by the time of the subsequent broadcast agreement renewal (meaning that due in 2020) that Australia's second tier of professional competition [Super Rugby] will have been destroyed.[3]

3.6        Mr Tibbits advised that one conclusion from that report called on the ARU to reject the proposed expansion to 18 teams:

Either the management of Australian rugby has the courage to face up to that reality and force change with its SANZAR partners, or it will continue over the precipice it has now reached.[4]

3.7        RUPA told the committee that the ARU had acknowledged the report and its recommendations, but concluded that the benefits of expansion outweighed the costs:

The ARU noted their agreement to the sentiment of the RUPA-GMS recommendations but were confident that the broadcast uplift from the mooted 18 team competition would be more than sufficient to compensate for its shortfalls.[5]

3.8        In his appearance before the committee, Mr Clyne also acknowledged the 18-team competition was a 'poor format' and a contributing factor to the financial challenges facing the ARU. Mr Clyne stated:

I think there is the poor format of the 18-team competition, but, if I go back, the expansion from three to four to five saw a step-down in performance from 60 per cent of wins to 50 to 40. It's quite clear that Australia doesn't have the playing depth to support five teams and that fans simply don't turn up to watch teams that aren't performing, and that just exacerbates the financial competition.[6]

3.9        Mr Tibbits concluded that the decision to expand to 18 teams directly contributed to the cessation of the Western Force:

The ARU Board did not heed this prognosis and instead elected to put the interests of Australia second and opted for the expanded 18-team format for Super Rugby. That decision became the death knell of the Western Force.[7]

Concerns about the handling of the Melbourne Rebels

3.10      Submitters raised a number of concerns about decisions made by the ARU in connection with the Melbourne Rebels.

3.11      The first was the decision to support a fifth Australian franchise. One submitter noted that, at the time of the expansion, the ARU had few financial reserves:

The addition of another team was always going to be expensive for the ARU and yet they decided to do it at a time when they were already financially stretched. In the year that the ARU obtained SANZAR's agreement (2009), the ARU had posted a net deficit for the year of $279,000. Things improved slightly in 2010 but only enough to enable the ARU to post a fairly meagre net surplus of $1 million.[8]

3.12      The submitter noted that this was a relatively weak base from which to expand professional Australian rugby.[9]

3.13      The second concerned the manner in which the ARU sold the Melbourne Rebels in 2015. On 1 July 2013, the foundation shareholders walked away from the venture. At that time, the shares in the Melbourne Rebels were 'parked' with the Victorian Rugby Union and the ARU acquired effective control of the Melbourne Rebels.[10]

3.14      During 2014 the ARU started to explore a private ownership model for the Melbourne Rebels, saying:

...what we wanted to look at was a private ownership model, which had occurred in other markets. It's questionable it has worked in other markets. At the end of the day, that was seen to be a superior option to any other option.[11]

3.15      To seek a private purchaser for the Melbourne Rebels, the ARU conducted private discussions with a number of individuals:

There was a combination of both, in terms of soliciting, talking to some people and, in other cases, people approaching us—and this occurs.[12]

3.16      Whilst the comments were made in a slightly different context, one submitter noted that the ARU's decisions to privately transfer a licence or to remove a team could be contrast with the process run to gain entry to Super Rugby:

By way of contrast. [sic] the process in which WA gained admission to the Super Rugby competition in 2006 was totally transparent with formal expressions of interest sought, published criteria for assessment, opportunity to present cases, independence and objectivity in the decision-making process etc.[13]

3.17      Mr Rob Clarke, who was the Chief Executive Officer of the Melbourne Rebels at the time of privatisation, confirmed that no public expression of interest was sought.[14]

3.18      Despite the private nature of the process, the ARU received two bids for the financially struggling team, one from a group of Melbourne business people led by Mr Alan Winney and a second from Mr Andrew Cox and Imperium.[15]

3.19      The committee also received confidential evidence that additional stakeholders may have put in bids if they had known the team was for sale.

