JOINT COMMITTEE ON AGRICULTURE, FISHERIES AND FOOD debate -
Wednesday, 9 Jun 2010

Irish Bloodstock Industry: Discussion with Irish National Stud

Chairman

On behalf of the joint committee, I welcome Mr. John Osborne, chief executive of the Irish National Stud, and Ms Anne Lawlor, financial controller. The committee has invited them to discuss the problems under the previous management and to outline their vision for the future, particularly in respect of changes made to corporate governance, including expenses.

Members are reminded of the long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against a person outside the House, or an official by name or in such a way as to make him or her identifiable. By virtue of section 17(2)(l) of the Defamation Act 2009, you are protected by absolute privilege in respect of the evidence you are to give this committee. If you are directed by the committee to cease giving evidence in relation to a particular matter and you continue to so do, you are entitled thereafter only to a qualified privilege in respect of your evidence. You are directed that only evidence connected with the subject matter of these proceedings is to be given and you are asked to respect the parliamentary practice to the effect that, where possible, you should not criticise nor make charges against any person(s) or entity by name or in such a way as to make him, her or it identifiable.

I now call on Mr. Osborne to make his opening statement. I wish him well in his new post. He is highly respected in the bloodstock industry and has a good reputation not only in Ireland but worldwide.

Mr. John Osborne

I am grateful for the opportunity to come before the Joint Committee on Agriculture, Fisheries and Food today to provide members with an overview of the Irish National Stud and its role in the bloodstock industry and to outline our plans for the future. I will also address certain issues which have been the subject of recent comment.

The Irish National Stud is a 1,000-acre facility on the edge of the Curragh at Kildare Town. The Irish National Stud has a long and successful history as the flagship of the Irish bloodstock industry. The production of thoroughbred racehorses is a valuable part of the economies of the UK, France, Germany, Italy, Spain, USA, Canada, Brazil, Argentina, South Africa, the Middle East, India, Australia, New Zealand, Japan and Korea. Among these nations the Irish are considered to produce the best — the best people and the best horses.

This reputation has been built over decades of excellence with enlightened help from Government and the care and attention of countless skilled horse people. Many of the leaders of the industry worldwide began their careers at the Irish National Stud, where a course in stud management — the first of its kind anywhere in the world — was commenced 40 years ago. Students from 24 countries have been educated at the INS.

The famous Racing Academy and Centre for Education, RACE, where many great jockeys began their careers, and the newly-built Farrier School are sited on INS lands, creating a unique education hub in Kildare Town. These courses form a part of the bloodstock sector which produces €200 million in gross sales and employs 22,000 people in a rural-based, environmentally friendly, labour-intensive business at which the Irish are world leaders.

The Irish National Stud has a unique role in this industry. The INS is a commercial State body which is entrusted to be self-financing. Over our 64-year history, the Irish National Stud has received a State investment of €13 million in share capital and the lands are vested in the company. This investment is tangible in the land improvements such as stabling, offices, student quarters, the visitor centre, the museum, the gift shop, St. Fiachra's Garden and the unique jewel that is the Japanese Gardens, one of the most enduringly popular tourist attractions in Leinster. We receive up to 150,000 visitors every year.

Through the INS the State also has investments in stock. The INS has a broodmare band comprising 15 mares and has bred two group 1 winners in recent years, most notably Desert King which won the Irish Derby. We also bred the two-year-old winner at the Curragh last Friday. The mares produce stock for sale each year and this has formed a useful part of the income stream for the stud.

Another key source of income is the boarding and care of third party mares. One of our proudest moments arrived in 2009 when Sea the Stars became world champion, having been foaled and raised at the Irish National Stud. The most significant investment is in the stallions. A stallion prospect will be a well-bred colt which has performed at the highest level, which has a physique that appeals to breeders and which is available for purchase. In any racing season there will be fewer than ten horses which have these attributes. For the few colts that possess these traits the competition to buy them is fierce and comes from all over the world. Despite this, the INS is proud to have seven stallions on its roster at present, including two of the most successful stallions in Europe in Invincible Spirit and Verglas.

I will explain how a stallion's career evolves. The purchase price is usually a seven-figure sum, but some stallion prospects make even more. There is no guarantee that the colt will be a success at stud and it is believed that only one in ten could be considered long-term successes. To help the stallion achieve success the prospect needs to attract a large book of mares every season. The first runners will not be on the racetrack until they are two-year-olds, by which time the stallion will have completed four stud seasons.

The idea of syndication solves two issues. It helps finance the huge up-front investment and it encourages support from the shareholders who send mares to the stallion, especially in the years before the runners are on the racetrack. Invincible Spirit and Verglas produced their first classic winners out of mares owned by a shareholder. The Irish National Stud earns 80% of its income from the stallion activities. It is the foundation stone for all the other services we can provide. We have a foaling unit and boarding facilities for third-party mares. We have a fostering service for orphaned foals. We try to assist breeders with mating and husbandry advice. The stud management course is a service to the industry and we have held seminars and open days in the past to help raise the standard of production here. We try to assist equine research where we can and have worked with Dr. Emmeline Hill on the equine genome project. We also introduce more than 100,000 visitors to the bloodstock world annually, through our tourism activities.

By investing in the INS the State is telling the world that this is a business we are proud of. It is an industry we excel at and we are here to assist any countries which want the best advice on developing a similar industry. In recent weeks, we have received delegations from Korea, Japan, Australia, Libya, Germany, Italy and Brazil as well as a large group of UK Jockey Club members. These visitors enjoy the contact with a State-backed enterprise, especially so given that the INS has a worldwide reputation for excellence.

Members will notice that the word "reputation" comes up regularly. We succeed or fail depending on our reputation. We are entrusted to care for people's valuable horses but we have also been entrusted to preserve the reputation of an industry and we take that trust seriously. We are a commercial State body which must file annual accounts which are subject to external audit. The non-executive board has an audit committee which contracts internal audit tasks to another external firm of accountants. As far back as 1997 we signed up to a quality management programme known as the Q-Mark and we are probably the only stud farm to have achieved that distinction every year since then. We have always taken seriously the need for the highest standards of governance and accountability.

I was appointed CEO in February 2010. My colleague Ms Anne Lawlor was appointed financial controller in 2009. We join the management at a challenging time for the bloodstock industry worldwide. We employ more than 70 people at present and are examining all aspects of our business to devise the most suitable strategy for the future. We enjoy a close working relationship with our colleagues in the Department of Agriculture, Fisheries and Food. We have been reminded by them of the need for continual improvement in the standards applying in the company. To that end, we are undergoing a review of all our systems as part of a strategic review. We have created a compliance team within our small management group. At its weekly meetings, the team examines the relevant legislation line by line. The legislation and guidelines are constantly being upgraded. We will meet our departmental colleagues as often as necessary to check for changes in the requirements. The story of the Irish National Stud is a story of success in an industry which attracts large foreign direct investment to Ireland. During my tenure as CEO, my objective is to strengthen the position of the stud within the industry and to maintain the highest standards in everything we do.

I would like to address some other important issues. Some specific aspects of the activities of Irish National Stud have been highlighted in the media. I am happy to answer the committee's queries but before I do so. I would like to put the media stories in context. Since its inception in 1946, the Irish National Stud has been governed by a non-executive board of directors. The board has usually had a proportion of members who have made a significant investment in bloodstock. People who have an insight into the bloodstock market are best informed on matters of bloodstock valuation. Their presence in the marketplace requires robust adherence to the relevant legislation. This is dealt with through the ethics in public office legislation. Board members always disclose their interests to the company secretary and absent themselves from discussions which might give rise to conflicts of interest. They are actively encouraged to do business with the company. This improves the turnover of the company, demonstrates the board's confidence in our standards of care and sends a signal to that effect to our other clients. Board members do not receive any preferential treatment, compared to other clients. They pay the going rate for the services they use. Through its dealings with the company, the board gains a greater insight into the workings of the stud and can make decisions that are better informed.

The travelling expenses of my predecessor as CEO have been under the spotlight. The CEO of the Irish National Stud is expected to attend major international sales and race meetings to network with clients and to spot stallion or broodmare prospects. The events attended were chosen to attain the maximum return. The travel strategy was always discussed at board level and the guidelines were adhered to. In hindsight, aspects of the expenditure appear excessive. However, the company must maintain a profile in the competitive world of stallion promotion. We successfully compete with multinational stallion farms which have deep pockets. In the future, the company will be represented at similar events and the travel schedule will be approved at board level. We will continue to adhere to the code of conduct for the governance of State bodies. We will bear in mind that any expenditure must withstand scrutiny at a forum like this committee.

The role of the company secretary has also been highlighted. Mr. John McStay has filled that role — unpaid — for many years. Before the appointment of my colleague, Ms Anne Lawlor, the Irish National Stud did not have a fully qualified accountant in-house. It used Mr. Martin O'Reilly of McStay Luby to prepare the company accounts for audit and to perform the management accounting. This service was billed annually at a rate which was considerably below the market rate. Countless hours of service and advice were not billed by virtue of Mr. McStay's support for the Irish National Stud. He understood its unique role in Kildare and in the industry.

I would like to mention two situations that demanded a substantial commitment of time and expertise. The first case could not be dealt with by the then CEO due to a conflict of interest, so Mr. McStay dealt with it on behalf of the company. The overall result of the second case — the resyndication of Invincible Spirit, which was a complex financial transaction which demanded a fast response to a series of questions — was that the stallion was retained at the Irish National Stud. The presence of an elite stallion is the key to the financial stability of the company. The figure for Mr. McStay's input which was quoted in the press was, in fact, the charge to the overall syndicate. The charge to the Irish National Stud was approximately €13,000, while the financial gain to the company can be counted in millions. The significance of these endeavours to the stud, and the Irish industry as a whole, is immeasurable.

