All posts by Carlos

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Whose Income Is It Anyway?

Today the Welsh Rugby Union (WRU) magnanimously offered to help the four regions in Wales out, with a temporary loan to tide them over whilst they wait for the delayed payments from European Rugby Cup Limited (ERC). An amount was due at the end of January of £800,000 but was withheld due to uncertainty over the future of that entity. Whether that is a reasonable course of action is open to significant question, but that is not the purpose of this piece.

The purpose of this piece is to examine how it is that the WRU treat the income that is received by the Welsh game from the competitions that the regions play in, as their own income. And whether common wisdom on the reasonableness of this policy is affected by today’s offer, and the clear message underlying that offer that if ERC don’t pay, then the credit risk falls on the Regions, not the WRU.

In background, until the holding back of money by ERC, it was assumed that competition monies was received by the WRU and the distributed by them to the four regions. However, it now appears that these monies are received directly by the regions from ERC. Given this, people say, how on earth is it this the income of the WRU?

In deciding whether this money is the income of the WRU, one has to look at the rules governing the way that accounts are put together in the UK. These rules taken together are known as Generally Accepted Accounting Principles (GAAP). The key rule in this instance is contained with Financial Report Standard 5.

The issue is whether the WRU is acting as principal (it is their transaction, and therefore, their money), or whether they are acting as agent on behalf of the 4 regions (when it wouldn’t be their money).

If we look at the relevant rules we are told that if the WRU were to be regarded as acting as principal they either need to have the risks and reward relating to selling price of the service or holding the stock. Well there is no stock, and the WRU have no control over the price as they are paid what ERC agree on. With, of course, RRW having the right to appoint a director to ERC. So they probably fail on that front.

There are then three more tests. Firstly, if the WRU modify the service or perform part of the service. Well they don’t. Next do the WRU have discretion in the choice of supplier? Well this may be less clear cut, but there is long contract for the 4 regions. Six years left to run at the last WRU accounts! Finally, there is the question of who bears the credit risk. Well, if the WRU are offering a loan, it is plainly obvious they suffer no credit risk, as they are not affected at all by the non-payment by ERC. The only people in Wales affected, are the regions.

Therefore it would appear, that the WRU are NOT acting as principal here, and should NOT be accounting for this money from ERC as their income.

The standard then goes on to talk about circumstances where the ‘seller’ (WRU here) are acting as agent, and the money isn’t theirs to account for as income. The non-assumption of credit risk, as the WRU are saying today happens in this case, is given as a key indicator that they are acting as agent, not principal.

So what? Well the WRU turnover in their last accounts was stated as £61m. Of that, approximately £5m is the income in question from ERC. There is a total of £9.1m which is ‘competition income’, but that includes reveunes from other competitions where the principal/agent relationship may be different (though one would think they would be similar if not identical). Excluding ERC income would reduce the WRU’s turnover by £5m to £56m. Profit would remain the same at £5.6m, as that money is paid out to the regions. So, why are the WRU so keen to count the ERC money as their income?

Might it relate to on the covenants (conditions) in the Barclays loan?  A key indicator of financial performance is “EBITDA”. The WRU labels this figure clearly in their profit and loss account. It includes the ERC income, but doesn’t include the payment of the same sum to the Regions. This comes after this figure as an ‘allocation to affiliated organisations’. So maybe, there is a covenant that relates to this EBITDA figure? Without ERC income this drops from £29m to £24m. If all competition income was taken out, this drops to £20m. Would this cause a problem with Barclays?

On the face of it, today’s offer to the regions from the WRU looks generous. That is what it is designed to do. In doing so though the WRU have clarified where the credit risk lies on ERC income, and have therefore, at the very least, questioned, whether they are correct in counting ERC income as their own. Bluntly, in my opinion, they have clarified that it is not their income at all. I do accept that there may be information not in the public domain that may alter my opinion, but given the credit risk issue, it would need to be very convincing information.

All should be clear soon, I am writing to the Financial Reporting Review Panel to ask them to investigate the WRU accounts on this very matter.

donkey

Lions led by donkeys: the WRU board.

