Governance in Sport - Literature review Example

Governance in Sport of the of the Contents Definition of governance 3 Governance theories 3 Stakeholders Theory 4 Resource dependency theory 5 The effective size of board 6 Structure 6 Size 6 Roles and Responsibilities 7 Risk assessment and control 7 Human resource management 8 Strategic planning 9 The relation between sport governance and management 9 Summary 12 References 14 Definition of governance The concept of governance is related to effective management of an organization by ensuring strategic allocation of resources. Number of researchers has attempted to provide a definition of governance in the area of management. Governance includes performance of responsibilities towards a number of players like stakeholders, owners, employees and broader community as a whole. According to the definition of Cochran and Wartick (1988 cited in Wood, 1991), corporate governance embraces multiple concepts, theories and activities of boards of directors and non-executive directors. According to the definition provided by World Bank governance can be defined as “structures, functions, process and organizational traditions that have been put in place within the context of a program’s authorizing environment” (Du Plessis, Hargovan & Bagaric, 2010). The definition implies that the program must be created in such a manner which ensures that the objectives of the organization are met in an effective and transparent manner. From these above definition it can be summarized that the primary function of governance is to guarantee that every member related to the organization performs their roles and responsibilities in a coordinated manner that maximizes coherence and accomplishes organizational goals. It is also implied that governance aims to achieve ethical implementation of business functions. Governance aims to provide overall direction to the business by overseeing and supervising actions of management. Governance makes sure that expectations of accountability are satisfied and interest beyond the corporate group is regulated. Governance theories Academic literature identifies that there different types of governance theories namely stakeholders theory, agency theory and resource dependency theory. Agency Theory The agency theory of corporate governance emerged in the 1970’s and has been cited as the central theory of management behaviour in a number of scholarly articles. The core agency theory does not consider issues of management, internal and external issues of stakeholders of and the society at large. Agency theory highlights the alignment of interest between the shareholders and board members. According to researchers like Fama and Jensen (1983) there exists asymmetric information between executive management (who are agents) and claimants (who are principals). Therefore the main focus of the agency theory is to minimize the clash between shareholders and governing bodies of organizations. It has been observed that in agency theory directors or executive management tries to appropriate the value for them and it is extremely difficult for the shareholders to examine whether the directors are acting in the best interest of the shareholders (Shleifer & Vishny, 1997). The inherent source of conflict between the shareholders (principals) and directors (agents) forms the basic framework of the agency theory of corporate governance. In agency theory board plays an important role to guarantee managerial compliance to oversee that manager’s work in the best interest of the shareholders. Majority of private companies in the U.K. and the U.S. works as per the agency theory. The main agenda of the agency theory is to oversee that the agency loss can be minimized. Agency loss is the extent to which returns to owners fall below the value if they would have been running the corporation directly (Eisenhardt, 1989). The agency theory has been criticized by process theorists for neglecting process, game theorists for focusing on the unidirectional nature of relationship and transaction cost theorists for neglecting governance mechanisms. Researchers have also neglected this theory for its improper assumptions (Hill & Jones, 1992). Agency theory has also been criticized on the grounds of over simplicity as there are only two major players’ principles and agents. Additionally, CEO has also been found to be holding interest of owners and it is difficult to confer them the title of pure agents. Stakeholders Theory Stakeholder’s theory of corporate governance is a rather multifaceted concept that draws from the disciplines of economics, behavioural science, stakeholder’s and business ethics theory. The stakeholder theory considers the firm as a basic input-output model that is driven by number of players with different interests. The interest group includes employees, dealers, customers, government and the society at large. The main proponent of the stakeholder theory is Freeman. Freeman (1984 cited in Freeman, 1999) had challenged the notion that managers have any primary responsibility towards the stakeholders. The stakeholder theory of governance is an extension of the agency theory and takes into account more players rather than the stakeholders. The chief rationale behind stakeholder theory is that organizations have a profound impact on the society as a whole rather than just their own shareholders for which they should have equal accountability to the broader community as a whole. Based on a comprehensive review of the available definitions it can be summarized that internal and external stakeholders have a relationship of exchange with the organizations. The stakeholder theory implies that stakeholders hold more than “shares” of company, they hold “stakes” in the company. Furthermore the stakeholders are not only the shareholders but also suppliers, customers, employees, creditors and communities (Freeman, 1999). The stakeholder theory assumes that the relationship between the stakeholders and the organization is a bilateral one. This theory of governance has undergone through a number of criticisms primary one being with the difficulty to define the actual number of stakeholders. Others criticize the theory on the basis that it is chaotic and has ample chances of corruption in it. It is argued that the stakeholder theory diverts wealth from shareholders to others (Donaldson & Preston, 1995). Resource dependency