3.20      Submitters also raised concerns about the terms on which the Melbourne Rebels were sold to Imperium.

3.21      Under the terms of the agreement, the licence was transferred to Imperium debt free, for zero consideration.[16] The sale agreement also included two opportunities for Imperium to exercise a 'put option'.[17] Halsbury's Laws of Australia describes a put option as 'the right, but not the obligation, to sell the subject matter of the option to the writer [another party] at a pre-determined price'.[18]

3.22      The committee heard that in order for the Melbourne Rebels to become debt free, the ARU forgave $13 million in loans to the Melbourne Rebels.[19] In addition to this, the committee understands debts to other creditors owed by the Melbourne Rebels were also paid. In response to a question by Senator Reynolds, Mr Clarke stated:

Senator REYNOLDS: In terms of buying it debt free for $1, I also understand they got cleared of creditors of about another $1.8 million, which the ARU paid for, is that correct?

Mr Clarke: That could be right.

Senator REYNOLDS: What do you mean by 'could be right'?

Mr Clarke: I don't have the annual report in front of me and I don't have the figures in front of me.

Senator REYNOLDS: As chief operating officer, if you didn't know whether the Melbourne Rebels had any debts that needed to be cleared, were you aware that they had debts that the ARU undertook to clear?

Mr Clarke: I believe that it was handed over debt free, if that's the question.

Senator REYNOLDS: So, whether it's $1.8 million or more, there were debts to be cleared?

Mr Clarke: That's correct.[20]

3.23      One submitter questioned the transaction from Mr Cox's position:

My submission asks 'what was in it for Cox?'. What businessman worth his salt would go near a company that was so unprofitable that it had accumulated losses of just under $24 million in just four years with no prospect of that changing? We know that the ARU gave it to him on a plate having cleared all the debt and persuaded the shareholders to hand over their shares to Cox for nothing, but that still left the question of how on earth was Cox going to make this company profitable.[21]

3.24      One suggestion the committee received was that the ARU agreed to pay the Melbourne Rebels, in addition to the approximately $5.8 million provided to all Super Rugby teams from 2016,[22] an additional $5.5 million between 2016 and 2020.[23] The ARU confirmed that additional incremental funding was provided and that the agreement was front end loaded so that most of the money was paid out between 2016 and 2018.[24]

3.25      However, due to the commercial nature of the negotiations between the ARU and Imperium, the committee was not able ascertain whether any conditions were attached to these funds.[25]

3.26      Mr North confirmed the existence of a unit trust associated with Imperium which provided unit holders with an interest in the company.[26] Confidential evidence provided to the committee asserts a member of the Victorian Rugby Union board had an interest in that trust.

3.27      The agreement between the ARU and Imperium could be contrast with the proposal from Mr Winney whose bid was in the following terms:

The Winney Consortium bid to buy the Rebels from the ARU was to pay $100 for the Super Rugby participation licence and the club's intellectual property. It proposed that the Consortium would then recapitalise the club with $6 million in new equity, to take effect from the handover date. The Consortium advised that all matters up to 31 December 2014 would remain as the responsibility of the ARU and that all matters related to the post 31 December 2014 period would be the responsibly of the buyer. The buyers would absorb the anticipated 2015 losses, but were seeking the same uplift in TV rights payments in 2016-2020 period that would be paid to the other Australian Super Rugby teams.[27]

3.28             The ARU did not appear to undertake any due diligence on the Winney Consortium's proposal but did request $1 million be placed in trust to protect the ARU from an event of moral hazard, the ARU withdrew this requirement during the negotiations.[28]

3.29      Whilst it is not clear that these bids were actively being pursued at the same time, Mr Clarke confirmed that ARU management was aware of the offer:

My understanding was that, at high level, the two approaches were considered and the ARU formed a view that Andrew Cox's approach was better—or his offer was a better solution... But certainly ARU were aware of an alternative option. And how far the ARU management at the time took that I'm not sure.[29]

3.30      According to Mr Winney, the consortium withdrew from the negotiations because the ARU was 'unwilling...to negotiate on key terms'.[30]