I wish to comment briefly on the matter of stallion syndication. The Irish National Stud must purchase stallion prospects that meet its objectives. The strategy is to own between 25% and 50% of the horse, thereby spreading the investment risk. The other portion may be retained by the original owner, or may be dealt with through the introduction of shareholders. These shareholders are usually breeders who are prepared to make a long-term investment in the stallion prospect by investing their own money. As a low proportion of stallions can be considered to be successful in the long term, investment in this area comes with a high risk. Shareholders support the stallion by sending mares to him throughout his career. This supports the horse and helps him to succeed. The shareholder benefits from access to a stallion that may command a significantly higher fee commensurate with his success when the stallion succeeds. The uplift in the fee means the shareholding is considerably more valuable. The share is a commodity which may be bought or sold.

I have mentioned that directors have been encouraged to do business with the stud. This includes taking shareholdings in the stallions. The idea of aligning the interests of a company with the interests of those directing it is commonplace in business. When investment decisions of the scale of stallion purchases are being made, it is likely that the interests of the company will be best protected by a decision which an individual would be happy to make for himself. This may be why the board of the Irish National Stud has made so many successful investments in the stallion market over the years. Any transaction involving a director is always subject to full disclosure.

It is worth noting that in 2008, 24 stallions retired to serve the flat racing market in Ireland. In 2010, that number has fallen to seven. The Irish National Stud has not managed to purchase a stallion in the past two years. This trend must be reversed if we are to secure the long-term viability of the company. It is interesting to note that the winner of last Saturday's Epsom Derby, Workforce, was conceived in Ireland but foaled in the UK. His sire now resides in France. He does not carry the "IRE" suffix because his dam foaled in the UK prior to visiting a stallion based in the UK the following year. The industry depends on the presence of the best stallions. This can never be taken for granted.

We operate in a fiercely competitive market. The Irish National Stud has retained its market share. We are proud to have two stallions in the top 20 stallions in Europe at present. This would not be possible without the support of the Minister for Agriculture, Fisheries and Food and his departmental officials. While we do not receive direct funding, we have been trusted with significant State investment. We succeed or fail on the basis of our reputation and our standing in the worldwide bloodstock industry. We have a relatively small management team. We are committed to constantly improving our systems to ensure we can return to a strong financial position. We know we must always respect the trust placed in us by the Department of Agriculture, Fisheries and Food and our clients. I assure the committee that we expect the best standards from ourselves. We invite members to visit the Irish National Stud when they are in the area, to witness at first hand what it has achieved over the years. I thank the committee again for affording us the opportunity to clarify these matters.

Chairman

I thank Mr. Osborne for his comprehensive presentation and for the invitation to visit the Irish National Stud. I had the honour of visiting it in a private capacity with my family some years ago. I was very impressed by it. If members of the committee were to spend half a day at the Irish National Stud, perhaps during the summer break, it would be a worthwhile venture for the committee. We will examine that possibility. I thank Mr. Osborne.

Is it agreed that the format we adopted during the debate on the lost at sea scheme, whereby Deputy Creed and the other spokespersons get ten minutes and other members get seven minutes, should apply today? Agreed.

I would like to ask a few questions before I call Deputy Creed. Mr. Osborne can answer them when responding to Deputy Creed. What part does the Irish National Stud play in attracting foreign direct investment, which is very important for Ireland? Can Mr. Osborne explain to the committee the circumstances in which these travelling costs were incurred? Does he think they were excessive? The Irish National Stud is governed by a non-executive board of directors. Can Mr. Osborne elaborate on the membership of the board?

Deputy Michael Creed

I welcome Mr. Osborne and Ms Lawlor to the meeting. I concur with Mr. Osborne's opening remarks about the significance of the industry, which is worth more than €1 billion to the economy and employs more than 20,000 people. In terms of the specific business of the National Stud, stallion fees amount to approximately €180 million annually. Broadly speaking, the industry is well integrated with the rural economy and training fees amount to nearly €300 million. It is a large industry.

For everyone present, the primary motivation is to lance the boil that has emerged in recent weeks. It has damaged the national and international reputations of the National Stud and the industry. I note Mr. Osborne's closing remarks on the difficult trading environment, etc., but we must examine how the sport horse industry fell from its lofty perch of 20 years ago to where it is today and guard against the same occurring in the bloodstock industry.

Most people are concerned with the types of revelation about the Irish National Stud that have dominated the media in recent months. If we are to have a clean slate, it is time for a full, comprehensive and independent analysis of all the issues in the public arena, those being, corporate governance, bullying and harassment, management practices and conflicts of interest. A death by a thousand cuts will undermine the Irish National Stud's position. As a new CEO, Mr. Osborne has a singular opportunity to present that clean slate, to come out with his hands up in respect of prior events and to say that such activities, some of which the Chairman has referenced in respect of expenses, will not be the norm.

Concerning travel expenses, I accept that Mr. Osborne's industry is a global one. Any CEO in it who is worth his or her salt must travel. No one expects Mr. Osborne to take the bus and appropriate arrangements must be made, but considerable excesses have come to light. The committee would like to be assured that gross excess is a thing of the past.

Mr. Osborne might wish to comment on something I noted with interest, namely, how he skipped a line at the bottom of page 2 of his submission. The documents I have been circulated read: "We are currently loss making, with a fall in turnover and a high cost base". With specific reference to this line, which Mr. Osborne did not put on the public record, when does he propose to publish his accounts for the last trading year, what are they likely to show in respect of the Irish National Stud's financial health and how does he propose to address the financial difficulties it is facing?

A number of specific matters have arisen, particularly around the circumstances of Mr. Osborne's appointment and the retirement of the previous CEO and questions of bullying and harassment, which are regrettably not new issues for the Irish National Stud. In the past decade, there has been an unfortunate common thread of bullying and harassment. I am sure it is okay to put names on the record, since they are in the public domain. One case is ongoing in the courts. Prior to that, there were the Pat Mullarkey case and a host of others. What steps did the Irish National Stud take to learn from the Pat Mullarkey case? It is abundantly clear that none were taken to address the core issues, as they kept recurring at considerable financial cost to the State and to the detriment of the reputation of the National Stud. A mediator was appointed in the Mullarkey case. What steps did the Irish National Stud take to implement the mediator's recommendations? If it took any, how did we end up in a situation in which a host of other cases emerged and needed to be settled by the board at considerable cost? Is the national stud making provision in its current report, which is about to be published, for the cost of settling in cases currently before the courts? I would like Mr. Osborne to address these questions.

In preparing for this meeting, I was struck by how outdated is the legislation we are dealing with. Updating the legislation underpinning the establishment of the Irish National Stud and the 1976 Act is necessary. This morning, I read the company's articles of association. Regarding the disqualification of directors, they state that the office of director shall be vacated if the director participates directly or indirectly in the profits or benefits of any activity, scheme or undertaking of the company, provided that no director shall vacate his or her office by reason of the allotment to him or her, either alone or jointly with others, of a nomination for any mare in respect of a stallion, the property of the company. However, a director shall not vote on the allotment of any such nomination. If he or she does so, that vote shall not be counted. They go on to state that a director shall vacate his or her office by reason of being a member of any company that has done work for the company of which he or she is a director. This seems to fly in the face of Mr. Osborne's blunt statement to the effect that board members were actively encouraged to do business with the company. What is not stated is whether the company was actively encouraged to do business with board members. This is another fundamental issue that has arisen.

Untendered contracts have been paid out of public funds in respect of financial services to the company. Mr. Osborne stated that the company secretary was present in an unpaid capacity, but most people would consider €488,000 for financial services over eight years a reasonable reward. A contract of that value should have been put out to public tender. Interestingly enough, a payment of €48,000 was made to the company secretary for advice on the Mullarkey case. If the advice had proven beneficial and cured a difficulty for the company that had been raising its head time and again at considerable cost to the Exchequer, this would be fine, but what advice did the Irish National Stud get for that €48,000?

There are other significant issues, such as with the procurement of chandeliers, but the brief time available to me means I cannot go into questions of syndicates, conflicts of interest and buying shares in syndicates to the exclusion of outside investors who would bring benefits to the company. The committee needs to tease out the last matter in greater detail.

A cloud hangs over one of the few industries in which we are world leaders. The Irish National Stud is the engine of that indigenous industry. It is essential that we deal with the issues of the past openly. Only Mr. Osborne, as a new CEO, can do this. They must all be put on the table. By and large, they are the issues of his predecessors. What we do not want is a series of revelations week in, week out, which would undermine the credibility of an industry of such significance. The only way this will happen is not by dragging the Irish National Stud kicking and screaming to the table of accountability, but by it putting the information in the public domain voluntarily. Once and for all, we could establish a clean slate and serve an industry, pardon the pun on the National Stud's core activity, that has potential at a time when our nation is desperately seeking heroes and industries that will create and sustain jobs.

