Argument (#1-2 January-February 2022)

The Corporate Governance Hockey Challenges

by Taras Dumych

It was John Milton, the famous evil character of the Devils Advocate movie who responded to the question Why lawyers, why the law? with Because the law puts us into everything. As it appears now, the same quote can be used when referring to corporate governance.

Not only does corporate governance affect almost every aspect of our day-to-day life, not to mention business life, corporate governance is arguably the crucial element of sustainable development. While the governance is part of the ESG acronym, it is actually the governance part that defines how the environmental and social parts of ESG are to be framed and implemented.

This article examines how corporate governance could play a critical role in sport. It has been quite some time since professional sport and business got together. The recent developments that have taken place in the Ukrainian Hockey League (UHL) represent a great example of how corporate governance can affect the sports business as well as the legal wellbeing of an organization. The example of the UHL may be important not just for other sport leagues and associations, but for many other business ventures too.

Importatly, it is not the aim of the author to take anybodys side while discussing and assessing the situation around the UHL, but rather to attempt to look objectively at the development of the situations and possible solutions.

The rise of the UHL

In 2016 eight Ukrainian professional hockey clubs incorporated the UHL as a limited liability company. The UHL founders, thus, became the shareholding participants (shareholders) of the UHL, and the UHL became their joint venture company.

Soon after, the UHL signed a cooperation agreement with the Hockey Federation of Ukraine (Hockey Federation) under which the UHL received exclusive rights, basically a license, to organize Ukraines hockey championship. For this purpose, the UHL was responsible not only for the sport-related part of the championship, such as organizing games, referees, relations with international hockey leagues, such as Europes Hockey Championship League, but also for the business-related part, like relations with sponsors and media broadcasting.

Considering the poor state of Ukrainian hockey, it was certainly a challenge for the UHLs founders to operate the UHL and organize the championship. However, these efforts have resulted in the UHL becoming a truly professional sport league and the Ukrainian hockey championship receiving international recognition.

Over the championship seasons, however, the teams playing in the championship have changed. In the 2021-22 championship season only three teams continued to play out of the Original Eight, while the other five were new teams that joined, replacing those teams, which, mainly due to financial troubles, could not continue participating or even ceased to exist.

The changes with the teams playing in the championship have affected the corporate shareholding structure of the UHL. As of the 2021-22 season, three active teams remain among the shareholders, namely Bilyi Bars of Bila Tserkva, Donbas of Druzhkivka and Kremenchuk. Dynamo Kharkiv, although continuing to be a shareholder in the UHL, has not played for several consecutive seasons. The five new teams, namely Sokil of Kyiv, Kramatorsk, Dnipro of Kherson, Mariupol and Rulav Odd of Kharkiv, despite playing in the championship, were not shareholders of the UHL.

Starting from the 2021-22 season, the Hockey Federation has been a 50 per cent shareholder in the UHL, while the other four hockey clubs (including the one which has not been playing) each owned a 12.5 per cent stake in the UHL. Consequently, upon joining the UHL, the Hockey Federation immediately became a blocking and controlling shareholder of the UHL.

Turning to corporate governance and the management structure of the UHL, it followed a rather plain option for this: the General Shareholders Meeting is the supreme representative body of the UHL, while on the executive side, the UHL is managed by a sole director called the General Manager. No supervisory board or management board, as a collective executive body, has been established at the UHL.

Evolvement of the UHL crisis

Over the hockey seasons, the UHL has certainly attained visible sporting and entertainment success. However, there have been a number of structural weaknesses in the UHL that have been following the league since its inception. One type of weakness was of an economic nature. Every season there have been teams that, due to financial troubles, could not continue their participation in the following season. This has also resulted in shareholder changes at the UHL, as departing teams, though not all of them, also departed from the shareholding at the UHL. Dynamo Kharkiv, despite stopping playing in the UHL seasons since 2019, remained among the UHLs shareholders.

The other structural weakness was connected to a rather dominating power of one of the UHL teams and shareholders Donbas, which is owned by business mogul Mr. Borys Kolesnikov. Donbas was one of the UHLs most successful teams, having had the experience of playing several seasons in the Kontinental Hockey League (KHL). It must be acknowledged that Mr. Kolesnikov, played an important role in founding, developing and strengthening the UHL. At the same time, his influence was often decisive regarding the way most of the other UHLs shareholders acted. He also had control over the way the UHL conducted its business. Foremost, the influence of Mr. Kolesnikov was decisive when it came to appointing the executive management of the UHL.

It was reported that the idea behind the Hockey Federation joining the UHL was to provide balance for different interests in the UHL. At the same time, when in 2021 the Hockey Federation joined the UHL, the newly appointed General Manager was a nominee of Mr. Kolesnikov. The combination of these two moves was probably a kind of understanding planned as the way to balance the potential influence of the Hockey Federation and its President, Mr. Georgiy Zubko. However, as experience shows, governance and management solutions, which are based on an "understanding", ultimately turn out to be the problem-causing ones.

