Control rights and super rugby

Sam Richardson over at the Fair Play and Forward Passes blog has commented on what looks to me to be a hospital pass on the "ownership" of the Super Rugby franchises here in New Zealand.

Sam writes,

Yesterday it was announced that there were two successful applicants for licences to operate the Hurricanes and Crusaders Super franchises next season. The Hurricanes franchise is to be run by a consortium including the Wellington Rugby Union, former Hurricanes directors and Welnix, the owners of the A-League franchise the Wellington Phoenix. The Crusaders deal is a little less clear, but is understood to involve a major figure from the West Coast mining industry.

and he continues,

Firstly, there is no question that the NZRU is a clear winner in this process. They get (desperately needed) injections of private funds into the Super franchises which are expensive to run, and have been a drain on the union's coffers. To understand just how they win, though, it is useful to know what the licence for operating a team entails. Also from the NZH article above:

The NZRU will retain full ownership of the franchises, the contracting process and coaching appointments.
Investors will get to select, market and manage their team as well as lobby for players outside New Zealand if that works in tandem with the sport's governing body.

[...] The NZRU therefore has the power to allocate [and pay] the players to each franchise. Investors can do what they like once they get their player list, but a large portion of ownership responsibility is in fact taken away from them. It is a very different ownership structure from, say, US-based, Australian or European sports leagues. At least in the A-League, the Wellington Phoenix can employ whoever they want and sign any player they want. The NZRU retain control of which players can play in Super Rugby, what teams they play for and who coaches them. It is a very favourable set-up to the governing body, no question. It is understandable if the NZRU wishes to avoid any club/country conflict that affects many of our Pacific Island neighbours with overseas-based players contractually bound to overseas clubs that often conflict with commitments to the national team. Crisis averted. The other thing that the licencee model does for the NZRU is to wash their hands of the micro-level management that is often difficult when trying to run the game from a central level. The day-to-day running of a franchise is best done on the ground, and the rationale is that private investors will do the job of running the franchise more efficiently than the NZRU or a provincial-based board could. After all, there might even be some money in it for licencees if they do a good enough job!

Think next of the licencees - show me the money? Where is it coming from? And where are the wider incentives to invest in the franchises? As mentioned above, licencees will select, market and manage their team. That is, they'll do the best that they can with who they are given by the NZRU (who pay the players, after all). They are in the best position to eliminate inefficiencies in the day-to-day running of the franchise - they'll have a clear incentive to run a pretty tight ship.

First Sam is right when he says that the NZRU looks like the winner here. Many of the important control rights are formally in the hands of the rugby union, in particular the control over players. But the first things that comes to mind is the difference between formal authority (the right to decide) and real authority (the effective control over decisions) within organizations. While the rugby union may have formal control of many areas the question is who has real control? Over time its is not hard to imagine real control moving towards the licencees.  Given the amount of time and effort and money the licencees will have to put it, the licencees have a big incentive to make sure they get what they want.

As far as players are concerned this set up doesn't look stable. What happens when the licencees want a given player which the rugby union says they can't have? Given that if the licencees run their franchise well they may be willing and able to pay large amounts for the best players. Clearly this is in the interests of both the franchise and the player but may be not in the interest of the union. Conflict seem certain. The same could also be said of coaches. It seems naive to think that the licencees are just going to sit back and take whatever the rugby union hands out to them, no matter what it is. As Sam notes this is a very different ownership structure from, say, US-based, Australian or European sports leagues. And those leagues are structured in the way they are for good reasons.

The basic problem with the model the rugby union has gone for is that there are just too many different groups with control rights - formal or real. One of the basic outcomes of the literature on the ownership of firms is that ownership is normally in the hand of a homogeneous group. As Henry Hansmann has written,

With larger numbers of owners, however, homogeneity of stakes is the overwhelming rule. Ownership is virtually always confined to a single class of patrons -- such as investors of capital, employees, suppliers of other inputs, or customers. Within the class of patrons who serve as owners, moreover, ownership interests are, or are structured to be, highly homogeneous.

The model being applied by the rugby union just has too many different groups with different agendas involved in the franchises. They are just asking for trouble.