A legal analysis of FIFA’s governance reforms: do they meet the standards of best global practice?
Published 18 May 2016 By: Chris Baird
Fédération Internationale de Football Association’s (“FIFA”) stated overall mission is to “develop the game, touch the world and build a better future”. FIFA’s efforts to adhere to, promote and fulfil this ideology have been hampered by allegations of inappropriate behaviours and practices over many years, culminating last year in a spate of high profile and well publicised scandals centring on financial corruption and bribery. These could have been avoided, or mitigated, by a more robust governance regime. It would appear that the checks and balances that have been in place at FIFA’s management level have failed to appropriately regulate an organisation whose power and influence has multiplied exponentially as the commercialisation and globalisation of football continues to grow.
Following the most recent incidents, the 2016 FIFA Reform Committee (the “Reform Committee”) was established to propose reforms to the governance structure of the organisation. These reforms were ultimately passed on 26 February 2016 at the Extraordinary FIFA Congress in Zurich, heralding what many will hope to be a new age of corporate governance at FIFA. This article notes the sequence of events leading up to this reform process and analyses the key reforms from a modern, corporate governance perspective, primarily drawing on the guidance of the UK Corporate Governance Code (“CGC”).
The path to FIFA’s governance reforms
The governance reform process of FIFA was initiated due to its long, undistinguished history of involvement in scandals and allegations of bribery and corruption, culminating in events post 2010 relating to the bidding and award process of the 2018 and 2022 World Cups. The notable events, in relation to the governance reforms in particular, include:
- In December 2011, the Independent Governance Committee (the “ICG”) was established as a temporary body with the goal of overseeing the creation of a framework of good governance and controls for FIFA. The ICG was chaired by Mark Pieth and involved a consultation process with a wide range of experts and stakeholders from both inside and outside football. The ICG gained approval for some reforms, including the division of the Ethics Committee into both an investigatory and an adjudicatory chamber, revision of the Code of Ethics and establishment of a new Code of Conduct, and the introduction of a confidential reporting mechanism.
- In November 2014, Hans-Joachim Eckert’s summary of Michael J. Garcia’s inquiry report into the 2018 and 2022 FIFA World Cup Bidding Process was published. The inquiry was commissioned to review the bidding process for both World Cups, as well as to investigate specific allegations of misconduct and corruption. Mr Eckert surmised that Mr Garcia’s report showed insufficient evidence of wrongdoing to justify re-opening the bidding process. Mr Garcia immediately claimed Mr Eckert’s summary contained “numerous materially incomplete and erroneous representations” and appealed FIFA’s decision not to publish the entire report to the Appeal Committee. His appeal was ultimately unsuccessful and he resigned from his position as chairman of the FIFA Investigatory Chamber.
- In August 2015, the Reform Committee was appointed by the FIFA Executive Committee (the “Executive Committee”) to recommend relevant and appropriate changes to the Statutes and Regulations of FIFA, with the aim of promoting significantly improved governance and transparency within the organisation. The proposed reforms were submitted to the Extraordinary FIFA Congress and approved on 26 February 2016 in Zurich.
Analysis of the reforms from a UK corporate governance perspective
There has been a growing argument1 that governing bodies of sport should look to the governance standards of publicly listed companies as the basis upon which they should formulate their own corporate governance rules. In the United Kingdom, all companies with a premium listing on the London Stock Exchange are required to report on how they have applied the CGC, which sets out the standards of good practice in relation to management leadership and effectiveness, remuneration, accountability and relations with stakeholders. Outlined below is a comparative analysis between some of the key reforms approved by FIFA and certain fundamental principles of the CGC.
Separation of management functions
The management structure of FIFA has been reformed in such a way as to seek to replicate, broadly, the management structure of a UK publicly listed company. The Executive Committee will be renamed the FIFA Council (the “Council”) and will adopt the role of a supervisory board of directors, charged with oversight of strategic matters and supervision of standing committees and the FIFA Administration. It will no longer have executive powers or direct responsibilities.
The General Secretary will adopt the position of the Chief Executive Officer of FIFA, with overall responsibility for the performance of the FIFA Administration through the implementation of policies and strategies as defined and directed by the Council.
