On the 22nd of April, it was reported that the Melbourne Storm were caught breaching rugby league's salary cap for the last four years. Storm officials admitted to secretly paying some of their players beyond the cap's limit, and the NRL punished the club by stripping it of all achievements it attained in the period that the cheating took place.The incident provides an interesting case study which covers many elements of risk management.
Risk versus Reward
When addressing decisions of risk versus reward, the question to be asked is whether the potential for gain outweighs the potential for loss if things go wrong.For the Storm, the potential for gain was obvious. Two premierships, three minor premierships and $1.1 million worth of prize money over four years demonstrates that in the short-term, the risk paid off.However, while the Storm benefitted during the period the breaches took place, now that they have been caught, the longer-term damage to the club and the game is unfolding as we go to print. While the club has maintained its on-field performances since the breach was discovered, the lack of competition points throughout the season will undoubtedly weigh more heavily on player and supporter motivation as finals approach.
The actions of the guilty parties at the Storm have put their sponsors, owners, and the game of rugby league at risk of brand damage.The Storm's brand has been dealt a severe blow and some of its major sponsors have left the club. Understandably, the sponsors no longer want to be associated with a brand that carries damaging values that conflict with the brand personalities of their own products.The Australian reported that the Chief Executive of one of the Storm's major sponsors, Members Equity Bank, said: "As an organisation ME Bank believes in the principles of strong governance, transparency, integrity, and fairness and we seek to ensure that all of our corporate and community partnerships uphold these same values." With that announcement, he pulled the plug on a sponsorship worth more than $1 million.In a demonstration of just how much impact a tattered brand can have on sponsors, the University of California released research concluding that in the 13 trading days after news of the Tiger Woods affairs scandal broke, the market value of eight share-market-listed sponsors of Woods lost on average 2.3% of their share price or a total of US$12 billion from their share value.Risk assessments should include an analysis of what brand risks may be present. This includes not only the effects of having one's own brand tarnished, but also asking what impact will be felt if a brand of a strategic partner deteriorates.
Importance of Audit and Assurance
The Melbourne Storm incident also stresses the need for risk management plans to address auditing and assurance. There must be a formal way to check to see whether reported compliance practices are actually taking place.In this case, the Storm had allegedly been making fraudulent payment arrangement for four years before they were caught by the league's auditor. This raises concerns about whether this incident is isolated or might be more wide-spread.NRL boss David Gallop is now taking steps to address the NRL's auditing policy. For example, it was reported in the Sydney Morning Herald that the league has the right to access player bank accounts and tax statements if it is proven that players knowingly were involved in salary breaches.History shows that improved risk management and compliance standards usually follow major incidents. We eagerly await any changes that will improve the effectiveness of assuring the salary cap system.
Crisis management is the course one takes when a high impact incident occurs that involves some level of media attention and community outrage. While good risk management goes a long way to prevent risks from occurring, there will inevitably be high impact incidents that are unforeseen or unaccounted for.The NRL responded to this crisis swiftly by emphasizing the need for consistency and fairness across the competition, and by punishing Melbourne to the extent it did, it demonstrated how seriously it takes the matter.There are however some critics who believe that the leagues actions in handling the crisis have exacerbated the risks to damaging the integrity of the competition by withdrawing all points for the rest of the season. The issue has serious potential for plunging the game into crisis if other clubs are found guilty of rorting the salary cap to the degree that was discovered with the Storm.
Rugby League is however a resilient game despite its regular off-field dramas. Although 2009 was a year many involved in the game would rather forget due to numerous unsavoury off-field incidents, the NRL actually prospered financially and maintained strong fan interest at matches. The question still remains as to how many crisis the league can handle before it can no longer simply bounce back.The key issue is that there needs to be a stronger focus on risk management rather than crisis management. The prevention is always better than the cure and the league and clubs need to cooperatively build good corporate governance, compliance and risk management systems that nurture a long term culture of trust and cooperation, rather than deceit and short-term risk taking.