Once Australia’s largest publicly traded casino operator, Star Entertainment Group now finds itself in a fiasco, with its shares halted on the Australian Securities Exchange (ASX). How will this situation end? And can it be salvaged?

Chief Commissioner Philip Crawford has raised serious doubts about Star’s fitness to operate. With venues in Sydney, Brisbane, and the Gold Coast, Star’s future remains uncertain as it faces ongoing significant regulatory scrutiny.

However, it is never too late, especially considering that rival Crown Resorts has regained its footing after addressing compliance issues exposed in earlier inquiries.

How will this situation end, and can this escalating crisis be salvaged? With these questions in mind, SiGMA News turned to Dr Colin Lawrence, (pictured above) a globally renowned expert in corporate governance who proposes effective solutions and identifies the underlying issues that drove Star Entertainment Group to its current predicament.

“The Star’s poor foundations led to misreporting, fraud and potential AML violations. Customers were mistreated, the Star partnered with ‘bad actors’ in Macau and the company attempted to undermine the regulator through the appointment of an arbitrator,” asserted Lawrence.

Chairman Foster forced to resign because he couldn’t control CEO Cooke

LH: What are the most significant risks that arise from the failure to meet regulatory requirements, such as those related to anti-money laundering and responsible gambling?

Dr Colin Lawrence: Failure to meet these regulatory requirements is a criminal offence and will rank highly on both regulators’ and investors’ lists of concerns. It will further tarnish the company’s reputation, leading to costly fines and ongoing investigations. Regulators will demand direct oversight and the payment of regulatory costs, and the company may also face additional capital requirements. The private sector might refuse to engage with the company, leading to a decline in risk-adjusted profitability. This situation is similar to what happened at Star.

LH: How should Star’s risk management framework be overhauled to prevent similar failures in the future?

Dr Colin Lawrence: Star needs to strengthen its non-executive Board of Directors, focusing on recruitment, key responsibilities, and accountabilities. It is unacceptable that Chairman Foster was forced to resign due to his inability to control CEO Cooke and ensure a strong relationship with the regulator-appointed executive, Nicholas Weeks. Additionally, the company should build upon its risk management framework by implementing an Own Risk and Solvency Assessment (ORSA)-based operational risk system. This self-assessment framework identifies and measures the incidence and impact of operational risks.

LH: What lessons can be learned from the dual inquiries led by Adam Bell SC, and how should these inform Star’s future regulatory strategies?

Dr Colin Lawrence: These inquiries serve as a textbook case study in cultural failure resulting from a lack of tone from the top. This issue is closely tied to the senior executive team, the overall business strategy, and the target operating model.

Unethical conduct and criminal infiltration

LH: How critical was the role of senior management in exacerbating Star’s problems, particularly regarding their combative approach with regulators?

Dr. Colin Lawrence: The role of senior management is crucial in setting the company’s tone. The chairman’s resignation highlighted ongoing office politics, suggesting a conspiracy to oust the executive appointed by the NICC.

LH: Given the repeated findings of unethical conduct and criminal infiltration, what changes should be made to the board and leadership to restore confidence?

Dr Colin Lawrence: The company has not performed well, which is likely to deter investors. To date, the share price has fallen cumulatively by 87.5 percent over four years. A complete shift in business strategy is necessary. On paper, the company has an impressive investment profile, with $6 billion in assets, 18 million customers, and 8,000 employees. It also boasts triple casino ownership, with the Star in Sydney being its flagship for 20 years, the Star Gold Coast undergoing an $850 million transformation, and Treasury Brisbane. Despite these developments in commercial real estate and a luxury shopping concept, the company has dramatically failed to deliver value. Before implementing risk and governance changes or appointing a new CEO, a thorough re-evaluation is essential, as the company is overinvested and highly leveraged.

LH: How effective can a new CEO like Steve McCann be in reversing the deep-seated cultural issues within the organisation?

Dr Colin Lawrence: This will be an exceedingly difficult task, as it involves both changing the strategic business model and implementing the new ARC framework established by Deloitte after 2022. Although Steve McCann has significant experience, he would be wise to restructure the organisation in alignment with key stakeholders, including investors, banks, and regulators in each subsidiary. The culture of strategic misalignment and violations of compliance rules must be addressed, and a strong risk management culture needs to be developed. The shareholder report indicates progress, with the appointment of a new Chief Risk Officer (CRO) in each of the three major businesses and an increase in the risk team from 53 to 95 full-time equivalents (FTEs). They report implementing 30 new controls, including cashless gaming systems aimed at reducing anti-money laundering (AML) risks, setting limits on gaming time, and engaging in customer conversations. An AML and anti-crime unit has also been established, along with the implementation of an ethical framework focused on purpose, values, and principles.

While these initiatives are promising, unless the company radically changes its culture and business strategy, the likelihood of success for these controls remains uncertain.

Neglecting corporate governance

The failures of The Star highlight the urgent need for comprehensive governance reforms to restore trust and stability. Lawrence highlighted significant governance failures within the company, pointing to an ongoing failure in its business model and operational risk strategy. These issues reflect a failure of multiple controls and technical systems. The company’s trading suspension on 30 August follows a similar suspension in 2022, with regulators citing persistent problems. The company’s share price plummeted from a high of $4 in 2019 to $0.5, indicating deep-rooted issues he explained.

