The Agency Problem – Part 1

A case that may both demonstrate the reason for budget overruns and the general lack of controls within the IOF is the story when Brian Porteous, the President at the time, decided (apparently single handedly) to spend money over the anyhow loss making IOF budget on the SportAccord convention in 2013.

Brian decided to ignore the 2013 budget that was approved in July 2012, just 6 months before. A budget that he himself proposed as Vice President at the time of budget preparation.

The Council members, according to the Council minutes, did not blink, as in many other cases when the President made interesting decisions. The member federations had no meaningful mechanism to react.

As a result of the extra €14,100 spent on the SportAccord Convention the budgeted loss  of €52,400 for 2013 has become a loss of €66,600.  There was still some reserves left to spend.

IOF Budget 2013

Before we get into details of this story, I think that it would be useful to introduce some theoretical background.

The Agency Problem

The core issue around the IOF is what business literature calls the Agency Problem. This is an unavoidable feature of large organisations where owners  (shareholders, or in our case 70 member federations) entrust an agent (CEO/President, Board/Council) to run the organization on their behalf.  Unavoidably, the two parties will have different interest and the agent will run the organization in a way that is not optimal for the owners. Conflict of interests and moral hazards are frequent problems. The lost value to the owners is called the Agency Cost.

Of course, owners try to put some control mechanism in place, but it is far from being easy. The biggest issues are the asymmetric information and the lack of resources to understand all the questions in depth – after all, that was part of the reason why the agent was entrusted to run the organisation.

This is a broad subject studied deeply in business literature, but in the case of the IOF we may highlight three interesting points that may help to understand the nature of the problem:

  • Different interests
  • Asymmetric risk appetites
  • Changing the rules

In many cases we can observe all three points, as in the story of the IOF becoming an exhibitor on the SportAccord Convention 2013.

A Presidential Decision

The Minutes of the #164 Council Meeting contain the following note:

17  Political agenda for our Olympic ambitions
BWP informed Council that the IOF would have an exhibition stand at the SportAccord Convention to be held in St. Petersburg, Russia in late May. The aim is to raise the profile of the IOF and the sport of or
ienteering in general. At this point in time, the IOF should keep the avenue open to both the Olympic Summer Games and the Olympic Winter Games.

This was a decision that stepped over the budget approved in July 2012, just 6 months earlier. The fact that it was not included under any other name in the original budget is best illustrated by the comparison of the original and the update where a new line SportAccord 2013 appeared as seen below.

It is interesting to note that according to the minutes Brian did not discuss the matter with the Council. This decision was not listed under Point 4 of the minutes discussing the decisions taken since the previous Council meeting. The minutes give the impression that he did not proposed it to the Council and did not seek a decision by the Council. According to the minutes, he simply informed the Council without mentioning any monetary implication. There was (still) money to spend.

Council members did not even blink according to the minutes. Some of them commented on this in private, but as in many other cases they quietly kept their opinion to themselves. According to the minutes no questions were raised about monetary implications.  No attempt was made to provide checks and balances to the President. Apparently the Council let the President do what he wanted.

Interesting to note that Brian was the Vice President of the IOF starting in 2007, so he must have had all the opportunities to influence the preparation of the 2013 budget. There was probably money allocated to participate on the convention for the President, as it was the case in previous years.

Participation as an exhibitor on the SportAccord convention has become important only after Brian was elected as President. For reasons unknown, it became suddenly so important, that he did not hesitate to step over the budget approved 6 months before, apparently not seeking even Council approval.

The cost of participation as an exhibitor in 2013 was stated as €14,100 in the 2014 Congress Binder, though it is unclear whether all the travel cost was included here, or part of it may have showed up under other items. One may say that it is not a major item, but this is just a well documented example of the way things are done by the IOF Leadership and how the money has gone.

It is an interesting coincidence, that the new President was involved in sports consulting at the time, a business where one of the key success factors is the ability to generate conversations with various participants of the sport management society. Anybody ever attended a major convention knows that having an exhibition booth increases the opportunities for conversations by at least a magnitude, at least. A revelation that the IOF had to have a booth on the SportAccord convention over and above the original plans and budget may be attributed to the attention by divine powers favouring the new President.

Brian Porteous CV

Another interesting coincidence is that now, when Brian has gone to become Honorary President, and the IOF’s reserves were largely spent, participation on the SportAccord Convention has immediately fallen victim to cost rationalization as specifically stated in the letter sent by Leho to member Federations in July 2017.

IOF - Letter to members July 2017 -3 - SportAccod highlight

For no better reason, we may have to attribute this coincidence also to divine powers who ensured that these costs were no longer priority in 2017 when the newly elected President had no interest in the business of sports consulting.  The will of the Almighty is unpredictable.

Unfortunately, this looks like a classic case of conflict of interest. These facts can be interpreted in a way that the IOF has incurred extra expenses over the approved 2013 budget, based on the decision of the President, that may have benefited the business of the President.

The member Federations had little chance to react, even the ones who might have been interested to control the way things were done. First, they have learnt about the cost implication only in 2014, more than a year after the decision was made and the money was spent. Second, Brian was the only candidate as the IOF President so he was elected by acclamation, i.e. with no secret vote, according to the Statutes. There is little point in challenging somebody, if he is re-elected anyhow, independent of his conduct.

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There is no easy solution to the Agency Problem, especially in a not for profit environment. But the problem is there, and there is a very real agency cost to member Federations. I’ll share more examples of the problem and options to resolve this a few weeks from now, for the fortunate reason that I will be offline over the coming weeks.