theory The resource dependency theory focuses on reduction of dependency on the organization on external environment by networking and legitimacy. The basic point of the resource dependency theory is that organizations are not self-sufficient autonomous entities that can achieve its goals by itself. It is rather dependent on is extent of access and control over its external resources. The role and composition of board is very important in ensuring that the organization have access to the correct set of resources. The resource dependency theory of governance assumes that the financial performance of a company is heavily influenced by its board members who have access to resources and are in charge of executing important duties (C. M Daily, D. R. Dalton & Cannella, A. A., 2003). The resource dependency theory also assumes that access to critical resources and the contact with influential groups have the capability of reducing the search costs and uncertainty of the company to a great extent. It has also been observed that diverse composition of board members enhances the networking ability of the board members and allows the organization to access richer resources and knowledge base. The boards have been theorized to play a major role between the organization and its external environment by obtaining external resources. Researchers are also of the view that the size of the board has an important role to play in bringing more resources as larger number of board members has access to greater number of linkages and resources compared to smaller boards (Hillman & Dalziel, 2003). The effective size of board There are multiple parameters to study the effectiveness of boards by studying different parameters. This paper takes only three variables namely structure, size and roles and responsibilities. Structure The effectiveness of board has been hugely interpreted in the terms of board structure. The concept of board structure has often been linked to the aspect of board performance. Empirical studies conducted by researchers have revealed that presence of external directors is not positively correlated with better organizational performance. Effective board structure is characterized by independent members with dominant leadership qualities. Boards should be characterized by members who have the capability to work in teams and find solutions to the problems of the organization. Researchers have also commented that there should be separation of chair and the CEO and a set of directors who are competent enough to conduct their responsibilities (John & Senbet, 1998). Size Different scholars have different opinions regarding the optimal size of boards for which no conclusive result can be reached regarding the size. The study conducted by Lipton and Lorsch (1992) had confirmed that large corporate boards reduces their efficiency due to the increasing complexity of the agency theory problem. Hermalin & Weisbach (1991) were of the view that the size of the boards depends on a large number of characteristics. The research conducted by Yermack (1996) can be considered as the first one that had embarked an empirical study to determine the correct board size by linking board size to performance of the firm. The results from the research had shown that there is a negative and significant effect of board size on Tobin’s Q. Researchers like Zahra and Stanton (1988 cited in Yermack (1996) had however found that larger board size is related to better organizational performance due to greater diversity. Roles and Responsibilities The roles and responsibilities of board members in performing the duties are the chief attributes of organizational success. Boards have the ultimate legal responsibility to govern a corporation. The board members have the responsibility to maximize the value of the shareholder and to ensure that the day-to-day business of the company has a minimum adverse impact on the broader community. The chief roles and responsibilities of a board may be characterized as that of management and governance, mission development of the organization and evaluation, financial oversight and overall organizational development (John & Senbet, 1998). Risk assessment and control Risk assessment refers to the job of identifying and evaluating potential risks and their impacts on the shareholders and develops ways in which these risks can be mitigated. The corporate governance of an organization has an important role in identifying the risks of an organization and mitigating them with the help of internal risk assessment system. Board plays the function to manage the risks involved in the crucial decision-making process of the firm. The rationale behind the role of board is that organizations use a major part of their profits to take risks and invests them in other ventures. Board of directors have the responsibility to examine the extent of risk that is to be taken by the organization. Researchers have found out that leadership within organizations plays a role to support the risk taking appetite of the organization (Hermalin & Weisbach, 1991). There are two ways by which corporate governance boards exercises control over organizations namely internal and external control measures to reduce risks. In case of internal control measures the governance must ensure that three key players are managed namely shareholders, managers and board of directors and simultaneously complying with financial obligations and long-term goals. It has been argued that independent board of directors are in a better position to manage the conflicting interests. External control mechanisms focus on transparency, accountability and fairness to protect the interest of consumers, shareholders and environment from adversary practices (Cohen, Krishnamoorthy & Wright, 2002). Researchers like Rediker and Seth (1995) have shown that in case of internal controls the agency theory problem is heightened if management and control are separated. It has been observed that in case of large organizations the concept of ownership is complicated as it is spread over a number of shareholders. In these cases delegation of internal control measures and decision management is a rather complex task. External government controls are related to controlling of external shareholders through governance mechanisms. Human resource management Importance of human resource management in the organizational culture is of