David Green queries to what extent regulators consider whether the associates of casino licensees have the necessary skills and experience to do the jobs they’ve been hired for.
The multiple failures of governance and operational management attributed to Australia’s leading casino licensees, Crown Resorts and The Star Entertainment Group, by the various regulators and Royal Commission inquiries to which they have been subject over the past four years obscure an inconvenient truth; in assessing the suitability of the licensees’ associates, including directors and senior management, regulators have tended to apply a generic standard of suitability. This approach essentially focuses on the reputation, good character and financial soundness of an individual, and on identifying any links they may have with, for example, organized crime.
What this has arguably led to is a failure to adequately consider whether an associate has the requisite skills and experience to meet the requirements of the role to which they have been appointed by the licensee. The Casino Control Acts of the major Australian casino jurisdictions (Victoria, New South Wales and Queensland) all provide for a rather more nuanced standard, to the effect that suitability extends to the applicant being assessed as suitable to act in the capacity for which they are engaged. Put differently, no applicant should be found suitable unless they have the requisite skills and capacity to discharge their ascribed functions.
So, how might regulators determine whether someone is suitable to act in a defined capacity? A good starting point would be to compare the applicant’s skills, qualifications and experience with the articulated requirements for the position … what are the essential functions to be performed? What stakeholders will the position be required to interact with? What were the key recruitment/appointment criteria applied in engaging the applicant for the position? What inquiries did the licensee itself undertake to satisfy itself as to the suitability of the applicant to perform the assigned role?
Overlaid on an understanding of the organizational role and responsibilities of the applicant is the desirability of establishing that they are demonstrably capable of, and experienced in operating within, a highly regulated environment. That is not necessarily limited to gambling regulation; for example, the Chief Executive Officer and Chair of a listed casino licensee need to be familiar with both listing rules and corporate regulatory requirements, particularly around continuous disclosure and securities trading. That is not to say that they should be experts, but they should have sufficient knowledge and experience to enable them to effectively source and utilize expertise on a timely basis.
Ultimately, it is a matter for the judgement of the licensee who it considers fit for purpose in a role. That said, it remains solely for the regulator to be satisfied that an individual considered to be an associate of the licensee is suitable to fill the role. There is the potential for tension to arise between the two. For example, both Crown and Star have had periods in their recent history when the Chair of the Board has stepped into the role of acting Chief Executive. The requirements of the two roles are very different, particularly if the Chair is a Non-Executive Director. Aside from having to become an executive employee, with the capacity to perform the role full-time, there may also be a change in remuneration arrangements, and in the governance integrity of the licensee. Admittedly there may be little option for a regulator other than to allow such an interim arrangement, but it is in its own and the public’s interest that it satisfy itself that there is no better option available, and that any approval it may give for such an arrangement should it have concerns is strictly time limited.
A corollary of the foregoing is the composition of remuneration payable to an applicant, particularly the “at-risk” component of it. In the quest to drive superior returns and commensurately reward and retain management, most listed companies have adopted remuneration strategies which favor short- and long-term incentives over base salary and allowances. Many of the metrics used to determine the quantum of such rewards are generic in nature, such as average share price, total shareholder return, market share growth and so on. The underlying principle, what gets measured gets done, may influence shareholder support, but there is a question as to whether companies operating licensed casinos should simply run with the pack when it comes to such metrics. They may argue that they need to be competitive for talent, but the flip side of reward is risk. Given the demonstrated failure of both Crown and Star prior to 2022 to rein in risk and manage their respective regulatory compliance obligations, what could regulators have done to influence their remuneration policies?
Controlled contracts in Victoria and New South Wales are contracts which must be filed with the regulator, and which may be subject to a direction to the licensee by the regulator not to proceed with, or to disengage from the contract. The regulators have some discretion as to what they consider to be controlled contracts, which generally revolve around their materiality and their subject. Since employment contracts with CEOs may provide for millions of dollars in remuneration to be paid annually, and contain trigger provisions which might or should raise concerns for regulators, there is a strong case to be made for including C-Suite contracts under the umbrella of controlled contracts.
So, what metrics might be appropriate to a casino licensee’s CEO? Since the regulators’ objectives must include compliance with their requirements, zero events of material (ie. requiring an outlay exceeding a threshold amount by the company) non-compliance would be a sensible starting point. Vesting periods on share or option entitlements could also be deferred for a period after an executive has left the employ of the licensee. Extended claw-back periods could be applied to cash bonuses to ensure that they could be reclaimed by the licensee should it subsequently emerge that the recipient should not have been entitled to a bonus, for example due to withholding information which may, if known, have impacted quantitative metrics, such as share price, or regulatory compliance.
The point is moot as to whether greater advertence to the nuances of suitability would have mitigated the non-compliant behaviors exhibited by Crown and Star in the periods covered by their respective inquiries and commissions. Nevertheless, the tools are available and the public interest mandates that they be used more extensively.
