Gregor Paul is one of New Zealand’s most respected rugby writers and columnists.
ANALYSIS
On Thursday, New Zealand Rugby will hold a Special General Meeting in Wellington, at which all 27 provincial unions will be asked to choose a new governance structure for the national game.
They will have two options in front of them: the first is called the Review Proposal, and it is pushing for all nine directors to be independent, and to be appointed by a panel that is independent as per the recommendations of an extensive report published last year.
The other option is the so-called Proposal 2, created by a handful of unions, which they say is largely similar to the Review Proposal but for the one key difference that they insist at least three of the directors must have served some time on the board of a province.
The build-up to this vote has been turbulent and ugly, with the New Zealand Rugby Players’ Association (NZRPA) threatening to set up a new entity to manage professional rugby if Proposal 2 is adopted.
Gregor Paul explains what this vote is really all about, why it has caused so much angst, what is at stake and why the two proposals are considerably different than how they may appear.
What is this vote really about?
In the coming weeks, New Zealand Rugby (NZR) will reveal its financial results for 2023 and they are expected to show an operating loss of between $15 million to $20m, confirming that the national body is on track to lose more than $80m in the three years since it sold an equity stake in its commercial assets to US fund manager Silver Lake.
When the numbers are made public, they will show that NZR is losing money at a rate that will prove to be catastrophic for both the professional and community game.
Unless there is either a material uplift in revenue or a significant reduction in costs – or both – Silver Lake’s $200m investment will be gone before the end of the decade and rugby in this country will be facing disastrous choices; either to sell off more equity or to take on significant bank debt to try to dig itself out of an enormous financial hole.
This characterisation of the accounts as catastrophic and presentation of rugby’s future in New Zealand as dystopian is not hyperbolic, but simply a mathematic reality on current forecasts.
Such a scenario is currently playing out with professional club rugby in England, where the decision to sell an equity stake to private equity group CVC in 2019 has destroyed what was once one of the game’s great leagues.
From having net equity of $380m in 2019, the English Premiership now has net equity of $10m, accumulated debts between the 10 clubs of $604m, and in 2023 the league and clubs lost $120m.
Rugby entities who opted to bring in private equity partners were always taking enormous risks and while it is starting to look like the situation in England is irreversible, there remains hope that New Zealand can save itself from financial ruin.
It is not too late for New Zealand to rebuild a commercial strategy that produces more revenue, better manage its costs and make its decision to partner with Silver Lake deliver the financial success on which it was sold.
But for this redirection and rebuild to happen, and for rugby to start charting a path towards a sustainable future, it needs an influx of new leaders and an overhaul of the pathway in which these leaders find their way into the game.
These were the unequivocal findings of an exhaustive independent review carried out last year by a team of governance experts led by the highly experienced former Fonterra executive and director, David Pilkington.
His 134-page report was unambiguous that the current system of appointing directors to the NZR board is not fit for purpose and that the game will succumb to the many threats it faces if it does not reshape itself with a distinct voice leading a unified body of disparate stakeholders.
And this is why the game is on the verge of civil war over the structure of which governance system to adopt, and why the players are threatening to set up a new entity to manage professional rugby if the provincial unions vote for their own change proposal that Pilkington says will leave NZR with the same flawed representation model that is failing to effectively manage the sport.
The fight is not a battle of wills, a test of strength and influence to see which of the most powerful stakeholders in the game can get their way. It is not the professional players against the provincial unions – the former hoping to protect their income and power at the expense of the latter – and it is not a quest to marginalise the provinces, disenfranchise them from key decision-making roles and populate NZR’s board with commercial directors who don’t have any knowledge of rugby’s wider ecosystem.
The NZRPA, NZR, Super Rugby Pacific clubs, the New Zealand Māori Board, a handful of provinces and New Zealand Rugby Commercial (NZRC) – the company set up to manage the game’s money-making assets – are all aligned in their belief that they are fighting to save the game itself.
They have heard and read compelling evidence that if change is not implemented to modernise NZR’s governance to operate with directors who are independent – not of rugby, but of direct affiliations to one stakeholder – then the Silver Lake deal will financially destroy rugby and the sport will be powerless to fix any of its various existential threats, which range from declining participation, confused elite pathways, an unsustainably expensive NPC, bloated management structures and a diminishing social licence to see itself as the national game with inherent power to unite and inspire.