3.31      Some submitters questioned the way that the ARU handled these transactions because it exposed the ARU to additional risks at a time when it may not have been able to afford it:

Whilst the ARU itself was not in a position of financial distress, the ARU was becoming distressed that, as essentially the lender of last resort, given the obligations in the broadcast deal, it would need to step in and bail out one, two and possibly even three of the Super Rugby teams at that point.[31]

3.32      At the same time, the cost of funding Super Rugby came at the expense of the lower levels of the game.

Grassroots rugby

3.33      At the start of the inquiry the ARU acknowledged that there was some discontent among grassroots stakeholders about investment in the lower levels of the game:

...if there were to be Senate inquiry, it could well have been brought by grassroots stakeholders in the game asking, 'Why are you not investing more money in the grassroots of the game, because growing the participation of young boys and young girls is a key measure?'[32]

3.34      Throughout this inquiry, the intersection between the elite game and the grassroots was a recurrent concern.

3.35      The ARU explained to the committee that grassroots participation was a major factor in many of the reviews that have been conducted into ARU governance:

I can confidently say grassroots participation would have been a significant component of probably most of them. The majority of them go back to governance. In my five years in Australian rugby, perhaps the single biggest issue I have been trying to deal with is the governance of the sport. It goes back to your first question—that, as the chief executive of the governing body, I actually do not control the implementation strategy at a state level. That is extremely frustrating.[33]

3.36      RUPA suggested to the committee that the tension between the ARU and community rugby had been occurring for sometime:

...for a long time the relationship between club rugby on the east coast and the ARU has been strained. There was some well-publicised press at the end of last year about several key past players—former Wallabies and former coaches—coming out and expressing their discontent with the ARU for how it was running the game and that change needed to occur in how much that level of the game was being prioritised.[34]

3.37      Grassroots stakeholders consider that the lower level of competition needs to be prioritised because it fosters the future of the sport. As one submitter suggested:

Without the fan base there is no audience to generate broadcasting revenues and without the grassroots there is no sport to present to the fans.[35]

3.38      Another submitter suggested that reducing funding to the grassroots was already having an effect on player numbers in New South Wales:

...the ARU has failed to foster and promote Rugby throughout Australia, but rather it has by its focus on elite rugby, driven down grassroots rugby and player participation numbers, so that the real player participants in 2017 are down by more than 15% on the real player participants in 2014...[36]

3.39      The submitter also advised that the downturn in players was having an economic effect on those grassroots clubs:

Grassroots rugby has watched as more than $200 million has been wasted on the elite level of the game in the last three years, while there is a diminishing return on the humble club bbq and canteen because player numbers are down.[37]

3.40      This can be contrast with the significant growth in grassroots rugby in Western Australia during the tenure of the Western Force.

3.41      The Western Australian Government told the inquiry that there had been a substantial increase in rugby players in Western Australia during this period:

During the time of the Western Force, rugby in WA grew four-fold in numbers and spread into new communities in Western Australia. A complete pathway was established from grassroots through to national and international competition through the Western Force and the Wallabies.[38]

3.42      That sentiment was anecdotally supported by submitters from Western Australia who told committee that Western Australian rugby organisers had no trouble attracting players:

...in other parts of the country, especially Western Australia, Rugby is actually growing. In WA the major problem facing Rugby organisers is not recruiting players, it is finding grounds to put them on.[39]

3.43      However, some submitters question whether that will continue with the removal of the Western Force. As one parent told the committee:

...[there are] legions of WA kids who have come all the way through the WA system dreaming of playing for the Wallabies. My two sons now age 17 and 18 still have that dream. They are amongst dozens of quality players raise in this positive environment just emerging from junior ranks. Just when it appeared everything is finally coming together the ARU destroys it with no alternative put in place. No attempt at a Plan B. Just the total abandonment of WA. My boys and their friends are shattered. They've even talked of abandoning the game altogether and taking up AFL.[40]