Mr. John Osborne

I thank Deputy Creed. There are many different strands of questioning here. There is an interesting anomaly in the code of conduct for the governance of State bodies whereby directors are asked not to do anything that is detrimental to the company. If an active horse breeder who has great success is forced to transact all of his or her business with stallion farms which are in competition with the National Stud that is fundamentally detrimental to the activities of the stud. So——

Deputy Michael Creed

That is not what I am suggesting

Mr. John Osborne

I am only highlighting one of the conflicts around which we try to work. People are doing the stud a favour, if one likes, by using its stallions. They are sending a signal to the market that they are happy to use these stallions and they receive no preferential treatment in so doing. Given the sensitivity of the issue we commissioned a study a number of years ago to look into the directors' dealings in terms of how they compared to ordinary Joe public. We discovered the directors were unfairly or excessively harshly treated relative to the ordinary person who walked in off the street. In other words, the non-directors received better treatment than the directors in their dealings with the company. That was because of the degree of sensitivity attached to that issue.

Regarding what we have done, we are constantly trying to improve it. Even the code of conduct was updated in 2009. The legislation and standards expected evolve. We now have a dedicated HR person who deals with all personnel issues. It is not a huge workforce and it may have had a disproportionate amount of issues over the years but we have addressed this by bringing a specialist into the area. We are aware of the need to beef it up. We now have an in-house accountancy function which has greatly strengthened the management structure. We have a team. This is not just words. Three of us are working twice a week on the very subject of compliance and governance issues to ensure that it is not merely a ticking of boxes but something actively happening within the building all day every day. Standards have always been high, will continue to be so in my time, and, I hope, will improve.

I cannot comment on the specifics of certain issues, as the Chairman is aware. All I can say is that this has been a great opportunity for me to move on and say, "This is how we're going to go forward". This is the opportunity to say that lots of things were different in the last decade and things are going to have to be different from now on if any of us are to survive in business and meet the challenges we face. I have been open and frank about the situation concerning many points. Financially, we are under as much pressure as any business at the moment. Our results will be posted in two weeks' time and they will not be pretty. We are going to post substantial losses, of the order of €4 million in 2009. That is an operational loss of €1.5 million and various write-downs and provisions make up the rest. It is a significant downturn and it reflects the global marketplace.

New brood mare registration numbers are down 30% for two years running. The average age of the brood mare herd is creeping up every year. The number of stallions serving the market is falling dramatically, as I highlighted. As the Deputy pointed out, the danger of rapid deterioration in what was a hero industry is very real. We face that threat and do not shrug it off as inconsequential. We have a very big role to play in this and have to work hard at it. My priority is financial stability for the company — and quickly — because we cannot continue to sustain losses of that order.

I wish to point out this is not an immediate drain on the Exchequer. This is surrendering gains made in better times. Basically, we have blown the boom. We had a few good years where a lot of windfalls came our way and in which we made substantial amounts of money. The Invincible Spirit situation has been a great anchor for the finances of the company but his heartbeat is very significant to our finances. That is our reality at the moment but we are working hard to turn that around, mindful of the need to realise that from now on it is not enough to say we comply just because we tick the box. I have to be able to come before the Chairman on any day and say that what we say is what we do, that our standards are what they say on the box, whatever the cost.

I was careful to point out in my opening statement it is vital we have a presence in the major networking events worldwide. It is vital that the company is represented at these places and I can tell members what they are. There are various events throughout the calendar at which everybody worldwide gathers and where the most business is transacted. We cannot say we will stay at home and wait for something to come our way. We have to get out there and work for it. There are going to be expenses in the future. We will be careful about the style of the expenses and see they pass muster and inspection and do not offend. That is the standard we must set. However, we are in a fiercely competitive marketplace. Our competitors have deep pockets and are multinational in that they have full-time paid representatives in all these countries. We do not. We have to get in there among them and try to get our share. We have maintained our share and it is fair tribute to the staff that we have done so. That is the legacy of 60 years of tradition and doing a good job for people.

There were a number of other issues. I hope I have not——

Deputy Michael Creed

I will refresh Mr. Osborne's memory on my questions because I may have rambled. There were two specific issues. One was on tendering for business with the board, specifically accountancy business. The second was with regard to the advice on the Mullarkey case. What advice was given and was it implemented? If it was implemented why did the problem keep recurring?

Mr. John Osborne

My opening statement referred specifically to Mr. John McStay. I do not know if any members know him but I have known him for a long time. I understand closely how big a part he has played in the workings of the stud and how personally he takes its whole business. Hand on heart, I believe he has always done it out of a spirit of public service and wanting to do the best for the stud. The Mullarkey case was a specific situation in which the chief executive was not able to act on behalf of the company because he was conflicted by the ongoing legal situation and therefore Mr. McStay was pretty much doing jobs that may have been the remit of the chief executive officer at the time. Cost and time were involved. The idea was that Mr. McStay would act on behalf of the company at the time and he was paid for that service. It was a particular service——

Deputy Michael Creed

A mediator made recommendations in that dispute.

Mr. John Osborne

There was a long process and I do not want to go back over it. Let us say the dispute lasted several years and was disruptive to the company. When it became very legalistic obviously there were situations in which we needed greater resource at senior management level and Mr. McStay performed that function. He is an eminent and very knowledgeable man who understands the industry inside out. He was good for the company and probably kept it on an even keel through the difficult period.

The accountancy firm was incredibly good value, which we know because we used other accountancy firms for different jobs. It fell within the framework in which price comparison ought to suffice with regard to value for money or procurement. It is down in black and white how many days and hours his colleague spent preparing the books for the company and we know the billing to the company was of the order of somewhere between 40% and 55% of the normal charge. It was good for the company and we know it was good value.

Deputy Michael Creed

Is that known on the basis of the accounts done for the National Stud presented by Mr. McStay's company?

Mr. John Osborne

We know the hours and days worked so we know how the figure would have been arrived at or how it compared to a potential outsourcing to an agency, for example. The business has become more complex and the financial pressures have become so much greater that it would be much stronger for us from a management perspective to have our own finance function. Ms Lawlor was appointed in early 2009 and we have our own in-house accountancy function now.

Deputy Michael Creed

I will finish on this topic. The Mullarkey case was the first bullying and harassment case but unfortunately there were five others which followed, all of which came at a cost. Advice was paid for and a mediator was employed. Clearly any company dealing with an issue like that would consider work practices and management style after such an event and single out the elements identified in a mediator's report which was paid for. Mr. McStay was also paid to give advice and measures to be put in place would be identified. There was a conflict between the former CEO and Mr. Mullarkey but were steps taken at a management level to address the fundamental and underlying causes of management style which were giving rise to problems of bullying and harassment? It is abundantly clear no steps were taken.

That is a problem inherited by Mr. Osborne and did not happen on his watch. There was a very significant cost and in view of this will Mr. Osborne indicate what provision is being made in the 2009 accounts for the ongoing costs arising from bullying and harassment during the tenure of the former CEO? If Mr. Mullarkey was involved in the first case, the clock is still ticking in respect of cost to the National Stud. Did we implement any changes in management style because of the original case?

Mr. John Osborne

There has been a significant change in style with the new CEO and we are having weekly management meetings. There is a very good atmosphere in the workplace and everybody is working well together. Everybody is flexible and facing the challenges as best they can. I would find it very disappointing if we ran into any of those difficulties in future.

Deputy Michael Creed

Is that acting as if nothing happened under the witness's predecessor with regard to the Mullarkey case?

Mr. John Osborne

I did not say that.

Chairman

I put some questions to the witness but I am not worried if he feels he cannot answer them.

Mr. John Osborne

With regard to the foreign direct investment, I have mentioned all the delegations. That is in the past number of weeks. These people come to Ireland and we are almost the first port of call. They love the place and get a great experience. People often ask why we have a national stud and what is the point. It is a valid question that we must regularly address. I believe, on reflection, that the greatest advantage to the industry is the fact that the State is indicating this is a legitimate business of which we are proud, in which we excel and that we are delighted to put the harp on. It is an Irish business that we are good at and which we welcome.

There is some element of cost which is an investment on the part of the State. It has a significant effect on visitors, who cannot believe the access we have to people in power who understand the business and have a share in the business through racing interests, etc. That sends a powerful signal with regard to people investing in Ireland. Prince Khalid Abdullah, whose horse won the derby on Saturday, has a significant presence in County Kildare on a large farm between Kilcock and Summerhill where he raises young stock. He brings much investment and employment, boosting the local economy. He has farms outside Kilcullen in County Kildare, where he raises young stock as well.

Such people choose Ireland because we have the land and people who understand the horses and can do the job better than others. The tradition built in our area, with success stories like Sea the Stars, sends a signal worldwide and draws such people to Ireland. Foreign direct investment follows from that. It is not just about off-farm sales but the sale of farms and the conversion of farms from extensive use to a labour-intensive use, which stud farming can be.

With regard to the non-executive board structure, it is not for me to decide. Looking back, there has been a mixture of expertise available within the board, which has always been the objective. The majority of members have had more than a passing interest in the business for obvious reasons. It is a specialist business which needs specialist and quick decision making, especially when it comes to the purchase of stallions and mares. The mixture ought to have a number of people interested in horses, bearing in mind the possibility of conflict of interest that may arise. That is why I keep saying the process must be robust and pass muster. It must stand up to inspection, which is why we have been sensitive to that fact.

Deputy Martin Ferris

I thank Mr. Osborne for his presentation. I concur with Deputy Creed in that all of us have only one interest, which is not to damage the company and ensure it comes out of this okay. Many questions must be asked, particularly with regard to the recent press allegations and the damage done to the company. Related to this is how the company has been working and changes, if any, made or that will be made. There is a significant concern specifically concerning bullying or allegations of bullying, which has been an issue over the past ten years. The interest of the industry is paramount to all of us because we recognise the value to the Irish economy now, in the past and I hope in the future.