In a letter sent to the provincial unions (PUs) on May 26 by NZRPA chief executive Rob Nichol and on behalf of the board and membership, he said: “We are overhead-heavy and lacking in clarity and alignment at a strategic, operational, and roles and responsibility level.
“We are inefficient and ineffective, misaligned, and frankly losing our game.
“Against this, we have a participation problem that has no answer in sight beyond pockets of good work being done within some communities; a fractured relationship with schools rugby that continues to undermine the game’s potential; a professional pathway that is confusing and misaligned between PU[s], Super and national teams; exceptional international sevens teams about to compete in the Olympics but no meaningful domestic sevens pathway, participation or competition at all; domestic and international professional competitions that are struggling despite what is some fantastic rugby being coached and played; a game plagued by a lack of clarity around its on-field identity in the modern day and confusing interpretation and application of rules that frustrate even the most ardent rugby supporter.
“Amongst all this we all know there is great potential and opportunity in the game we love. But our current governance, structures and leadership is stopping us from realising this potential – despite many very good people working hard on and off the field in the community and professional game. It’s tragic.
“But you all have a chance this week to change that.”
How did we get here?
In early 2019, NZR’s board and executive looked around the world and saw how private equity investors were buying into sports, including rugby properties such as the English Premiership, Six Nations and what became the United Rugby Championship (sides from Ireland, Italy, Scotland, South Africa, and Wales).
The rationale for these entities taking outside investment was that they saw an opportunity to use the capital and expertise of their partners to grow revenue, win new fans and change the financial and audience profile of the sport.
NZR was facing similar threats at the time – it was forecasting more money going out than coming in; it was seeing teenage boys leave the sport in alarming numbers; Super Rugby was failing to hold its audience share; the NPC had become almost irrelevant and there was a convoluted elite player pathway that was riddled with duplication and confusion.
Having seen the Northern Hemisphere open itself to private equity investment, NZR’s board convinced itself that it too needed to do the same thing, so it agreed to sell a 15 per cent stake in its commercial assets to US fund manager Silver Lake.
But it was a deal that it agreed in secret, without meeting its legal obligation to consult with the NZRPA as part of its collective employment agreement.
The NZRPA was concerned not just by the lack of due process NZR followed, but by the deal itself, which they felt undervalued the assets being sold, and came with high risks to the national body but high returns for Silver Lake.
Additionally, the NZRPA felt that NZR didn’t have a revenue problem the way it was suggesting – that its almost $200m of annual income was sufficient for its needs – but that it had a distribution and structural problem which meant its cost base was too high.
The players refused to support the initial deal, fearing it would prove self-destructive for all of the game in New Zealand.
At the time, NZR’s board and executive team said publicly that they had secured a deal that would be the envy of the sporting world, that it would flood the grassroots with cash and that the professional players were blocking it because it came (without negotiation) with a lower percentage in their revenue-sharing agreement.
“It would be a terrible mistake if the players don’t eventually support this deal; a really bad mistake,” then chairman Brent Impey said at NZR’s annual general meeting in April 2021.
Painting the players as self-interested and greedy and the deal as transformational, given it was going to see Silver Lake pay $388m, was an easy PR win for NZR.
But Pilkington, after gauging how events transpired as part of the review into the governance structure, told the Herald: “It is quite telling that the initial deal NZR did with Silver Lake was commercially poor.
“It was, only dare I say it, NZRPA getting involved that extracted more value for rugby. NZR should never have agreed with that initial deal, and I find much of what they did was all about how can we appease the unions and give them what they want?
“And what they want is money and as long as they are getting money, they will go along with this.
“But some of the commercial elements negotiated by Brent Impey and the team at the time were terrible.”
When a stalemate was reached in June 2021 over the initial deal, the NZRPA agreed it would be willing to work with NZR in renegotiating a new private equity agreement, on the condition that the national body agree to a comprehensive independent review of its governance structure.
The players weren’t specifically against a private equity investor coming on board, but they felt the arrival of Silver Lake and the creation of NZRC significantly increased both the potential financial risks and rewards and made it imperative that the game attracts high-quality directors to oversee and understand commercial strategies and make decisions that are in the best interests of all of the game.