According to the CGC, “the board’s role is to provide entrepreneurial leadership of the company within a framework of prudent and effective controls which enables risk to be assessed and managed. The board should set the company’s values and standards and ensure that its obligations to its shareholders and others are understood and met”.2 The FIFA Governance Regulations (“FGRs”) set out the duties of the Council, which focus on establishing the strategic direction, policies and values of the organisation. The FGRs also refer to the oversight duties expected of the Council. The duties of the Council under the FGRs are broadly in line with that expected of a board complying with the provisions of the CGC, providing the Council with a strong structural foundation on which it can operate effectively.
Importantly, the chair of the Council (the President)3 and the CEO4 will be separate roles. The CGC highlights the importance of a “clear division of responsibilities” for the running of the board of directors and the running of the company itself, with a separate chairman and CEO.5 By establishing separate roles, chairmen and CEOs can independently focus on their own roles, with the CEO responsible for the day-to-day operations of the company, and the chairman involved primarily with oversight and supervision.
One aspect of corporate governance that the FIFA reforms have not implemented is the appointment, and role, of independent non-executive directors. The CGC outlines that the board of a company should include an appropriate combination of executive and non-executive directors, a majority of whom should be independent.6 Such persons, who are ordinarily external and independent personnel, could use their experience to contribute to the organisational strategy of the Council, challenge proposals and scrutinise the performance of the Council and individual Council members. The Council will instead be formed of members appointed by the football confederations and associations of FIFA,7 and therefore lack the independence of thought and affiliation that would be expected by the CGC. By not requiring the Council to appoint persons not connected to football or the Confederations they represent, an opportunity to add objectivity and independence to the Council has been missed.
Furthermore, the size of the Council will be increased to thirty seven members.8 The CGC outlines that boards should be of a size that is sufficient for the requirements of the business to be met and not be so large as to be unwieldy.9 The Grant Thornton Corporate Governance Review shows that the average board size for FTSE350 companies in 2015 was 9.4. A literature review by Tavistock Institute of Human Relations and Crelos Limited for the Walker Review suggests that there are cognitive limits to the number of individuals with whom a person can maintain stable relationships, and that as the size of the board grows, the problems of passive free riding, dislocation and “groupthink” grow with it, rendering it less effective. A smaller Council size would be more beneficial to the effectiveness of FIFA as a whole.
Comply or Explain
A company with a UK premium listing is required to include in its annual report a “corporate governance statement” explaining how it has applied the main principles of the CGC. It must also outline whether it has complied throughout the period under review with all relevant provisions and, if not, explain its reasons for non-compliance. This approach is a hallmark of corporate governance in the UK; it has been in operation since the CGC’s beginnings and provides a degree of flexibility to companies, recognising that a “one-size-fits-all” approach does not work and can be unduly restrictive.
The introduction of a “comply or explain” requirement could benefit the governance structure of FIFA. “Comply or explain” recognises that an alternative to a governance provision may be justified in particular circumstances if good governance can be achieved by other means. Rewarding openness and transparency, it both requires and incentivises organisations to publicly disclose their efforts to achieve good governance. FIFA, being a global organisation operating in all areas of the world, may at times be unable to strictly adhere to its FGRs due to local law, custom or other similar restrictions. It may therefore benefit from the flexibility that a “comply or explain” mechanism provides. More importantly, FIFA should also disclose on a regular basis how it operates its corporate governance arrangements in practice, thereby allowing greater scrutiny of those systems and making FIFA a more transparent organisation.
The reforms prohibit both the President10 and members of the Council11 to hold office for more than three terms of four years (whether consecutive or not) and so a maximum of 12 years. The requirement to seek re-election at regular intervals conforms to a principle of the CGC that all directors should be submitted for re-election at regular intervals, subject to continued satisfactory performance.12 However, the re-election requirement of the President and members of the Council fall short of the CGC requirement that directors of FTSE350 companies be subject to annual re-election.13 Requiring frequent re-election is a progressive reform as it places a greater obligation on the President and members of the Council to perform to the best of their ability. Owing to the issues of mismanagement that has plagued FIFA in the past, a requirement of annual re-election would have been welcome.
A contributing factor to the mishaps at FIFA is the particular legal structure that underpins the organisation - established as a not-for-profit association in accordance with Articles 60 et seq. of the Swiss Civil Code, it has outgrown its legislative framework. Not-for-profit legislation in Switzerland is very liberal and offers associations a flexible framework in which they can freely operate. The statutory provisions contained in the Swiss Civil Code are intentionally broad to allow not-for-profit organisations to pursue non-commercial purposes. Notably, up until 2000, corruption of foreign public agents was not prosecuted by the Swiss authorities, and bribes were tax deductible. Reforms have been implemented and stricter anti-corruption laws have been enacted, but the legislative framework remains inadequate for an organisation of the size and importance of FIFA.