Mr. Osborne stated in his presentation that board members were actively encouraged to do business with the company but he did not say by whom. The board was set up in 1946 and I assume it is the governing body of the company. Were board members actively encouraged by the company or the directors?

Mr. John Osborne

It is stated on an annual basis in the company accounts. The rationale is as I described it. If the directors are happy to do business with the company, our clients are reassured by that and it sends out a good signal. They are meant to do what is best for the company, and one of the best things to do is boost turnover by putting business our way. That may give rise to a certain element of conflict but as long as it is transparent, that conflict should be reduced. It is eradicated by the light shone on the issue.

It has been good for the company that the people involved are horse people who have mares that need to go to stallions, and it is best that they come to our stallions. If they were prevented from using the services of the stallions, it would create a ridiculous situation where people were running one company but using the services of a competing company. That would be bad for the INS, would create great amusement among our competitors, but would not serve anybody. Our owners certainly would not be too happy.

Deputy Martin Ferris

Where there is a conflict of interest involving a board member, then whose interest does the board member represent?

Mr. John Osborne

If the person is conflicted, then he absents himself. The disclosure is spelt out. The CEO discloses to the chairman and the board discloses to the company secretary. If a conflict of interest directly impacts on somebody's decision making ability at the company, then the person is not party to the discussion. Much of the business does not impact on the welfare of the company at corporate strategy level, but rather at operational level, where they are sending mares to be foaled in the foaling unit. That will not create any company law issues. That will only be good for the turnover for the company and it shows that people are availing of our services. When they send their mares to our stallions, it leads to turnover figures that cause a sharp intake of breath when we see them in the newspaper. However, if they spend their €10,000 for a stallion service fee with us or with our opposition, then which is better for the INS? Which is better for the Department of Agriculture, Fisheries and Food? Which is better for us all? Surely it is better if the director sees fit to use the stallions that we stand. These figures are substantial but the flip side is that the turnover goes elsewhere.

There is no strategic conflict in this. There would be a conflict if one of them had a stallion prospect for which they wanted to find a home or sell to the market. That would be a huge conflict, but it would be flagged and that situation has not arisen. Most of the turnover figures on disclosure items refer to turnover at an operational level and do not involve strategically conflicting issues.

Deputy Martin Ferris

Mr. Osborne said in his presentation that the INS is currently loss making, with a falling turnover and a high cost base. How long has that been happening? What steps does the INS intend to take to rectify this?

Mr. John Osborne

The year 2007 was a turning point all over the world, including our world. The number of players in the market has fallen. The number of mares in circulation has fallen, as has the number of stallions retiring to stud. The number of people still in our business has fallen, just like in every other business. Our tourism visitor numbers have fallen, in line with national trends. All of this is in line with global market trends.

Another significant factor is a change in market behaviour. At one time the vast majority of mares visiting our stallions resided on the farm for six, eight or ten weeks. Nowadays they are with us for half an hour. They are driven in, they are served by one of the stallions and they depart. In the last five years, what we call "walk-in covers" has risen from 10% of the business to 70% of the business. The structure of the stud farming business has changed dramatically and very quickly. That came at a time when many other changes were taking place as well in the global market place and in the Irish industry.

The fall in turnover is relatively recent. We hit a peak in 2005 and 2006. We are working on the cost base. We see where we can make substantial savings. It will take a couple of years to make it happen, but we are working on everything. We have looked at every expenditure item. We expect to be cash positive in the next 12 months.

Deputy Martin Ferris

In respect of the travelling expenses incurred by his predecessor, Mr. Osborne said that events attended were chosen to obtain the maximum return and that the travel plans were always discussed and the guidelines adhered to. Did the travel plans include the cost of travel? To what guidelines is he referring?

Mr. John Osborne

I can tell the Deputy the events that would be considered unmissable by the industry and where the maximum number of people are present in the same place at the same time. One such event is taking place next week at Royal Ascot. There are sales in Keeneland in November and Newmarket in December. These are the events that everybody attends and it is where most of the business is done. We could lay out our year in January and figure out what events we have to attend. This would have been done at board level from year to year.

It is slightly coy to say that we adhered to the guidelines. The guidelines specifically state that there is no first class travel. There was never first class travel, although there was business class travel. This is an ongoing issue. It explains why the numbers are so large. The concept of business class travel is the subject of debate everywhere we go. It is widely accepted that business class tickets for long-haul travel represent a productivity gain, even if they come at a cash cost, as the person to whom we are paying a substantial salary is better able to perform to the maximum having availed of a proper business class flight. Some people would argue against that. The guidelines specifically state that there should be no first class travel, so first class travel was not used.

Everybody knows that last minute tickets come at a huge premium. Circumstances occasionally dictate that somebody wants to meet a company representative immediately, which could lead to a significant gain for the company. Are we going to sit at home or are we going to buy the last minute ticket? On occasions where a deal had to be done, then the ticket price was not significant in light of the sums at stake.

We could analyse this for a long time. I will be present at some strategic events. We will address issues of style. We will still be incurring what are really promotional and marketing expenses rather than living expenses. That is what much of this headline figure represents. It was a promotional and marketing exercise as much as anything else.

Deputy Jack Wall

I apologise for the absence of Deputy Sherlock. He was held up this morning in Cork and unfortunately was not able to make it.

I welcome Mr. Osborne and Ms Lawlor. I wish the current CEO well. His efforts to improve the National Stud were undermined by past events. The man is entitled to move forward in a positive vein. I am not stating that what happened in the past is acceptable and I want to state that clearly. However, progress is needed at present because of the change in the economy, not alone here but worldwide. We must think of that and see what we will do about it.

The Minister for Agriculture, Fisheries and Food has already appointed two directors in Seán Brady and Jessica Harrington, both of whom have backgrounds I imagine will be helpful to progressing the stud. Jessica Harrington is a renowned trainer in south Kildare and Sean Brady has a background in agriculture and business, accumulated during years of previous employment. I see their appointment as being positive.

However, four outstanding places remain and they need to be filled. I hope the Chairman will mention to the Minister that we want those positions filled. We want a full board to make decisions and for that board to be active and vibrant, and to see and understand the problems that exist and address them.

I visited the National Stud and it is a magnificent facility. The work done and dedication there has to be seen to be believed. Deputy Ó Fearghaíl and I are from Kildare, which is called the thoroughbred county because of the involvement with the bloodstock industry. Thousands are employed in Kildare through the industry, and it has three racetracks in Naas, Punchestown and the Curragh. We see the value of having a proper structure in place.

I was concerned about how the small breeder fits in. We speak about Royal Ascot and other such meetings but they do not seem to fit in with the small breeder and farmer who is facing difficulties. When I asked about this at the National Stud I was told there are stallions which meet the budget of such small breeders. As such, one can see it is not only about big spenders. Clearly they are important because they represent a greater turnover but there are facilities for small breeders and that is as important in the present circumstances. The line of business that exists facilitates everyone.

Tourism figures have decreased slightly and perhaps Mr. Osborne will speak about this. However, they are still above the national average. What extra work is being proposed on improving the two gardens or making them more accessible for visitors? They are in mint condition but what is proposed to make them more presentable for families? On a recent visit, I saw Vintage Crop and Florida Pearl; it was unbelievable as one never thinks one will see such horses after they compete. People were taking photographs of them.

I want to see the National Stud moving forward and a mechanism put in place by a full board for it to address the problems outlined by Deputy Creed. I do not want us to be looking over our shoulders all of the time; that would be destructive rather than productive and would not do the Irish bloodstock industry any good. Let us address the issues as soon as possible. Let the Minister fill the board and let the board examine the matters, state mistakes were made and that they will be addressed. The present CEO has done much in this regard and has good interaction with the staff at weekly meetings. I understand the senior staff had not had a meeting in 27 years but I could be proved wrong on that. There is a need for this and I can see a constructive approach being taken.

What write-down was there in the valuation of stallions from 2007 to the present day? The numbers suggest the National Stud made a loss of €4 million. However, to the ordinary punter that is not the true figure. It may look in the books as though it were €4 million but in reality that is not the figure, it is €1.5 million. The write-down on the valuation of stallions should be mentioned.

What is the percentage of use of the stallions by mares of the directors? We speak about them using them and I think that is only right. It seems crazy to me that if Michael McStay is a director of the National Stud, and he has a mare which all the form books state should be covered by a stallion that is there, he should not have to go down the road to somewhere else because he is a director. That would be crazy. It would be bad business and would be a bad indication of the product he is trying to represent. It would defeat the purpose of what the National Stud is all about. Perhaps directors' mares represent only 10% of all the coverings that took place but it is an important figure to have out in the arena to state these people did not take over a huge percentage of what was available to the public.

Chairman

I will convey the Deputy's request with regard to the board to the Minister.

Deputy Bobby Aylward

I understand the four appointments will be made shortly.

Deputy Seán Ó Fearghaíl

I grew up in Kildare and have lived beside the National Stud all my life. I have been very conscious of its development over the years, and of the enormity of the difficulties in running a stud which is a major international enterprise as an open house where more than 100,000 people come every year. That is not a challenge that faces many other stud farms, which are closed entities and can get on with their business in a very effective way.

It is reassuring to hear members from all sides of the House acknowledge the importance of the stud and its significance. Deputy Creed referred to the business of staff relations, bullying and intimidation. Living locally that is something of which I would have been conscious over the years. Equally, it was a matter of the style and personality of those who were there in the past.