3.44      Mr Gary Gleeson explained to the committee that the Western Force brand is also used for a number of other rugby union teams in Western Australia, including the Junior Gold Cup and the men's and women's sevens teams. Mr Gleeson urged that the intellectual property acquired in the Alliance Agreement, including the names Western Force and Perth Spirit, be returned to RugbyWA.[41]

3.45      Many of the submitters to this inquiry expressed some level of frustration with the ARU. Mr Ross Xenos, Chief Executive Officer of RUPA suggested to the committee that perhaps the reason for the discordance between grassroots participants and fans and the ARU stems from the underpinning structure of the game:

If we look at the structures within Australian rugby, we have not really adapted any of our underpinning competitions or platforms to embrace professionalism, to the point where it could be said that club rugby on the east coast has never really fallen into an integrated pathway in terms of how it supports the professional game and how the professional game supports it. I think some of those underlying issues remain unresolved, and this has led to tension in relationships. Whilst that doesn't directly lead us to the conversation about how many Super Rugby teams we have, I think that there are some broader issues within Australian rugby which essentially set up what I believe is an environment of distrust rather than an environment where all stakeholder groups are very closely working together. This is an issue that I know the ARU is trying to work really hard to change and I know it is trying to be more transparent, but unfortunately it does feel like it has been reactive to what has occurred most recently.[42]

3.46      The ARU told the committee that it remains committed to grassroots rugby in Western Australia and to providing a pathway to the national and international competition for young players.[43]

Corporate governance

3.47      Submitters have also raised concerns about the corporate governance of the ARU.[44]

3.48      The ARU is a public company limited by guarantee with the Australian Company Number 002 898 544.^[45]

3.49      Directors of the ARU are required to comply with all of the obligations of company directors under the Corporations Act 2001 (Cth) (Corporations Act).[46]

3.50      These obligations include:

• exercising their powers and discharging their duties with the degree of care and diligence that a reasonable person would exercise;[47] and
• exercising their powers in good faith, in the best interests of the company and for a proper purpose.[48]

3.51      The ARU also has particular reporting requirements, including:

• preparing a financial report and a directors' report each year;[49]
• ensuring that the financial statements provide a true and fair view of the financial position of the company;[50]
• ensuring that the directors' report:
• gives details of any significant changes on the entity's state of affairs during the year;[51] and
• gives details of any significant matter or circumstance that has arisen since the end of the year that has significantly affected, or may significantly affect the entity's operations on future financial years.[52]

ARU's Concise Financial Report 2016

3.52      One submitter raised concerns about the ARU's compliance with its reporting obligations in its Concise Financial Report—31 December 2016.[53]

3.53      As detailed in Chapter 1, South Africa, New Zealand, Australia and Argentinian Rugby Union (SANZAAR) made a final decision to adopt the 15-team format from 2018 and remove two South African and one Australian Super Rugby teams on 10 March 2017.[54]

3.54      On 22 March 2017, Mr Clyne and Mr Pulver signed the ARU Directors' report in its Concise Financial Report—31 December 2016 for the preceding year.[55]

3.55      The ARU Directors' report for 2016 covered the reporting year to 31 December 2016.[56] The submitter suggested that there was a requirement under company law that required the ARU to disclose material items that occurred after the reporting date.[57]

3.56      Paragraph 7 of the ARU's Concise Financial Report—31 December 2016 states that no material item, transaction or event took place between 31 December 2016 and 22 March 2017 that would significantly affect the operations of the company in future financial years:

7. Events subsequent to reporting date

In the interval between the end of the financial year and the date of the report, no item, transaction or event of a material and unusual nature has arisen, in the opinion of the Directors of the Company, to affect significantly the operations of the Company, the results of those operations, or the state of affairs of the Company in future financial years.[58]

3.57      However, paragraph 8 of the Directors' report suggests that there are likely developments that are not disclosed in the report:

8. Likely developments

Further information about likely developments in the operations of the Group and the expected results of those operations in future financial years has not been included in this report because disclosure of the information would be likely to result in unreasonable prejudice to the Group.[59]