Corporate Social Responsibility – Ruggie’s Report
Intertwined within FIFA’s reform of its governance structure is the refining of the organisation’s corporate social responsibility programme, through, most notably, the implementation of a new Human Rights framework. The European Commission defines corporate social responsibility as a “concept whereby companies integrate social and environmental concerns in their business operations and in their interaction with their stakeholders on a voluntary basis”. A deeper analysis of this meaning goes to the process by which the societal roles of organisations are renegotiated and realigned. FIFA, in its pursuit of realigning its governance structures to internationally accepted standards, commissioned the United Nations Secretary General’s special representative for business and human rights, John G. Ruggie, to produce a report setting out recommendations on the importance of FIFA embedding respect for human rights across its global operation.
The Ruggie report outlines that FIFA should adopt a clear and coherent human rights policy, identify and evaluate human rights risks and enable access to effective remedies if a fundamental human right is breached by a member of the organisation. The recommendations are intended to be practical, and to address the human rights issues the organisation has encountered in the past. Of note, Ruggie suggests establishing the necessary internal operational and accountability structures to ensure human rights receive the required protections. The developments of FIFA’s corporate social responsibility through the establishment of human rights policy highlights the overall progress made by FIFA, and should ultimately benefit the overall governance structure of the organisation.
Compliance and monitoring
A new compliance regime will also be implemented at FIFA as a result of the reforms. A new position of Chief Compliance Officer has been created, who will be tasked with overseeing FIFA’s compliance program. The Chief Compliance Officer is to report directly to the General Secretary and the Audit and Compliance Committee, the latter of which already has the general responsibility of ensuring the completeness and reliability of FIFA’s financial accounting, as well as monitoring financial and compliance matters, including, in particular the distribution and flow of development-related funds.14
The reforms note that the Chief Compliance Officer is to “ensure that the internal compliance function is structured in accordance with international best practices” and “review and adopt stronger related party transaction policies”, which includes requiring all employees and FIFA committee members to regularly certify their compliance with FIFA policies.
How, in practice, this new compliance regime will be implemented and the effectiveness of it, remains to be seen. However, the resignation of Domenico Scala, the chair of the Audit and Compliance Committee, announced on 14 May 2016, is an ominous beginning. The decision to allow the Council to appoint and remove members of FIFA’s committees, which led to Scala resigning, sends a clear message that the Council is still the body at FIFA with ultimate control and power.15
FIFA’s reputation has been severely damaged in recent years. It has faced serious allegations of corruption and bribery from all corners of the globe. Its former long standing President, Sepp Blatter, has been banned from all football-related activity for six years over “disloyal payments” he made to Michel Platini in late 2015. The debacle over the Garcia report, and the recent dawn raids of FIFA in 2015, has brought the credibility of the organisation to its knees. Never has the need for radical reform of the governance procedures been so evident or necessary for an international organisation that impacts so many people globally.
The recent reform package is a welcome development in that it is, at least, a step in the right direction. However, it is clear that the reforms fall far short of that expected of a UK listed company – a minimum standard to which FIFA, as the governing body of world football, should aspire and be judged, and so do not go far enough for FIFA to “regain” (or perhaps it should be “obtain”) credibility.
The need remains for greater transparency, accountability and coherency across the organisation. Efforts should be made urgently to ensure that the reformed governance structure that will be implemented at FIFA will continue to develop and evolve to adapt to the continuing progression of the football world, with an emphasis on protecting the interests of key stakeholders, such as players and fans.
What is clear is that radical behavioural, cultural and governance changes within the organisation are necessary, and one can but hope that the 2016 reforms are only the start of this process, not the end. FIFA should – and perhaps given recent history, for its own survival needs to – adopt and apply corporate governance standards and systems that reflect the very best global practice.
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- Tags: 2016 FIFA Reform Committee | Anti-Corruption | FIFA | FIFA Congress | FIFA Council | FIFA Executive Committee | FIFA Governance Regulation | Football | Governance | Independent Governance Committee (IGC) | Regulation | Swiss Civil Code | Switzerland | UK Corporate Governance Code (“CGC”) | United Kingdom (UK)
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Chris is an associate in the corporate department at Slaughter and May, as well as being part of the Sports practice team. Working with a team of colleagues, he advised Lord Moynihan on the Governance of Sport Bill.