Today, on 2 January 2014, the board of the Welsh Rugby Union Limited (WRU) met to discuss the next stage in their attempt to reach agreement with the four professional teams they put forward to compete at the professional level of the game of Rugby Union. On the 31 December 2013, the professional sides represented by Regional Rugby Wales (RRW) declined the opportunity to continue their participation agreement with the WRU for the next 5 years.

On 1 January 2014, the Chief Executive of one of those four teams, Gareth Davies, challenged the WRU board to carefully consider at their next meetings whether the route of non-negotiation with RRW as laid out in their press release of 31 December, was really the route that they wished go down.

Effectively, he was asking the board of directors to challenge the executive directors, led by Roger Lewis, to justify the actions that were being done in their name.

So who are the board of the WRU, and what should be their role and composition?

We will firstly look at the role of the board.

It is accepted that good corporate governance in public interest entities such as sporting bodies, and that the work of the staff at such bodies (including the Chief Executive) is monitored and controlled by an effective board of what are termed ‘non-executive directors’.

In other words, directors of the business that have no day-to-day involvement in the business. The Institute of Directors (IoD) state that the non-executive director’s (NED) role “is to provide a creative contribution to the board by providing independent oversight and constructive challenge to the executive directors”.

In terms of composition, the UK government recently put their name to a set of guidance rules for sport and recreation boards, such as the WRU. In section 4 of this guidance they outline the following (amongst other points):

- Bodies should have a board of no more than 10 members

- The board should have at least two independent NED’s bringing knowledge and experience from outside the sport

- Ideally should have an independent Chair to bring an objective perspective

- The board should be chosen on the basis of their competence, ability, quality, leadership, integrity and experience

Let us look at three comparable bodies and the composition of their boards.

The Scottish Rugby Union has a board of nine members. One of these is an executive director. Of the other eight, two appear to be completely independent NED’s, including the chairman. The Chairman is a former CEO of First Group PLC, and the other independent NED is the UK CEO of Deutsche Bank. Of the other 6 NED’s, one is a former rugby player who is a specific NED appointment and the other 5 appear to be elected. Of those 6 though, there is an entrepreneur, a Chartered Accountant, and a CEO of a listed company.

The Rugby Football Union (RFU) has a board of 15 members, including three executive directors.

They have 3 independent NED’s, who all current hold senior appointments at businesses, for example, a large law firm. Of the other 9 directors, many have held, or do hold, senior positions in a variety of businesses.

The English Football Association (FA) board is made up of 12 members. One of these is a staff member, the General Secretary. There is an independent chairman, who is a former Director General of the BBC, amongst other appointments. Of the other 10 directors, 4 are elected from the grass roots of the game, 4 from the professional game, and 2 appointed NED’s. One is a barrister and local authority CEO, and the other is a former executive director of Hilton International and Ladbrokes.

So, how does the WRU match up against these? Who actually sits on the WRU board?

There are 18 directors, only one of whom is an executive director. That is Roger Lewis, the Chief Executive Officer.

There is a chairman, David Pickering. He is not independent, as shortly before being elected as Chair in 2003 he was employed by the WRU as Wales team manager. His business experience is somewhat unclear.

Another two directors sit as a ‘National Representative’. One is Gerald Davies. Whilst he has a healthy business background, his independence could be questioned due to his previous rugby career. The other is Martin Davies. Whilst being a Chartered Accountant, he does not seem to have experience at a senior level in a large business, according to the WRU website.

If the WRU claim that the ‘National Representatives’ are the equivalent of an independent NED, then I would question their independence. The skills and expertise of the other National Representative do not appear to be as strong as the comparable bodies laid out above.

The other 14 directors are elected by WRU districts. Not one of these directors has any senior business experience. Many are retired, and worryingly, 6 of them were directors when significant decisions were made in 1999 and subsequent years, decisions which almost placed the WRU into an insolvent position.

To summarise, the composition of the WRU board, in the author’s opinion, fails to comply with best practice set out by government endorsed guidance relating to the governance of sport. In addition, the business acumen and experience of its board members falls short of that of comparable bodies, and if the National Representatives are the independent NED’s, their independence and calibre is questionable, certainly when compared to similar bodies.