We would have to state that the appointment of Mr. Osborne is a very positive signal to the community. People know him and his family and they know the contribution he and his family have made over the years to the industry. There is great public anticipation of a new era of openness and positivity in how the National Stud does its business and how it engages with the local community.

Deputy Creed also mentioned syndication and the question of how board members dealt with the bringing of mares to the stud. These are major issues in how they were presented in the national and local media.

Other minor procurement issues also arise. Deputy Creed spoke about the issue of chandeliers, which is undoubtedly a reference to Lady O'Reilly and the fact that the stud is lucky to have her as chairperson of the board given her international renown in the bloodstock industry. It would be unusual if the gift shop in the National Stud did not carry goods of the renown of Waterford Crystal. Can Mr. Osborne confirm that the purchase of such materials is related to the day-to-day operation of the gift shop? Reference was made in the national press to the procurement of a horsebox. This was a cause of concern because a board member was related to somebody in the motor industry. Did the investigation of these matters in the aftermath of the public controversy uncover anything untoward or extraordinary in the procurement processes? Is Mr. Osborne satisfied with the manner in which business was conducted?

I thank Mr. Osborne for setting out his stall so clearly and comprehensively. The stud has been given a valuable opportunity to clear the air and put the public record straight. There have been significant problems in style and personality but these are in the past and the stud has an opportunity to continue the role it played for the past 60 years in progressing the Irish bloodstock industry and generating international revenue.

Chairman

It was important that we heard the views of the two local Deputies, who have great knowledge of these matters.

Mr. John Osborne

It is interesting how matters are portrayed. Our gift shop caters for our 100,000 or 120,000 visitors and we try to stock as many high quality, Irish-sourced items as we can. Waterford Crystal goods were among the line items we sold over the years.

Deputy Michael Creed

Rightly so.

Mr. John Osborne

The revenue was grossed into a big figure but the products were sold for a profit in the gift shop. We received 40% of the price.

On the procurement of the horsebox, the individual in question is delighted and proud to be the first Kildare man to be a director of the National Stud. His local knowledge was very useful to us and he helped in many different ways. Various strands of legislation can work against one. I spoke about the change in the way our business is conducted in respect of walk-in covers. We needed a box which would safely allow us to transport a mare and foal. Furthermore, we found that students were driving between yards with employees thrown in the back and the health and safety people said, "Thou shall not". We had to discontinue the practice because insurance issues would arise in the event of a car crash. We needed a crew cab, therefore.

We decided that we would make an investment in a vehicle that would be useful in various roles and identified a specific type of box that was new to the market and contained a crew cab that could accommodate six passengers as well as being able transport a mare and foal. We went through the procurement process and received quotations on the only locally available alternatives, which were second hand boxes that did not include crew cabs. To comply with procurement legislation, we sought a price abroad. In the end, the agent for this new type of vehicle was local and we made our purchase from the local guy. He was a director of the company and it looked tricky but we completed all the stages and the purchase was above board. We even have the invoice from the French manufacturer which shows that the margin on the transaction for the local garage was 3%, or approximately €2,000. If we are subject to that level of micro-management, we will almost close us down.

Chairman

The stud gave employment to people to construct the vehicle.

Mr. John Osborne

It enabled us to have it serviced locally. It was a good result and it was not the underhand arrangement that was alleged. There was very little in it for the local person but it was a perfect solution operationally for the company.

Deputy Wall asked about numbers. We are conducting a strategic review with Fáilte Ireland, in which regard I will be meeting a representative from that organisation this Friday. Our numbers are down but not to the same extent as the national trend, partly because we are celebrating the 100th anniversary of the Japanese Gardens this year. Tourism is a major reason for our existence. It is not a significant source of revenue compared to the stallions but it is probably equally significant in terms of what we can do for the industry and the country as a place to visit and an introduction to a business that people may never otherwise experience. We will develop three strands in our tourism business, namely, horses such as Vintage Crop, the Japanese Gardens and St. Fiachra's Garden and heritage. We are also involved in the discover primary science programme for school children and we encourage school tours from an educational point of view.

Deputy Bobby Aylward

I wish Mr. Osborne and Ms Lawlor the very best in their new positions. I hope Mr. Osborne's work is not overshadowed by the past events we have read about in the newspapers and I trust good corporate governance will be the name of the game from now on.

I presume the board is appointed by the Minister for Agriculture, Fisheries and Food. How many members does it have and how long are their terms?

It is disappointing to learn that the stud lost €4 million in 2009, although that is probably not a big amount of money in the scheme of things. What profits did the stud earn in the good years? I presume it has developed a financial plan which will restore the operation to profitability.

A stud farm of 1,000 acres, seven stallions and 15 mares is great for the country. We are world leaders in this industry and we should keep that position. I would like the stud to bring us even more worldwide fame.

There are several stud owners in County Kilkenny.

Chairman

As well as hurling.

Deputy Bobby Aylward

We have brood mares and good stallions as well as hurling. Has the National Stud encountered problems in collecting fees since the downturn? Does it work on a no fee, no foal basis?

Mr. John Osborne

Directors can serve for a term of three years before they have to offer their resignation to the Minister, who can accept the resignation or reappoint the director. Last year two directors rotated out and two more are due to leave this year. The term can last three or four years because there is sometimes an overlap. Two directors retire each year. That is how it was set up.

Deputy Bobby Aylward

How many members are on the board?

Mr. John Osborne

It is a seven person board consisting of a chairman and six directors.

On the issue of debtors, as with every other business the Irish National Stud has had more than its share of difficulties in that regard. We have an international clientele and collecting from far flung places can present a particular difficulty. We are trying to work with people on this issue as many of them are in a difficult position. In certain places, the money simply is not available and we must try to assist the individuals in question to get their animals to market and do the best we can to generate money again.

On write-downs, stallions and so forth, I made a presentation on this matter to the bank a few months ago. If one takes the original State investment, the value of our stock and stallions alone exceeds the original State investment. God forbid that it would occur but if we were to liquidate only the four legged, the State would be comfortably clear on its investment.

In the past, when there was a windfall it was generally invested in plant and so on. The facilities I mentioned are investments made in good times and we are all reaping the benefits of them. They include the visitors centre, museum, offices, leisure facilities for staff, student accommodation, in excess of 400 stables dotted around the place, a couple of land acquisitions to replace the land severed by the motorway and St. Fiachra's Garden, a millennium project which cost €1 million. In addition, we have had ongoing investment in upgrading and freshening up the Irish National Stud to improve what we offer. I hope we will continue this investment process if we overcome the current financial difficulties.

The National Stud has never been an annual drain on the Exchequer. While it is a shame to be in a loss-making position because it constrains what we could do, we will soon be better fixed and I have all sorts of ideas about what we could do in such circumstances. I hope that an upswing in the market combined with efforts to tighten up what we do and how we do it, we will see better times ahead.

I echo the sentiments expressed by Deputy Aylward's neighbours in south Kilkenny as regards debt collection. That is the position in which we find ourselves and we are working on it.

Deputy Bobby Aylward

Does the National Stud work on a no fee, no foal basis?

Mr. John Osborne

We always try to give good terms to breeders. Most of our deals are done with a concession that if breeders pay by a certain date and subsequently encounter difficulty, they will receive either a free return or their money back.

Deputy Bobby Aylward

I presume the National Stud had profitable years. What type of profits has it made?

Mr. John Osborne

We are involved in a very cyclical business which has had good and bad days over the years. Our profitability is virtually in line with whatever index one wishes to track it with. If business is good, the horse business is good although there may be a slight time lag between business generally and our business. In good times our highest recorded profits were approximately €9 million. However, these included profits from a land disposal and other matters.

The Invincible Spirit deal shows what can happen to an investment. The horse cost in the region of £2 million and the Irish National Stud owns 40% of him. He was re-syndicated and has a current market value of approximately €25 million, which means we have a €10 million investment in one horse that was bought for an initial outlay of approximately €700,000. This type of uplift is available when one gets it right. When one gets it wrong it is a pretty brutal business.

Deputy Bobby Aylward

Will Mr. Osborne elaborate on how the public-private partnership works? Does the National Stud have a certain share with private citizens holding the remaining shares?

Mr. John Osborne

The public-private partnership is a way of financing a huge up-front cost. Stallion prospects cost millions. It would be a tough bet for the National Stud to make one bet of that order on one horse, considering that only a small proportion of these horses are long-term successes.

Some of Deputy Creed's comments relate to the position in the 1970s when stallions were limited to 40 mares per annum and securing access to them was a problem. This resulted in applications to use a particular stallion being decided on the basis of a ballot. Some of the constraints placed on directors at that time referred to ensuring that the ballot was above reproach, every breeder had an equal chance and directors were not favoured. Those days are long gone. The book sizes are now large and stallions now cover many more mares per season. We have more than 100 mares for four of the stallions this year.

In a strong ownership structure introducing shareholders to go with our shareholding spreads the risk and attracts a large number of mares to the stallion. This means the stallion covers a good solid book of mares every year. It is a good way of spreading the risk and gives us a better chance of buying the stallion prospect when it arises.

While I would not describe them as allegations, Deputy Creed hinted that some people felt excluded from the party, so to speak. That is not my experience. As a large up-front cost, not everyone is prepared to make such a bet. I have asked our clients — those who are in the business and send mares to us — whether they would like to take a share if we find a stallion prospect this year, in other words, whether they are prepared to enter a partnership with the National Stud in the purchase of a stallion share. The opportunity is available to people who make themselves known to us. We would like to work with such people because a broader ownership structure is better for all concerned. It is a good system from the company's point of view in that we are not over-exposed to a single animal. We would like to have a stake in stallions to benefit when the upside comes.