3.58      The submitter questioned how Mr Clyne and Mr Pulver could sign a statement that said that there had been no material change that would affect the ARU's operations in future financial years when the removal of an Australian Super Rugby team would probably have a financial impact on the company:[60]

On the 10 [sic] March the ARU had told the SANZAAR meeting in London that they would reduce the Australian Licensees from five to four. Certainly one fifth of the Super Rugby teams  would be considered material.[61]

3.59      At the hearing on 16 October 2017, Mr Clyne was given an opportunity to respond to the suggestion that the decision to move from five Australian teams to four teams was a matter that had the potential to affect the ARU's operations in future financial years and should have been disclosed.[62]

3.60      While Mr Clyne did not respond to that specific question, he told the committee that paragraphs seven and eight could be reconciled:

Because you're always making financial forecasts and you're making best and worst case scenarios for the future going forward. What we've done is we've faced that scenario on many previous occasions. What we've done in each case is look at the situation and cut costs to the detriment of the game. And that's what we would've done in the future. So we are committed and we understand our fiduciary duty to ensure the entity is solvent.[63]

Composition of the Board

3.61      Submitters from grassroots organisations expressed concerns about the way that ARU Board members are appointed.

3.62      One grassroots submitter explained the nomination process:

Elevation to the ARU Board only happens via a nomination from the Nominations Committee, a committee that is appointed by the ARU Board. No outsiders are permitted.[64]

3.63      This nominations process has its origins in one of the last reviews of the ARU's governance undertaken by the Hon. Mark Arbib. The Nominations Committee process was recommended to prevent conflicts between directors and the member unions that nominated them and to ensure that the ARU Board was able to obtain a diverse skills-based Board.[65] 

3.64      Some grassroots supporters lament that the nomination process has narrowed who can be elected to the Board:

No one from club rugby, schools rugby, junior rugby, regional NSW rugby, and no one from an area of disadvantage has been elected to the ARU Board in the last 10 years.[66]

3.65      However, even the New South Wales Rugby Union advised the committee that it may be worth the ARU revisiting its existing governance arrangements:

Despite the best intentions from the ARU and its affiliates as articulated in the Australian Rugby National Charter, the existing model continues to lack the requisite division of responsibility to foster the long term viability and growth of the sport...the success of Australian rugby union remains conflicted by governance ambiguity.[67]

3.66      Another submitter also suggested it may be time alter the way ARU Board members are nominated:

While Mr Arbib's proposals are ideal in principle, the outcome of their implementation has not been a success. Australian Rugby circa 2017 bears absolutely no similarity to Rugby Australia circa 2012. 5 years under the current regime has seen it's position plummet almost to the point of oblivion. The current ARU Board has demonstrated repeatedly that it does not have the nouse [sic] or foresight to evolve...[68]  

Committee view

3.67      The committee acknowledges the concerns that have been expressed by submitters about the stewardship and governance of rugby union in Australia. The committee is concerned by some of the decisions that have been taken by the ARU in recent years and thanks submitters for bringing those concerns to the committee's attention.

3.68      The committee notes the view of submitters that whilst previous recommendations such as those in the Arbib review are ideal in principle, they have not achieved the intent or spirit of the recommendations. In addition, the ARU have undertaken 13 reviews since 2008.[69] The committee has received information on the scope and recommendations contained in these reviews, but no evidence of implementation.

3.69      Given the knowledge of both offers to purchase the Melbourne Rebels licence, the committee has significant concerns about the rationale and conditions which led to the ARU's decision that the offer from Imperium was superior. The committee notes that whilst it is aware of the terms of the initial offer from Mr Winney's consortium, the understanding of Imperium's offer is more limited, particularly in relation to conditions placed on funds transferred from ARU to Imperium over the course of ownership.

3.70      The committee has significant concerns about the evidence provided in relation to figures relevant to the Melbourne Rebels' licence transfer to Imperium and witnesses' inability to confirm those figures.

Navigation: Previous Page | Contents | Next Page