Lawrence emphasised the need for a credible business strategy, including a robust regime of checks and balances, accountability at all management levels, and a properly functioning Audit, Risk, and Compliance (ARC) committee. The resignation of the chairman reflects the failure of executive leadership said Dr Lawrence. Furthermore, the alignment of incentives and compensation for all staff was identified as a critical missing element.

Unethical conduct and criminal infiltration

In response to the latest inquiry report, Lawrence stated that the damage to Star Entertainment Group’s corporate reputation is extremely severe. This negative press deters investors, and regulators are closely monitoring the company. Reputations, built over decades, can be quickly tarnished by poor management and system failures. The strategic business model’s failure, evidenced by an 87.5 percent capital loss, highlights the poor ARC violations.

To rebuild trust with shareholders, customers, and the broader public, Lawrence reiterated the need for a new business strategy, a new target operating model, and a new risk management framework. The company must address the negative perceptions created by its association with organised crime and unethical practices. This involves rethinking its target operating model, avoiding partnerships with shady characters, and ensuring full compliance with anti-laundering directives. A comprehensive three-line defence control system from the bottom to the top is essential to restore trust and stability.

Market risk and financial stability

LH: What are the implications of the trading halt on Star’s shares, and how might this impact its financial stability?

Dr Colin Lawrence: The trading halt seems to be a specific issue rather than a macro one. While it might impact the gaming industry in the long term, any short-term insolvency could destabilise parts of the commercial real estate industry and investment into gaming and tourism. However, it does not appear to be widespread.

LH: With massive write-downs in casino asset values and ongoing financial strain, how vulnerable is Star to market fluctuations and further economic downturns?

Dr Colin Lawrence: Star’s commercial real estate portfolio is procyclical, but its revenues could be anti-cyclical, as increased unemployment might boost revenues in the gaming and sports industries. However, investment is likely to flow out of this industry, similar to what happened with Trump-controlled casinos in Atlanta, which went bust and set the city back.

LH: What strategies should Star employ to secure its financial future, particularly regarding the blowout in construction costs at Queen’s Wharf?

Dr Colin Lawrence: Star needs a total rethink of its strategy. Having lost 87.5 percent of its value in four years, divestment seems a strong possibility. The company needs a comprehensive review of risk-adjusted profitability and may have to form partnerships, which could challenge antitrust laws.

LH: Should shareholders be concerned following the latest revelations and financial difficulties?

Dr Colin Lawrence: Shareholders should be very concerned but they shouldn’t be surprised. It could be that they were in the dark until 2022 but without doubt today they would clearly be shocked at the company’s share price performance.

LH: How in your opinion should Star engage with its shareholders to navigate the current crisis and prevent future class actions?

Dr Colin Lawrence: To transform the company, a new engagement plan with the shareholders should be set up and the company should stop being opaque and share better MIS with shareholders – disclosure avoids law suits in the future.

LH: Given the steep decline in share price, what prospects are there for a recovery, and what should shareholders realistically expect?

Dr Colin Lawrence: I’m very negative on what I have seen so far. Given all the issues it will be extremely difficult and my best guess would be a merger, or disposal of assets; obviously the brunt will be borne on lenders; Shareholders could be wiped out; I think prudential regulators will demand recapitalisation of of Star to be allowed to trade.

Stabilising Australia’s casino industry, M&A

Dr Lawrence urged for the need for tougher regulations within Australia’s casino industry. According to Lawrence, the introduction of higher capital thresholds for obtaining licences and more stringent penalties for executives who breach regulations are essential steps toward ensuring accountability and stability.

He highlighted that tighter gaming regulations would likely have significant implications for Star’s operations and revenue streams. Given the company’s current financial struggles, restructuring would be necessary. However, Lawrence stressed that strengthening gaming rules should be a priority moving forward to prevent similar issues from arising.

There have been recent rumours about Hard Rock Hotels and Resorts potentially interested in acquiring Star Entertainment. Even a few months ago, in May this year, Star Entertainment’s share surged after reports surfaced that a consortium which included Hard Rock was preparing to bid for The Star. At the time Hard Rock had denied this and it was followed by a drop in Star’s share price. When asked about the potential for further consolidations and M&A within the Australian casino industry, Lawrence noted that while this might not necessarily be a risk, it could serve as a solution to stabilise the sector. He expressed concern that such consolidations might breach antitrust regulations, but acknowledged that in the short term, they could help provide some stability.

Furthermore, Lawrence outlined broader lessons that other companies in high-risk industries, like gaming and entertainment, could learn from Star’s situation. He pointed out the importance of linking executive recruitment and remuneration packages to performance, suggesting that substantial penalties should be imposed for violations of rules. He proposed that equity-linked pay structures could incentivise better governance. Additionally, Lawrence noted that Star may have expanded too quickly, highlighting the need for stringent conditions to be met for obtaining a gaming licence.

SiGMA News spoke with Dr. Colin Lawrence, an expert in corporate governance and regulation. He is also a recognised expert in all areas of financial risk management bringing more than 30 years experience in financial services and corporate strategy consulting. From 2008 to 2013 Dr Lawrence was the Director of the Risk Specialist Division at the Prudential Regulatory Authority (PRA). He was also a Director of the Bank of England responsible for overseeing the regulation of financial services and banking in the UK and senior advisor to the Governor of the Bank of England. Formerly Dr Lawrence was Managing Director at BZW, Nat West and First National Bank of New York.   He is a former professor of finance at Columbia University.

SiGMA East Europe Summit powered by Soft2Bet, will take place in Budapest from 2-4 September 2024.