Chairman

Perhaps the next speaker, Deputy O'Keeffe, will take some shares.

Deputy Edward O’Keeffe

I welcome Mr. Osborne and Ms Lawlor. It is not right to hold our guests responsible for the sins of the past. I give them a clean sheet and wish them well in their endeavours to put matters right. The problems alluded to are part of a worldwide trend in both the private and public sectors. Every day, the newspapers feature bad news. It is about time we gave people hope. A statement by the United Kingdom's Prime Minister the other day was frightening but the problem is a global one.

How often did the board meet? Did the chairman take a hands on approach or was he reactive? Did he simply come and go? My colleague, Deputy Creed, placed great emphasis on corporate governance. Corporate governance has collapsed because audit committees in private companies and public organisations are a bloody joke. While I do not wish to dwell on history, the manner in which audit committees were appointed and their failure to report back to the full board raises questions about corporate governance. We have learned about their role on the issue of remuneration and in the banking sector.

How does the National Stud propose to write off its substantial losses? Will they be carried forward? If so, they will impede the success of the business.

The National Stud is involved in a world class business. As a small country, Ireland is highly dependent on world trade, whether in the equine business, the food sector or other markets. Great play is made of the manner in which we travel and spend money abroad. However, as a small country we must trade. We must not allow Ireland to acquire the image of a Third World country. Some people would have us travel on the back of a bus or on a donkey and cart. We left that behind us in the age of leprechauns. All sorts of people argue that we overspend. If we are to sell Ireland, the country must have a good image. Irrespective of who travels, if they do not stay in a good hotel, travel on a good airline or arrive at an exhibition or trade fair in a good car, it is a minus for Ireland. In my experience travelling abroad I see people from the poorest countries in the world spending much more lavishly than we have spent. While we depend so much on trade and export 90% of our goods, with the horse breeding business similar, we must address this issue. The small minded approach, which is returning in this country whereby we have the kind of inward thinking that we are doing this through exorbitant expenditures, needs to be addressed in a different way. If we fail to do so we will just be an island surrounded by water with no one to talk to us as we will not have the image and will be seen as poor people with a Third World image. Politicians need a broader vision of things. We need to get out of the morass we are in and we will not do that if we have this inward image that we are nobodies.

Mr. Osborne mentioned countries such as South Korea, Japan and Australia which is an enormous country in terms of the horse business. Ireland has a linkage with Australia in equine business. We need to develop that further which will entail significant expenditure on travel and other costs. I support all that. The Irish National Stud was founded in 1946 at a very difficult time in our history just after the Second World War. I commend the people who founded it whoever they were. I understand its operation has a capital value of €13 million, which is a very large amount if it could be realised tomorrow morning.

Along with some of my colleagues here, I attend horse race meetings occasionally and I have had the privilege of owning a few horses in the past. They were worse than the shares, I must say.

Deputy Michael Creed

I did not see mention of the horses in the Deputy's declaration of interest.

Deputy Bobby Aylward

So long as there is no money on them now, the Deputy does not need to declare them.

Deputy P. J. Sheehan

Does the Deputy have shares in Red Rum?

Deputy Edward O’Keeffe

There is more horse activity in your constituency than there is in mine.

Chairman

The Deputy should address his remarks through the Chair.

Deputy Edward O’Keeffe

The industry is worth €200 million and gives significant employment. The State makes a contribution, which in future might not be as lucrative as it was in the past. I wish the Irish National Stud well and look forward to visiting its facility — I have not been there yet. We have read about and hear about it. All the bad things are overshadowing the good things. Historically it has done well for Ireland and our equine industry. I wish Mr. Osborne and his staff every success in the days and years ahead.

Chairman

A few other members are offering. As they may not take too long perhaps they should all speak together.

Deputy P. J. Sheehan

I have just a few——

Chairman

Senator Bradford is before the Deputy.

Deputy P. J. Sheehan

I am prepared to wait.

Senator Paul Bradford

We shall leave the best wine until last.

Chairman

I trust Mr. Osborne does not mind.

Senator Paul Bradford

I welcome Mr. Osborne and Ms Lawlor. If my memory is correct I believe it was 1988 when I last saw a delegation from the Irish National Stud before the then Oireachtas Joint Committee on State-Sponsored Bodies. There has been much water under the bridge since then. I do not even recall the big issues in 1988, but we have all seen the changes in the horse breeding industry. We are all very proud of what the Irish National Stud has done for horse breeding in this country and it is the flagship of our equine sector. However, all sectors need a review of management which is why the witnesses are here. We are not asking them to account for sins of the past, in a sense, if they exist. However, we are certainly interested in their plans for the future. I listened with some concern to Mr. Osborne's comment about the losses of €4 million. I do not know the exact context in terms of turnover. I acknowledge that the sector is in a downward part of the cycle, which always happens in horseracing. Hopefully better times will come again.

Regarding the core activity of selling nominations, I would be the first to acknowledge that Mr. Osborne is leading people from his own position down. It is not possible for Mr. Osborne or the former CEO to run the business entirely from an office in Kildare. The chief executive and others in the company must certainly travel, seek business and be ambassadors for the company. We could have a lengthy debate on some of the expenses, including flight costs, etc., which have been presented to us. I concede that that work must be done and we must seek the maximum value for money. It is important that the Irish National Stud is fully represented at all the sales opportunities, be it at sales, races or whatever. Mr. Osborne and his predecessors traditionally have represented the company as the salesperson at Royal Ascot, Newmarket or the sales in the US or Japan. As the Irish Thoroughbred Marketing does, should the Irish National Stud have a more hands-on sales-type agency within the company apart from Mr. Osborne having to be seen as the ambassador here, there and everywhere? Should we have a number of designated staff with a marketing and development perspective?

Mr. Osborne mentioned that the heartbeat of Invincible Spirit was important to the company. Obviously a very significant percentage of its revenue is being generated by that sire. Every big stud farm needs a flagship sire. It is very disappointing that the Irish National Stud's flagship sire is not Sea the Stars, a racehorse the likes of which we will probably not see again. His mare boarded on the property of the company. Why is Sea the Stars not standing at the Irish National Stud? While I accept it sounds bizarre, is it correct that there were opportunities to purchase on behalf of the Irish National Stud shares in Sea the Stars in the autumn of 2008 when he was concluding his two-year-old career? I admit that none of us are visionaries. As we have seen, the top two-year-olds do not always become the champion three-year-olds. However, he would still have appeared a leading prospect in autumn 2008. Did the board have an offer and consider taking a share in Sea the Stars in 2008 or did such an opportunity again present itself in the early part of 2009? If that stallion was now standing in the Irish National Stud it would absolutely secure the stud's long-term future. As far as I know, the owners of Sea the Stars had a long-term involvement with the Irish National Stud through their mare, Urban Sea. In so far as Mr. Osborne can discuss the company's business with individual clients, is that family still maintaining its involvement and boarding mares at the Irish National Stud or how stands that relationship now? Was there an opportunity for involvement with Sea the Stars? Were offers or suggestions made to the board to allow the Irish National Stud to purchase a proportion of Sea the Stars and if that was the case, why was it not followed through?

Deputy P. J. Sheehan

I thank Mr. Osborne for his comprehensive address to the committee. He has set out in no uncertain fashion problems that exist with the Irish National Stud and how they will need to be overcome in years to come. Either we are in this game or we are outside the game. It is important that Ireland with its unique history of horse breeding through the years should achieve the paramount success it is bound to achieve if it goes down the right road. I do not want to see the new CEO muzzled with regard to developing and expanding the prospects of the national stud, which is the flagship of the Irish bloodstock industry. It is of paramount importance that we proceed along the road of success and expansion. I dislike the move afoot towards penny-pinching in the reports we see in the media about expenses in hotels and elsewhere. If we want to maintain our image internationally, we must maintain our image when we go abroad as well. I fully agree with Deputy Edward O'Keeffe who said this must be nipped in the bud. It is disgraceful to see reports in the national newspapers of the tips given for service in hotels. The bloodstock industry is of such magnitude that if it is handled in the proper fashion, it will pay rich dividends to the nation.

I congratulate the bloodstock industry which employs 22,000 people in a rural based, environmentally friendly labour intensive business and in which it is a world leader. We must maintain our impetus and stature in that industry. I am envious of the people of County Kildare who have such a valuable national asset as the Irish National Stud on their doorstep. It is a pity my colleagues in Cork South-West, Deputies Jim O'Keeffe and Christy O'Sullivan are not with me today, because we would bemoan the fact we did not have that industry based in Bandon.

Chairman

I do not think the Deputy would worry about the other two. He would like to get the stud in his area.

Deputy P. J. Sheehan

Be that as it may be, the Irish National Stud is a jewel in the crown of whichever county it is in. It is a flagship for the Irish bloodstock industry and has 150,000 visitors each year. Are visitors charged for admittance?

Mr. John Osborne

Yes, they are.

Deputy P. J. Sheehan

Therefore, there are rich dividends from the tourism side also. It is magnificent that the stud attracts so many visitors, 70% of whom are more than likely international visitors. I am sure some come from as far away as Japan because of the Japanese Gardens which are part of the project.

We must bury the hatchet on the issue of expenses. I am well aware that there can be variations in travel expenses and so on. The document I have here details the expenses of Mr. Clarke.

