Performance-enhancing drugs, sport and corporate governance—Lessons from an Australian football club Matt Nichol

Performance-enhancing drug (PED) use in sport is a significant international issue, highlighted by the Essendon Australian Rules Football Club (FC) supplements saga. This controversy, dating back to 2012, resulted in anti-doping penalties, substantial financial costs (AUD$10.38 million in fines and legal fees, plus a AUD$200,000 occupational health and safety fine), staff suspensions, and a ban from finals in 2013. Additionally, 34 current and former players were suspended after a Court of Arbitration for Sport (CAS) ruling.

1. Corporate Governance Failure at Essendon FC

  1. Central Argument: The article posits that corporate governance failure was at the core of Essendon FC's problems, despite unique features of sporting entities. It advocates for a significant role of corporate governance in modern sporting clubs to prevent such issues, especially given the increasing commercialization of sport.

  2. Agency Theory: The discussion draws on corporate governance theories, particularly agency theory, which suggests aligning management's interests with the firm's success through incentives, balanced by independent directors who monitor performance and ensure accountability.

2. Overview of AFL Club Corporate Structure

  1. Evolution: AFL clubs have transitioned from small, local, volunteer-administered unincorporated associations to multi-million dollar corporate enterprises. Most are now unlisted public companies limited by guarantee.

  2. AFL's Role: The Australian Football League (AFL) operates as a company limited by guarantee, with member clubs as its stakeholders. The AFL acts as a key internal regulator and often holds ownership interests in several clubs while regulating others, raising potential conflict of interest issues. It also influences club governance by requiring approval for constitutional changes and director/CEO appointments.

3. Corporate Governance in AFL Clubs

  1. Club Constitutions: These legally bind the company, members, directors, and company secretary. They cover objects, members, and directors, with football-specific matters like mergers and team name changes. AFL license agreements further regulate clubs.

  2. Legal Capacity & Board Responsibilities: Boards manage the corporation's business, exercising all powers not reserved for members. Key responsibilities include:

    • Monitoring management performance and business operations, particularly in areas that could attract legal liability (e.g., supplements programs).

    • Providing strategic direction. Courts emphasize directors must stay informed and meet as necessary. Essendon's board was reportedly unaware of the supplements program.

  3. Independence of Directors: Directorships are typically volunteer roles, often filled by club supporters, former players, or those with family connections, which can affect impartial judgment and independence. The Australian Securities Exchange Corporate Governance Council (ASXCGC) principles, though not mandatory for unlisted entities, recommend independent non-executive directors and subcommittees.

  4. Board Size: AFL club boards can range from 5 to 13 directors, with an average of 8.11 in 2016. Many clubs exceed the Australian Sports Commission's (ASC) recommended board size of 5 to 9 directors.

4. The Essendon FC Supplements Program and Corporate Governance Failures

  1. Anti-Doping Regime: Governed by the UNESCO International Convention Against Doping in Sport, the World Anti-Doping Agency (WADA) Code (enforced by the Australian Sports Anti-Doping Authority - ASADA), and the AFL Anti-Doping Code. The AFL adopted the WADA regime in 2005.

  2. Program Details: Initiated in August 2011, the program involved administering various substances (e.g., peptides, vitamins) to players, often by injection and without the full knowledge of the club doctor. Some substances were permitted, others prohibited (such as Thymosin Beta 4 - TB-4), and some had uncertain status. Responsibility for WADA compliance was unclear.

  3. Investigations and Outcomes: Essendon self-reported, leading to:

    • The Switkowski Report (2013): Described the program as a "pharmacologically experimental environment" and highlighted a lack of supervision by administration over the football department.

    • ASADA/AFL Joint Investigation: Resulted in AFL fines (AUD$2 million), a finals ban, loss of draft picks, and coach suspension. ASADA issued infraction notices against 34 players, who were initially found not guilty by the AFL anti-doping tribunal, but later suspended by CAS for the 2016 season (a decision upheld by Swiss Federal Supreme Court).

    • WorkSafe Victoria: Fined Essendon FC AUD$200,000 for breaching occupational health and safety laws by not providing a safe work environment.

  4. Specific Governance Failures: Lack of oversight of "high-performance" staff appointments and the rapidly growing football department. At the time, Essendon's board had only an audit committee; it later added a nomination committee but removed it, and expanded the audit committee to include risk and integrity, but still lacked a remuneration or dedicated football operations committee. Directors may have breached their duty to act with reasonable care, skill, and diligence.

5. Recommendations for Corporate Governance Reforms in AFL Clubs

  1. Implement Mandatory Principles: The AFL should develop and mandate a unified set of best-practice corporate governance principles for all clubs, adapting from existing guidelines by:

    • Australian Sports Commission (ASC): Emphasizes board composition, roles, processes, integrity, and compliance with laws/codes (e.g., anti-doping). Many clubs currently do not comply with ASC recommendations on board size (5-9 directors) or director independence.

    • ASX Corporate Governance Council: Principles for listed companies (e.g., board structure, ethical decision-making, risk management) are relevant for improving transparency and governance in large, commercial sporting entities.

    • Australian Athletes’ Alliance (AAA): Focuses on protecting sport's essence, accountability, transparency, and separation of powers.

  2. Enhance Board Subcommittees: All clubs should formally adopt:

    • Nomination, Audit, Risk, and Remuneration Committees: Consistent with ASX recommendations.

    • Football Operations Committee: A crucial fifth committee dedicated to monitoring the football department's practices, performance, substance administration, and WADA compliance. This committee should include directors with relevant experience (e.g., former athletes, medical practitioners) and receive regular reports on substances given to players, flagging any prohibited ones.

  3. Increase Independent Directors: While acknowledging the value of passionate, affiliated directors, a greater mix, including a substantial minority of independent directors (without prior club association but possessing business, legal, or governance expertise), is needed on boards and especially subcommittees to provide objective judgment and act as "gatekeepers."

  4. Mandate Board Training: Implement formal induction and ongoing professional development programs for directors, covering legal duties, company affairs, industry developments, and the roles of subcommittees, drawing on ASC and ASX guidelines. The Greater Western Sydney Giants FC provides a good example of a board charter that includes such a program.

Conclusion

Modern sporting clubs' commercial nature necessitates robust corporate governance. The Essendon FC scandal underscores the critical role of governance in preventing high-risk practices. Implementing mandatory governance principles, utilizing board subcommittees (especially a dedicated football operations committee), integrating independent directors, and providing continuous board training are essential steps to improve oversight, ensure compliance, and prevent recurrences across all AFL clubs.

The article examines the Essendon Australian Rules Football Club's (FC) supplements scandal, arguing it stemmed from corporate governance failures. It highlights the increasing commercialization of sport necessitates robust governance structures in modern clubs. The authors recommend reforms for all AFL clubs, including mandating governance principles, establishing specific board subcommittees (like a football operations committee), increasing independent directors, and implementing comprehensive board training to prevent similar issues.