utmost importance. Effective management of human resource have profound impact not only from the point of view of the organization but also from the point of view of the employees and the community at large. Effectiveness of human resource management on the organization works through three main channels namely high-performance management, high-involvement commitment and high-commitment management. Human resource managers play the role of conflicting issues in the work environment for improving the work culture of the organization. The relationship between corporate governance and human resource management is influenced by the nature of ownership of the organization and HRM strategies adopted therein. The HRM of an organization is affected by the composition of the boards (whether majority of members are owners or stakeholders), the percentage of accrued profits to the shareholders, managers and employees and the extent to which shareholders or stakeholders are involved in the management (Johnson & Greening, 1999). Researchers have pointed out that dominant stakeholder of an organization determines the type of HRM practices that will be adopted by the organization. For instance, in a pubic organization government acts as a dominant stakeholder and takes the charge of deploying human resource practices. However, on the other hand in case of private institutions internal stakeholders are dominant and the human resource management practice is aimed at promoting sustainability and profitability. One of the recent developments in the human resource management literature is the inclusion of HR in the strategic decision making process of the firm (Delaney & Huselid, 1996). This concept is known as strategic human resource management which incorporates the strategic management of a firm with human resource management. Strategic planning Based on the work of previous researchers, the role of board in the strategic planning is a debated one. Researchers like Mance (1971 cited Hendry & Kiel, 2004) had confirmed that boards have little contribution to make in the process of strategic planning while researchers like Andrews (1980 cited Hendry & Kiel, 2004) had confirmed that directors of the company plays an important role in devising strategic plans for the organization based on their knowledge and expertise. Plethora of studies has been adopted by researchers to obtain deeper insights about this debate and it has been found that the role of boards in strategic planning is a rather critical one. Boards play a role in identifying the planning parameters on which the strategic plan is formulated. The CEO then has the responsibility to prepare the plan and present it to the board members. The strategic plan prepared by the CEO has to be reviewed by the board to incorporate their judgement in the planning process. According to some researchers strategic planning is one of the most important responsibilities of the board. Strategic planning forms the basic framework of corporate governance theories (Hendry & Kiel, 2004). Strategic planning of a company refers to the oversight or the road plan that the company prepares for its future course of action. Strategic planning and implementation refers to the process of identifying the organization’s future plan by matching the capabilities and resources of the companies with the requirements of business environment. The board prepares a mandate to prepare the planning process for the organization and monitors whether the organization can achieve its pre-defined goals (Delaney & Huselid, 1996). The relation between sport governance and management The previous sections in the paper have established the importance of corporate governance in organizations. It has been observed that the role of corporate governance and board of directors ranges from assessing the risk of the organization to formulating strategic plans. Based on this analysis this part of the paper focuses on the importance of governance and its implication in sports background. The concept of sport governance has become relevant with the growing commercialization of sports. It must be mentioned that sports organizations does not belong to the public/private organizations or profit/non-profit spheres purely. The nature of stakeholders in a sports organization is also different compared to a commercial profit organization. Researchers have identified that the type of sports organizations can be classified as commercial elite sport and non-elite sport. If the sports organizations are owned by shareholders then the role of the board is to set directions and control activities on the part of the shareholders. The sports industry is also dominated by “not-for-profit” legal organizations (Hoye & Cuskelly, 2007). In case of the later group the profits earned by the organizations are returned back to the organizations and not to the owners for their further development. In case of not-for-profit organizations, the legal members of the organization have similar rights to that of shareholders in the sense that they have governing rights. Therefore, it can be argued that the nature of the organization plays an important role in the type of governance board. A major difference between sports organization and commercial organizations lies in the measurement of performance of both. Businesses measures performance in terms of financial gains whereas sports organizations measures it in terms of achievements. Governance in sports organizations has been often related to formulation of strategies for the companies, determining eligibility, membership and regulatory power within the organization (Hoye & Cuskelly, 2007). Numerous studies have been taken up by researchers to identify the role of governance in sports organizations. Many researchers have applied the concept of agency theory on sports organizations and focused on the importance of principal agent problem. The research conducted By Forster (2006) had focused on the problems of governance on the global sports organizations. The global organizations identified by Forster included International Federation of Football Associations (IFFA), the International Association of Athletic Federations (IAAF), the International Olympic Committee (IOC) to name a few and these organizations have immense influence on the governance structure of sports committee. The research of Forster has also identified few of the self-governance