Chairman

The Deputy should not name him.

Deputy P. J. Sheehan

All right. Who is responsible for Tully House? Is it owned by the stud?

Mr. John Osborne

Yes, it is.

Deputy P. J. Sheehan

Therefore, whatever has been spent on Tully House has made it more of an asset to the Irish National Stud. If that is the case, why are there complaints about the bill for the new patio at Tully House? With so many visitors coming through the gates, perhaps the condition of the patio had deteriorated and it needed to be renovated. This should be taken into consideration before criticising the expenses.

The Irish National Stud has defended its expenses bill for its seven-member board of directors, which totalled €85,397 between 2001 and 2009. If we divide the total by the number of years, we get an annual figure of approximately €9,500 per year. That is a very modest amount for a seven-member board and should not have given rise to a need for investigation. If we are to penny-pinch in this regard, our bloodstock industry will be the loser. However, I have no doubt but that under the guidance of Mr. Osborne and Ms Lawlor the national stud will achieve success.

Chairman

I call Deputy Doyle now. I hope he will not need too much time as I have another meeting to chair at 2 p.m. I ask Deputy Aylward to take the chair while I go for a cup of tea. If I do not get back before the finish, I thank the delegation from the Irish National Stud. We look forward to visiting the stud later in the year.

Deputy Bobby Aylward took the Chair.

Deputy Andrew Doyle

I apologise for not being able to be here for the start of the meeting and thank Mr. Osborne and Ms Lawlor for their presentation. It is a pity the Irish National Stud has been pulled into a controversy such as this because as a result of prudent investment by the Government down through the years this industry has been one of the few resources in which we have an edge and can compete on a world-wide scale as one of the best, if not the best. For the industry to be dragged into controversy for something which in overall relative figures is minuscule is a shame.

If the industry is to compete on the world stage, members of the Irish National Stud should and must consist of members from the industry. It is unacceptable that its members should be members because they are friends of a politician. We have complained about the composition of boards down through the years, where people with nothing to do with an industry or with no expertise in the area were put on a board. If a board member happened to be the right man to train a horse, he should not be disbarred from the board. It is horses for courses.

The opportunity to have a new chief executive and management team offers the chance now to clear up any bad practice that might have existed or that might taint the industry. I welcome the establishment of a compliance team which has been holding weekly meetings and going through the legislation. The continuing success and good reputation of the Irish National Stud are dependent on ensuring that practices that would taint that reputation are ended forthwith. I will keep an open mind until the board, when it is fully constituted, has an opportunity to carry out its business.

I agree with Deputy Wall in respect of the assistance the Irish National Stud provides to jockeys and farriers, among others, and small operators. I have a number of half-breed horses but no thoroughbreds. However, I know many people who own thoroughbreds. The Irish National Stud is seen as the natural port of call in respect of assistance and it needs to develop its services in that regard.

On 14 February — St. Valentine's Day — my entire family and I visited the Irish National Stud. It was a great experience. The previous occasion on which I visited was when I wheeled my now 20-year old around it in a buggy. Everyone should be proud of the Irish National Stud. I just hope Mr. Osborne does what is necessary to ensure that its reputation is kept intact.

Mr. John Osborne

Senator Bradford referred to Sea the Stars, which is a privately owned racehorse. In such circumstances, the owner is in a position to make whatever decisions she sees fit. We were lucky enough to have Urban Sea living at the Irish National Stud. The strength of the Irish National Stud, as a brand, is what brought her there in the first instance. She lived at the stud for six or seven years. There is only so much one can say in respect of such matters.

Due to the fact that Sea the Stars was foaled and raised at the Irish National Stud before being transferred to the care of a former chairman of the stud, Mr. John Oxx, we have always monitored his progress closely. He is a most beautiful horse. Even as a two year old he was obviously a contender but he was not yet the real McCoy. We entertained great hopes that one day he might return to us.

Members referred to expenses. The owner of Sea the Stars lives in various places across the globe and the board took a decision to investigate whether there might be a possibility of purchasing an interest in him when he was a two year old. This would have been a huge punt on the part of the stud. However, the board decided to at least investigate whether the owner was prepared to do business. Unfortunately, she was not so disposed. She made a very good business decision in that regard because in the following 12 months his value probably multiplied tenfold. It was nearly a great investment for the stud but it did not happen.

As 2009 progressed, Sea the Stars became one of those once in a decade or once in a lifetime horses and his value exceeded anything we could possibly finance, even with the sort of ownership structure I have outlined. We could not have found enough shareholders with a sufficient level of resources to allow us to buy a horse of that value. It came down to more subtle considerations such as managing the career of a stallion such as Sea the Stars.

If I were the Aga Khan and possessed his wealth and if the possibility of having a stallion such as Sea the Stars arose, members can imagine the lengths to which I would have gone to secure the services of said stallion for my stud. We were not able to compete with the Aga Khan. The owner of Sea the Stars decided to retain the horse and stand him at the Aga Khan's stud. We do not know the particulars of the deal. We are very proud that Sea the Stars remains in County Kildare. This development is as good as a new factory being established in the county. Having a stallion of that calibre in the locality gives rise to a great sense of pride. Sea the Stars is a tourism attraction and it is a shame that he is not at the Irish National Stud. However, that is business. We are still in the game and we are looking for the next great horse.

Senator Paul Bradford

It is important that rumours which are doing the rounds be quashed. I am glad Mr. Osborne outlined the efforts of the Irish National Stud to acquire this stallion. It is only possible to do so much. One cannot force an owner to choose one stud farm over another. The owner made a decision and the stallion now stands in a stud owned by the Aga Khan. However, the latter does not own the stallion. Is there a connection between the current management of the stallion and Mr. Osborne's predecessor at the Irish National Stud?

Mr. John Osborne

I am not sure if I can answer that question.

Acting Chairman (Deputy Bobby Aylward)

Yes, Mr. Osborne should be careful.

Mr. John Osborne

In light of certain considerations, I would prefer not to go into that matter.

Acting Chairman (Deputy Bobby Aylward)

Mr. Osborne is right to exercise caution.

Senator Paul Bradford

It is important that the question I have posed be answered at the appropriate forum.

Deputy Michael Creed

Mr. Osborne has privilege while appearing before this committee.

Mr. John Osborne

I am not being smart but I understand that said privilege is limited in nature. In any event, I am not sure whether I am the right person to whom that question should be put. The nature of the relationship between the owner of a horse and the owner of a stud farm other than the Irish National Stud is something to which I would not necessarily be privy.

Acting Chairman (Deputy Bobby Aylward)

I do not know whether Mr. Osborne is the correct person to whom the question posed by Senator Bradford should be put.

Mr. John Osborne

The truth is that I do not know the answer to the question.

Deputy Michael Creed

With respect, this matter goes to the heart of corporate governance issues. We want to discover whether the former CEO of the Irish National Stud was, while he held that position, the subject of a conflict of interests.

Acting Chairman (Deputy Bobby Aylward)

It is not for Mr. Osborne to——

Deputy Michael Creed

When the individual to whom I refer was CEO, he was also acting on behalf of the Tsui family in respect of Sea the Stars. That is a critical corporate governance issue.

Acting Chairman (Deputy Bobby Aylward)

——comment on the previous CEO. Members are putting Mr. Osborne on the spot.

Deputy Michael Creed

It is our responsibility to deal with the Irish National Stud's compliance with corporate governance considerations.

Acting Chairman (Deputy Bobby Aylward)

The question that has been posed should be put to the former CEO of the Irish National Stud, who could be invited to come before the committee. It should not be put to the current CEO, thereby obliging him to answer for something which happened previously.

Deputy Michael Creed

Is there a court case pending between the former CEO and the Irish National Stud?

Acting Chairman (Deputy Bobby Aylward)

We are entering dangerous territory.

Deputy Michael Creed

It is a simple question requiring a "Yes" or "No" answer.

Mr. John Osborne

The Irish National Stud received a letter from legal advisers to my predecessor outlining certain issues with which they are unsatisfied.

Deputy Michael Creed

Has the Irish National Stud taken legal advice with regard to Mr. Clarke's discharge of his duties? During the time Mr. Clarke was CEO, he should have been pursuing only the interests of the Irish National Stud. If the stud has not yet taken advice, it should do so.

Mr. John Osborne

I will take the Deputy's recommendation on board.

Acting Chairman (Deputy Bobby Aylward)

Members are putting questions to the CEO which he is not in a position to answer. If they have questions regarding the former CEO, he should be——

Deputy Michael Creed

The Acting Chairman is wrong. This matter relates to corporate governance. Mr. Osborne is the current CEO and while he is not personally responsible for the decisions made, he must speak on behalf of the Irish National Stud with regard to its views on the issues under discussion.

Acting Chairman (Deputy Bobby Aylward)

Would it be acceptable for Mr. Osborne to provide a general rather than a specific answer? This matter could yet be considered sub judice because a court case might be taken. We must be careful with regard to what we say.

Deputy Michael Creed

It is not sub judice at present.

Acting Chairman (Deputy Bobby Aylward)

Legal proceedings might be taken.

Deputy Michael Creed

Yes, and it might rain tomorrow.

Deputy Andrew Doyle

Mr. Osborne indicated that he has appointed a compliance team which examines the relevant legislation on a line-by-line basis. Is that with a view to looking forward or looking back?

Mr. John Osborne

It is in the interests of looking forward.

Deputy Andrew Doyle

So it is not in the interests of discovering whether a breach occurred in the past.