That NZR endured another heavy financial loss in 2023, after a $47m deficit in 2022, has brought some of the NZRPA’s concerns to fruition and why Nichol in his most recent communication to the provincial unions, said: “The ongoing loss-making and subsequent financial risks to the game are compounded now that we are in partnership with private equity investment.
“Globally federated sports [non-private] who have taken on private equity have struggled to deliver a commercial model that has performed,” he said.
“They are struggling and resorting to taking on more investment. Just look at the A-League and the CVC investment into Northern Hemisphere rugby.
“The point being we need to be world class in our management of the investment the game has taken on, to ensure it works for the game and our partners in the long term. Currently we are simply not.
“Our national game cannot afford to find ourselves in this situation. But without the right expertise governing our game, and its subsidiary NZRC, in the best interests of the entire NZR group, that is where we are potentially heading.”
Was the Pilkington Review truly independent?
The NZRPA called for a review because it felt NZR’s governance was not fit for purpose.
The Pilkington Review, which the NZRPA co-sponsored with NZR, came back with a definitive finding that the national body’s governance structure is not fit for purpose.
To the provincial unions, this seems like the people who paid for the research were able to buy a report that said exactly what they wanted it to say.
But Pilkington is clear that there was no manipulation, no pre-conceived outcome and that the report is an accurate and fair assessment of a vast dossier of intelligence gathered from thousands of hours of interviews, town hall interactions and written submissions from every stakeholder imaginable, including schools, clubs, referees, universities, provincial unions, Super clubs, All Blacks and local government representatives.
“I have heard the comments that this was instigated by the players’ association and Rob Nichol, to get the answer that Rob Nichol wanted,” Pilkington told the Herald.
“Firstly, there was quite some deliberation on the part of myself and other members of the panel as to whether we would take on this task or not.
“I was satisfied that while this was a condition imposed by the NZRPA around the Silver Lake deal, I was satisfied that both parties [NZRPA and NZR] were undertaking this exercise in good faith.
“If you look at the submission of the [NZ]RPA and the final recommendations of the report, you will see there is quite some difference, and it was not a case of them putting their submission in and us saying that is the answer.
“Rob was not constantly in our ear saying this is what we want and had he been so, we would have quickly told him it is an independent review and he’d have to wait for the report.”
What specifically is wrong with the current governance system?
The Pilkington Review report is 134 pages long and broadly highlights that there is long-standing distrust between the provinces and NZR, a history of poor and mis-leading communication between them and that the two groups see themselves as enemies rather than allies.
But the report essentially identifies three key failings with the current set-up.
The first is that because the provincial unions are able to nominate and elect board members, and because they control the appointments panel which vets candidates, they have too much power and influence.
Pilkington’s view – and he had full access to confidential NZR board papers and minutes from meetings – is that they are using that influence to get people they want on the board and then mandate them to only focus on matters of parochial interest.
He says that the NZR board is too frequently caught up focusing on matters that should be left to management to deal with.
He also felt that the PU representatives didn’t consider their obligations to make decisions in the interests of the whole of New Zealand rugby but were instead focused on how much money the unions would be getting from NZR and that they wanted that money purely to strengthen their flagship team playing in the NPC.
Pilkington says: “The key thing that we felt is that there was no clear leadership voice for rugby.
“One of the things I insisted upon is I wanted unencumbered access to everything and everyone and that included getting access to their [NZR] Diligent board books.
“All their board papers, all the confidential meetings notes... everything is posted on there, which we had unfettered access to.
“That painted a picture where the board were preoccupied with a lot of parochial disputes and discussions. You had the PU reps from a best practice governance point of view trying to delve into what I would describe as operational matters, and yet matters where attention was needed, they were almost being ignored.
“It was like the PUs had put their person in NZR and the board itself was not operating anything like I would expect in best practice.”
The second failing is that the board lacks recognition that one of its key functions is to understand and approve the strategic approach of the NZR executive and then hold management accountable to delivering to clearly set, measurable targets.
Pilkington says: “They were not holding the management to account to deliver against a pre-agreed [and] determined strategy.
“You looked at the KPIs of the management and they were all over the place. Whereas I have sat around high performing boards in good companies and the most important thing a board has to do is sign off on that strategy and ensure management are then delivering against that.
“I saw a lot of that simply not happening in NZR because they were too busy trying to deal with these parochial issues.”
And the third major issue is the lack of oversight of NZRC and comprehensive understanding of what it is trying to do and whether it is succeeding or not.