While most likely the tensions between Mr. Kolesnokov and Mr. Zubko, two ambitious leaders of their respective organizations, may well have started earlier, these tensions became visible in a communication scandal that concerned inappropriate sporting behavior during a hockey game by one of the players on the competing team. There is no doubt that the players behavior was inappropriate, and he got the maximum penalty for it. However, the UHL General Manager, and the media, ultimately owned by Mr. Kolesnikov, rather than address and resolve the situation, started escalating it up to an international level. This escalation was not only harmful for the reputation of the hockey player and the team concerned, but was also close to a communications disaster from the point of view of the reputation of Ukrainian hockey.

The scandal resulted in a series of events on the legal battleground and beyond. First, at the initiative of the Hockey Federation, the UHL General Manager was dismissed and a new General Manager, an internationally-recognized Ukrainian hockey veteran player, was appointed. The dismissal was unsuccessfully challenged in court. Furthermore, the fact of the Hockey Federation joining the UHL as its shareholder, was also challenged in court based on some grounds of formality.

On the non-legal battle ground, Mr. Kolesnikov called off most of the Donbas players, who were in the national hockey Team Ukraine squad from an international hockey tournament, just one day before the first game. Unless immediately replaced with players from other teams, Team Ukraine would not have been able to be properly represented in the tournament.

The players, mainly from Donbas and another team from the orbit of Mr. Kolesnikov, who left Team Ukraine, were disqualified by the Hockey Federation, and were banned from playing in 10 consecutive games in the UHL tournament. As the players did not obey the penalty, that failure led to their teams being disqualified from the UHL tournament.

In response to the disqualification of the teams, Mr. Kolesnikov announced that the disqualified teams, as well as two other UHL teams and two more newly-created teams, would form a new organization and new hockey tournament called the Ukrainian Hockey Super League (UHSL). The UHSL tournament would not be subject to Hockey Federation regulations and would not have the status of the Hockey Championship of Ukraine. The Hockey Federation had to address this move by reorganizing the UHL tournament in order to be able to continue it in a new format.

Despite the two UHL teams departing to the UHSL, they remained among the shareholders in the UHL. Furthermore, Mr. Kolesnikovs associated businesses tried to exercise control over UHL matters, particularly at the level of media and broadcasting. Mr. Kolesnikovs TV channel, while having exclusive rights to broadcast UHL games, was not doing this and was blocking broadcasting on other media. The official webpage of UHL did not lead to information on the UHL, but rather, was redirecting visitors to the UHSL webpage.

Corporate governance side of UHL crisis

There were many grounds behind the UHL crisis, including communications and egocentric behavior. However, corporate governance was not only one of the sides of the crisis but was, simultaneously, also the foundation for the crisis. Corporate governance could also have been the solution to the crisis. However, the greatest problem of the UHL, as an organization, was not even poor or weak corporate governance, but rather the complete lack of any.

Differences between key shareholders

Donbas, on the one hand, and the Hockey Federation on the other, and particularly the men that stood behind those two organizations Mr. Kolesnikov and Mr. Zubko got to the point when, unfortunately, they became antagonists. At the same time, these two shareholders were the key shareholders for the UHL. The actions of these shareholders began to be directed against one another rather than towards setting up the new framework for the UHL and, in so doing, addressing the existing differences.

It is not rare for there to be strong differences and sometimes opposing interests between shareholders. It is not even something unusual that the interests of shareholders may be opposite to those of their company, which sometimes is the case with activist or vulture shareholders. It also so happens that there may be strong differences between the executives and shareholders. In all such cases the existence of a supervisory board increases the chances that these differences may be addressed in a way that will be in the interests of companies and their shareholders too. There was no such supervisory board in the UHL.

Absence of the UHL focus frame

In the case of the UHL, the business interest of its shareholders, particularly of hockey teams, would not be less important than the interest of the UHL itself. Except for the Hockey Federation, the shareholders of the UHL own and operate their respective hockey teams. In fact, the UHL really needed its teams to be financially successful, or at least solvent. Getting this result should have been within the framework of UHL governance.

However, considering how the UHL was governed, it was difficult to see how the framework could have been set up and by whom. It is unlikely that the framework could have been set up by the General Manager acting at the time, as he was acting more within the framework of the shareholder that he was close to. Neither was the Hockey Federation fully eligible to set up the framework for the UHL. The scope of interest of the Hockey Federation is rather broad covering, among other things, matters regarding the national hockey team, youth and children hockey teams and other tournaments.

However, the UHL is not just about a sports game, it is also about business. Sporting issues are not always completely in line with business, while without successfully handling business matters, the UHLs sporting issues would also fall into decline. The supervisory board, had it been established, could have been the one to set the UHL framework and connect the sporting and business interests of the UHL, its teams, the Hockey Federation and all the stakeholders involved.

Disconnection with stakeholders

In addition to the UHL shareholders, there were important stakeholders whose interests had to be within the framework of the UHL. Foremost, the stakeholders included the UHL teams which for whatever reason were not the shareholders of the UHL. In the 2021-2022 season, the majority of teams playing in the UHL tournament were not shareholders of the UHL.

