A company built on rolling dice

To me, none of the flashy part of Atlantic Lotto’s audit this week was surprising.

Not the $110,000 spent on Christmas parties, nor the hundreds of concert tickets shared among elected, government and political officials. Not the raises of up to 56 per cent for senior staff. Not the alcohol and entertainment expenses or the $3,000 dinner for the board of directors and senior executives.

After all, the corporation hasn’t had a full audit in 10 years, and while the cat’s away, the mice will certainly play.

What’s much more important in the audit? The fact that there are critical issues with how the corporation is managed by its owners. The Atlantic Lottery Corporation is a creature of governments – four governments own it and share in its governance, meaning that it can be an internal tug of war. It’s a money mill; it’s the only legal supplier of its products, from old-school lottery tickets to video lottery terminals. It can decide what those products are, and what kinds of returns it can extract from each dollar spent.

But there’s a real threat in the institutional problems the audit found.

The lottery corporation’s mandate has not been reviewed in almost a decade, just one of the many problems of having the corporation report to four different provincial governments, each of whom appoints its own directors to the board. Each of the four provinces gets to pick and choose what

products and services it wants – meaning the overall efficiency of the lottery corporation, and any economies of scale, are diluted, if not lost. The structure means the corporation can’t make significant business decisions in a timely way.

And it can make bad decisions: spending $640,000 developing an Internet gambling system, only to have the plug pulled by governments scared of bad press; investing $8 million in an online lottery without complete information. Being told by one government – Nova Scotia’s – where to spend money; Atlantic Lotto put $1.3 million into a company called Techlink because that’s the way the Nova Scotia government wanted it, even though it contravened the lottery board’s advice.

There are significant hurdles to be overcome.

I mean, think about it, the audit went as far as to suggest that the governments should actually appoint qualified board members. To put it precisely, the auditors said there should be “A board selection process that is competency-based, professional, competitive, open, transparent and reflective of the skill requirements for the board.” Believe it or not, the governments disagreed, saying they preferred their own appointees.

These are challenging times for the lottery business, which is seeing its traditional market eroded by the aging segment of its customer base, and the fleeing of younger gamblers to faster, more engaging Internet competitors.

And over the whole thing, there’s the problem of reporting to four different masters. How bad can it be? Consider this: “An example of the ineffectiveness was seen when the board unanimously approved bylaw changes related to changes in director appointment processes, but then the same four board members, acting as shareholder representatives, did not accept the changes they had just approved.”

Who designed that governance pretzel? Franz Kafka?

Add to that, over-a-decade-apart occasional audits by the provincial auditors-general, and it’s easy to see why there are problems.

The sexy stuff is in the missteps. The real and lasting problem is structural.

The governments who own the corporation have to decide whether they want to fish or cut bait.

The company needs to either be allowed to operate as a cohesive and independent whole, or else should be broken up to operate as individual provincial lotteries.

Get out of the lottery corporation’s way, or set up your own. Simple.