The success or otherwise of NZRC’s commercial strategy will determine the financial health of the whole of the game, as it holds the responsibility for growing revenue and transforming the income profile of NZR to ensure there is money flowing back to the grassroots.
Former All Blacks captain Richie McCaw, who is a board member on NZRC, told the Herald: “There are at least two appointed NZR board members on the NZRC and so they have to understand how decisions made at NZRC influence NZR.
“You have to be able to have your mind across all the implications from an NZR point of view. That is complex and I have to say, getting my head around it is no easy thing.
“It is complicated. Not everyone is capable of that so having people who can do that is critical.”
Pilkington says that of equal concern is the lack of recognition within the wider rugby ecosystem that there needs to be strong, robust oversight of NZRC.
He says that many stakeholders interviewed in his report felt NZRC was effectively autonomous and that its creation meant NZR’s board had no need to be overseeing anything commercial or financial.
“Some people in rugby told us that now they have set up NZRC, [the] NZR board can just focus on rugby,” says Pilkington.
“There was an absolute lack of understanding about what they have embarked upon and how they are going to ensure that is going to deliver for the whole of the game.
“When you set up a subsidiary of your company, you don’t just set it up and say well, you go off and do what you want to do. Ian Narev [NZRC chairman] and the Silver Lake guys were quite clear that they need competent people at NZR to be able to engage.”
Both change proposals being voted on say they will deliver the independent board Pilkington recommended. Is that true?
The cohort of provincial unions who have been instrumental in developing Proposal 2 – primarily Northland, North Harbour, Auckland, Hawke’s Bay, Wellington, Canterbury and Mid-Canterbury – say they largely agree with the Pilkington Review, support the concept of an independent board, but are asking for a specific mandate to be written into the constitution whereby at least three NZR directors must have previously served on the board of a provincial union.
These unions believe their proposal will enable NZR to restructure its governance process and outcomes just as Pilkington recommended.
They say their proposal will deliver better leadership for the whole of the game and that they have included the mandate around provincial experience merely to reflect the continued importance of community rugby in the overall landscape.
Wellington chair Russell Poole says: “There is no difference between Proposal 1 and Proposal 2 on how people are elected and the process that they go through.
“The difference is that in Proposal 2, the provincial unions [Proposal 2] have a line in there that says that three members on the NZR board at any given time must have spent some time on a provincial rugby board.
“Given the fact that one of the roles of that NZR board is to look after the game on behalf of the 150,000 participants, and that’s just the players, not the infrastructure and other people that go around that, I don’t think that’s unfair.”
But those entities who are in favour of Proposal 1 – which mostly adopts all the recommendations of the Pilkington Review – say that the differences between the two blueprints are considerably more extensive than the mandated line about experience.
They say Proposal 2 could end up with five directors being appointed – all of whom have affiliations to one specific stakeholder, be it provincial unions, the New Zealand Māori Board or a Pasifika Council.
They say that Proposal 2 also gives the provincial unions continued ability to control and influence the appointments panel and that it has created a new entity in place of the Pilkington-proposed Stakeholder Council called the Governance Advisory Group.
Pilkington’s view is that Proposal 2 does not create his imagined board of nine independent directors and that it will effectively preserve the problem of the board being representative of specific interests and therefore not lead to the right people wanting to apply and NZR not attracting the new leaders it needs.
“You need to assemble nine of the very best people we can get to provide governance and leadership to the sport,” he says.
“You do that by an independent assessment process where you attract good talent who want to put themselves forward and stand for the board.
“At the moment the three-pathway election process for getting directors on to the board is heavily influenced by the potential veto that the three provincial union reps have on that appointments panel.
“We got a lot of feedback from people saying they wouldn’t put their name forward to go through that process because it’s dominated by these provincial unions.
“What Proposal 2 has done is signal they [provincial unions] don’t want to give up their stranglehold on what happens at NZR. They are insisting on these levels of influence and control all the way through the process and the result will be you won’t get people putting themselves into that process.
“Will Proposal 2 deliver?... In our view it won’t necessarily give you the best nine people sitting on the board, and it will perpetuate this influence of Auckland, North Harbour, Canterbury, Wellington, Hawke’s Bay and Bay of Plenty.”
Gregor Paul is one of New Zealand’s most respected rugby writers and columnists. He has won multiple awards for journalism and has written several books about sport.