Getting Serious About Regulation in Gaming & Lottery Operators

I am in Barcelona this week moderating a session at the World Gaming Executive Summit www.wges.com on market growth and expansion into US, Europe and Asia gaming markets. I have a fabulous panel of CEO’s and senior executives from Sportech Plc, PKR, AG Tech and Lotto 24.

In readiness for the event, I have spoken to an array of senior gaming and lottery figures. I always find it interesting as an “outsider” to reflect on the key challenges and draw comparisons with other sectors. Indeed some of my client’s most valuable results stem from approaches that have worked in other sectors, which perhaps are further advanced (technology, complexity) or seasoned (regulation, market change and so on).

For investors, top management and employees attracted to the global gaming and lottery business, managing change and the impact of evolving regulation is an every day occurence. Yet how different is this to the nuclear, energy or indeed the financial services industry? Over lunch with a substantial private equity investor in the renewables sector, he recently recounted a story about how one recent decision by the Spanish governement had left one sizeable investment “compeletely underwater” for the forseeable future. There is no incentive for the owners to invest further in the business until legal challenges are exhausted and the fund nears its’ exit point.

Where profitable growth and expansion of a business is heavily exposed to “regulatory risk”, I counsel clients that their investment plans must contain the following:

(1) Capital allocation plans must include a “regulatory premium”. Factored into the cost of capital must be a premium commensurate with the level of risk accorded with the investment in that market.

(2) Human resource plans must include a “regulatory contingency”. In other words the higher the regulatory risk and the potential impact on the future of the business, the greater the flexibility (severance terms) and financial resources the business must hold in liquid assets to avoid a short-term change creating a catastrophic impact on the firm’s cashflow.

(3) Fixed asset investments must include a “regulatory risk-weighting”. In other words, fixed assets (gaming or lottery infrastructure, office leases and so forth) should be adjusted to the changing levels of regulatory risk apparent in that market and the impact on the future of the business.

Boards should hold top management accountable for regular oversight of each of these areas. Whether that is done formally, in the form of monthly or quarterly reporting or informally, at the quarterly results stage.

In too many companies, particularly mid-sized businesses in the gaming and lottery sector, regulation and compliance changes are a separate agenda item in Management or Board Meetings. It is not integrated correctly into the capital allocation process, the evaluation of results or even top management’s compensation.

For a sector that has seen seismic impacts of regulation on the industry’s future and its’ wider perception, there is still much progress to made in the Boardroom in providing the right controls over top management’s behaviour.

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