problems in the boards of the international organizations like ethical behaviour of the board members and nurturing of self-interests. Evidently there have been corporate scandals regarding the behaviour of board members in IOC and IAAF. Research conducted by Hoye and Auld’s (2001) on the other hand had particularly focused on the role of corporate governance in Australia. Research from his study has shown that effective boards perform considerably better compared to ineffective boards in terms of financial management, strategic planning, setting organizational goals and objectives, monitoring program, recruitment of board members and marketing aspects. It has been found that mutual trust between the board members, information control and leadership are important factors that drive the relationship between board members and drives organizational performance. Though there is ample evidence regarding the type of governance in the sports management literature yet there are few studies that have concentrated on the relations of board role with corporate governance in sports. An interesting insight regarding this was provided in the research work conducted by Inglis (1997). The results from the study had shown that the board performs four major functions namely framing a mission for the company, planning regarding the execution of mission strategies in terms of financial planning and human resource strategies, specifying the roles and functions of executive director and performing community relations. The application of agency theory is blurred to some extent in case of sports organizations. Researchers have established in case of non-profit organizations the parties who receive the benefits of achievement can be considered as principles. In case of sports organizations these parties may be organizations themselves, governments, sponsors, society so on and so forth. The works of Miller-Millesen (2003) had connected the resource dependency theory with that of sports organizations and found that non-profit boards is less likely to provide any type of external resources to organizations if they are stable. It has been observed that boards have a higher responsibility towards managing administrative functions of the organization. Stakeholder’s theory has also been applied to understand the role of boards in the governance of sport organizations. In case of profit sport organizations stakeholders comprise suppliers, employees, members and shareholders. The proportion of shareholders for non-profit organizations are considerably higher and include sponsors, general public, fund raising organizations and government to name a few. The role of the board is more complex in case of sports organizations as the diverse interests has to be managed. There is a dearth in existing literature regarding the size or composition of board members in sports organizations. Based on the existing literature regarding about the size of board, there is no convergence among researchers regarding the optimal size of the board. It can be argued that if the organization is largely dependent on donations or external resources then a larger size of board can be helpful for obtaining resources for the organization. Furthermore, researchers are of the view that organizations with independent board of directors have higher probability of monitoring the CEO of the company than a dependent board which mostly includes employees and other business insiders. Independent boards on the other hand have been found to be more efficient in terms of connecting with external stakeholders. Researchers have also concluded that sport organizations are generally composed of a representative structure and in such an environment it becomes difficult to guarantee long-term sustainability and self-regulation of boards. It is this representative nature of the boards that often makes it difficult to ensure long-term sustainability of sports organization. Despite best efforts on the part of the researchers there is no convergence of results regarding the financial performance of boards and its independence. The study conducted by De Zwart & Gilligan (2006) had focused on the role of governance and sustainability of sport organizations in Australia. The results obtained from the study had indicated that good governance has a direct correlation with sustainability of sport organizations in the long-run. Risk assessment and control of sports organizations have not been studied extensively in the existing literature. In case of sports organizations it has been established that board committees can perform the actions of audit and risk assessment. This is crucial to ensure that excessive risk taking activities of sports organizations can be curtailed. Risk assessment and control mechanisms and control mechanisms in sports organizations has been associated with good governance practices. The research conducted by McNamee and Fleming (2006) had focused on ethics audit of sports organizations as a part of the overall risk management process. The results from their study had shown that key personnel in the board have the responsibility of producing and reproducing organizational ethos while maintaining confidentiality throughout the whole process. Summary Corporate governance has become one of the most relevant topics in contemporary times. Despite the huge popularity in this field there is no common definition for the term. This paper has focused on the agency theory, stakeholder theory and resource dependency theory of corporate governance. It has been observed that each of these theories have their own shares of criticism and strengths that have described the role of boards in smooth governance. It can be concluded that risk management and control functions are an important function performed by boards. Corporate boards also determine the effectiveness of human resource management strategies and in contemporary times researchers have considered the integration of strategic management in the human resource management process. Therefore, it can be argued that human resource strategies have become a crucial part in the strategic management of firms. The role of corporate governance and role of boards have also become important in sports organizations. For sports organizations the nature of ownership plays an important part in composition and size of boards. 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