As they were not UHL shareholders, these teams formally had no voice regarding how UHL matters were handled, and had no shareholder voting rights. At the same time, these teams, and the teams owners, depended directly on the UHL, not only in the way the sporting matters were handled, but particularly how business matters were handled. Neither does it appear that the management of the UHL was taking into account the interest of these teams when managing the UHLs affairs.

One more important stakeholder in the UHL is the national hockey team of Ukraine, the majority of whose players are players from UHL teams. While there were differences between Mr. Kolesnikov and Mr. Zubko on matters of the Ukrainian national team, and while sending players to the national team there were certain financial consequences for the UHL teams, there is no doubt that the more successful the national team is, the more prestigious and successful the UHL tournament would be. Unfortunately, the national team was one of the immediate losers due to the differences between key UHL shareholders.

Management Weaknesses

In the absence of the supervisory board, the General Manager was the only permanently acting management body of the UHL. One-person ruling is always a weakness per se. In the case of the UHL, that was not just a one-person executive, but the executive closely associated with a particular shareholder. This soon, if not right from the very beginning, led to confusion between shareholder loyalty and obedience on the one hand, and organizational commitment on the other.

Furthermore, the loss of trust in the General Manager, and some of his actions, was one of the factors that led to the crisis. Arguably, it was viewed as one factor too many, and it was no longer in the power of the General Manager to gain back this trust.

How other hockey leagues are governed

Two worlds most prominent and popular hockey leagues are the National Hockey League (NHL), made up of teams from Canada and USA, and the KHL consisting mainly, but not only, of Russian hockey teams. Both the NHL and KHL have different governance structures and, probably, different governance philosophies.

The NHL, by its very organizational form, is an unincorporated non-profit association. The principal foundation and governance-setting document of the NHL is the Constitution of the NHL. The governance and management structure of the NHL is made up of two layers: the Board of Governors, and the Commissioner and executives. The Board of Governors consists of representatives of each one of the NHLs members (i.e. the NHL teams), being a Governor or Alternate Governors. In any case, each NHL member has one vote on the Board of Governors. As the supreme governance body of the NHL, the Board of Governors has many similarities to the General Meeting of a company.

The competence of the Board of Governors includes establishing the NHLs policies, upholding the NHL Constitutions and by-laws, as well as appointing the Commissioner who serves as the Chief Executive Officer of the NHL. The current NHL Commissioner, who has been at the reins of the NHL for almost 30 years, and who, by the way is a lawyer by education and experience, is an example of how a reputable, professional and independent executive can not only manage a huge and diverse organization, but also effectively grow it by adding new teams and NHL members.

It is the Commissioner who usually presides at meetings of Board of Governors and who leads them. Decision-making on the Board of Governors, whether these are sport-related or business-related decisions, may be based either on a majority of votes, three-quarter or unanimous votes, depending on the type of decisions, as provided for by the Constitution of the NHL.

The KHL is, on the other hand, centered between two organizations: KHL the limited liability company, and KHL the non-profit organization. The latter is the licensee of the former in organizing KHL sport tournaments and championships.

While both KHL organizations have many members, among which are the teams playing in the KHLs tournaments, the dominating members of the KHL are the businesses, which are the sponsors of the KHL, particularly those companies that belong to the Gazprom group. These companies, which are also often the owners of the KHL teams, have the greatest influence in setting up the governance framework and its execution for the KHL.

KHL is managed by the Board of Directors and the Management Board, both of which include representatives of some of the KHL teams, major business groups as well as influential and politically connected businessmen.

Takeaways and solutions

The UHL is an example of how important corporate governance can be for a sports organization, and how critical a lack of corporate governance can be. Comparing the UHL to the NHL and KHL, it seems that corporate governance in the UHL was missing, not only as a matter of form, but also as a matter of spirit.

The outcome of the UHL crisis, and the appearance of the breakaway and separate UHSL, resulted in a lose-lose situation for everyone concerned: the UHL, its shareholders and stakeholders, and Ukrainian hockey overall. Both the UHL, and the new UHSL, in addition to their losses in business, also lost in their sport competition and attractiveness. In addition, the UHSL is perceived as an organization with a sports tournament of questionable status, while some of its teams have also employed practices with questionable ethics.

Sound corporate governance for the UHL, which would include professional and independent individuals who would set the framework of interests for the UHL, can be a solution that will work, not only from the point of view of business, but sport too. Such corporate governance should include those, hopefully limited, powers the shareholders would want to keep for themselves, but foremost, those effective powers and responsibilities that would be delegated to both the governance and management bodies.

As a matter of form, launching an empowered, competent and entrusted supervisory board for the UHL could be a solution for addressing the differences between the organizations key shareholders. Establishing a supervisory board would enable board members to focus on the UHLs framework and business, while the owners of the UHL teams would gain time to focus on sporting issues and the business of their respective teams.

Once established, it would then be the role of the supervisory board to not only ensure that UHL is efficiently managed, but also that the UHL matters, with its stakeholders, are handled to the mutual benefit of all. Not only would the UHL and hockey teams win as a result of these measures, but it would also be a victory for Ukrainian hockey, and an example of how the implementation of ESG principles, particulary its corporate governance part, is able to resolve disputes and create opportunities.

Taras Dumych is a partner at Wolf Theiss
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