Mr. John Osborne

That was not the objective behind putting it in place. All I am saying is that regardless of what went before, we have a firm grasp of what will happen in the future. I need to be in a position to know that we are doing what we say we are doing.

Acting Chairman (Deputy Bobby Aylward)

Does Mr. Osborne want to provide a general observation in respect of the question put by the Deputy and Senator?

Mr. John Osborne

I really cannot comment.

Acting Chairman (Deputy Bobby Aylward)

That is fair enough. Does Mr. Osborne wish to answer questions from the other four speakers before I take supplementary questions from Deputy Creed?

Mr. John Osborne

The majority of losses are depreciation on investments made at the top of the market. That is not unusual. As regards staff dedicated to sales, we are a small management team which does its best to multitask. Everybody is trying to sell no matter what level of business they are at. Our staff represent us at sales. At our first staff meeting I told the staff they are sales people wherever they are in the business. There are 120,000 people coming through the place and I tell the staff they are selling from the moment the first person arrives in the gate in the morning until they depart in the evening. When they go to sales they represent us and wear the badge with pride and in deporting themselves wherever they are they also wear the badge. All tiers of the management structure are in the sales business.

As regards an international management, we would love to have the muscle our competitors have but are slightly financially constrained at the moment. However, we will investigate such developments. We admire the work of Irish Thoroughbred Marketing, ITM, but its objectives are to market Irish horses generally. We must still be cognisant we are selling the Irish National Stud and the services we provide. We are fighting our corner as best we can.

Deputy Michael Creed

I shall put a hypothetical question to Mr. Osborne. Does he think it would be appropriate for him, as chief executive officer, to accept bookings for a stallion other than the stallions owned and operated by the National Stud?

Mr. John Osborne

In my opening statement I mentioned that matings advice is a service we provide to breeders. Obviously, one's first instinct is to sell one's own stallions but any expert or anybody who follows the breeding game would know that certain stallions suit certain mares and sometimes our portfolio does not necessarily reflect the needs of particular mares. We have one stallion that stands for €45,000 and is a proven sire. Our next proven sire stands for €10,000 and we have two stallions that stand for €5,000 or less. We have three unproven stallions which have had no runners on the track.

A person with a mare may specifically want top-end proven stallions in a particular price bracket which may have the very same sire line as ours in that exact bracket and therefore what we have to offer does not apply. We have resident mares in the stud that are owned by third parties which visit outside farms. That is how these mating decisions are arrived at. We cannot limit the service purely to our own stallions because there may be issues of inbreeding or incompatibility that would make the service not apply and therefore we have to be a little bit more broad-minded while constantly trying to sell our own product first.

Deputy Michael Creed

I ask Mr. Osborne to throw some light on the issue of syndicates and resyndication. He also might give some specific insight into the management structure for Invincible Spirit.

Mr. John Osborne

A syndicate is usually managed by what is known as a syndicate committee, usually of three persons who represent the shareholdings. The INS is a servant of the syndicate to an extent. We had a stallion standing with us last year called Elusive City in whom we held no ownership. That syndicate committee decided to relocate the horse to France at the end of last year which was a disappointment to us after investing several years in him. He covered 160 mares last year with us and was a significant boost, at least to our market share numbers.

Invincible Spirit went to stud for a purchase price of £2 million, that figure coming off the top of my head. We own roughly 40% of him and always had a controlling interest in him. We would be one strand of the syndicate committee. Decisions are made in the best interest of the stallion and negotiation is with the INS as regards certain other operational issues, such as the fee at which the horse should stand. The shareholders would have some sort of input into decisions like that.

The resyndication was a unique situation. To follow Invincible Spirit's career, he came to stud as nothing particularly exceptional. He was a sprinter and a good two year old. He was injured as a three year old and his career was interrupted. He re-emerged as a five year old very good sprinter and we kept an eye on him all year. We let the owners know that he had enough to satisfy our needs. His last start was a group 1 in Haydock which he won, and we bought him the following Monday. His foals were spectacularly good-looking and sold for, on average, approximately ten times his fee. His first yearlings came back the following year and sold for even more. Then his first two year olds hit the track and he broke the world record for the number of two year old winners in a first crop. He was a sensation. He had numerous stakes horses among those. This does not happen often. It is once in a lifetime that a horse can start at that level and go to this position. The following year Invincible Spirit had a French Derby winner so he was a classic sire with his first crop. His fee crept up and up as did the interest from abroad.

The market consists of people with speculation instincts who do not mind betting blind and deep-pocketed people who are happy to sit back and wait and see what emerges, see which is the proven sire. They do not care that the price is considerably more expensive. They like the certainty of knowing what they have and do not mind paying for it. That is how a stallion's fee suddenly escalates when he becomes a classic proven sire like Invincible Spirit. When that happens the valuations become really spectacular because there are only ever eight or ten stallions in that category in Europe and we are lucky to have one of them.

This also means the shares in the stallion are suddenly very valuable. One should remember that the guys who bought blind on day 1 did so hoping this might happen once in a while. Here we had a horse who had an enormous market value, shareholders who were anxious to cash in their bet and we wanted to retain the horse for the stud. A bid came from an American-based agent which was substantial.

Deputy Michael Creed

They wanted to get involved in the syndicate.

Mr. John Osborne

No, they wanted to buy him outright. That would need a majority approval. We had a control or veto on him and we said that he was not for sale. A much bigger bid came back and we said we were sorry but he was not for sale. This continued over a period of a week or ten days. Every day the telephone would ring and another few million would be offered. The answer always was, "He is not for sale". The independent shareholders then began to feel we had made them prisoners, that they had a huge asset but because of our controlling share we did not want to cash it in. We were preventing them from cashing it in because it was an outright purchase situation. The horse was to be sold in his entirety. While we were saying "No" the individual shareholders were feeling cheated on their investment. They were like the guy with the £1 million cheque. They were worth a great deal of money but they could not cash it in. To an extent, that was unfair on them.

Acting Chairman (Deputy Bobby Aylward)

Could they have sold their share?

Mr. John Osborne

The person buying it wanted the horse. He wanted control and did not want to buy a shareholding.

Acting Chairman (Deputy Bobby Aylward)

They could have sold on the shares.

Mr. John Osborne

Yes, they are perfectly tradeable commodities. This particular bidder wanted the entire horse so he needed unanimity. We could constantly say "No" but at a certain point when the bid got to approximately $40 million, the shareholders indicated they would like some of it and that put us in a very difficult position. What happens in such a case? We got lucky when a third party came in at the very last minute and gave us one chance; they did not want to enter into horse trading but wanted to know if their proposal suited our purpose. The proposal was to buy a quarter share in the horse but leave it with the Irish National Stud.

The introduction of that outside capital allowed for a complete restructuring of the ownership of the horse. It went from a 45-share syndicate to a 90-share syndicate, with each individual shareholding having three options. The first was to stay in completely; the second was to stay in for half and cash half, which would have been a six-figure dividend; and the third was to sell entirely, which was a seven-figure dividend.

It was the dream result from the INS perspective, as we did not want to share any of our shares and we stayed roughly around where we had been. It introduced capital that the cash-hungry shareholders needed and a number of them took the option of selling out completely. Others took the medium option of taking some money off the table but staying in for the income stream that shareholding presents. Others stayed with us all the way. We had a new strong partner and the horse was retained for the INS.

An eight-figure sum was involved in this deal, which happened in the course of three weeks. It had never been done before and involved incredible negotiation and knowledge of how this is structured, legalities and how rules could trip us up. This was all done in the best interest of everybody and the net result was best for the company and the shareholders benefited from it. Mr. John McStay does not need me to defend him or hold his hand but his knowledge of how this worked, the structure of syndication and his craft in restructuring it in such a way that everybody got what they needed was invaluable. His charge to the company represents 0.01% of the net gain to the INS in the issue.

One can understand how complex this was and it is not something we will encounter very often. I hope it would happen regularly but it is very unlikely and the odds are stacked against it. That is the nature of the business. All these people make a bet to invest in a particular stallion or mare, hoping that events will unfold in a certain manner. They hope a horse's foals, yearlings and two-year-olds will be good and his three-year-olds will be classic winners. Stud fees would go from €8,000 to €75,000 in this case and the value will rocket. We are lucky to have this horse and that shareholders are prepared to take a blind bet at the start. There are also people prepared to step in when the money gets to that level. It is an interesting branch of finance.

Deputy Michael Creed

I thank Mr. Osborne because it is an interesting issue that is out there. He provided a very understandable explanation and the fact that Invincible Spirit remains in the Irish National Stud is important. I have some supplementary questions.

It struck me as relevant when Mr. Osborne said that the broader the ownership structure, the better for the company, which makes sense. If there are more shareholders in a stallion, they will be able to bring in additional business. There is a question with regard to the subsequent ownership structure for Invincible Spirit and the constant buying of shares on three different occasions. There was blue-chip outside interest which would have brought significant business to the stud if they had a shareholding.

As I understand the structure operating in syndicates, there was a first call on the shares being sold. In respect of the role of directors of the Irish National Stud, there was a clear conflict because they stood to gain by increasing the shareholding in the premium sire in the national stud. By increasing their own shareholding they were locking out business which could have been brought to the stud, which illustrates a clear conflict of interest that must be addressed. We must find a way to tackle this and nobody is suggesting that people with that level of insight on the syndication process are not a valuable asset. A clear conflict of interest emerges.

The figures I have suggest that the gains to be made are quite staggering. Three directors were earning in the region of €2.9 million from their involvement in that syndicate at a time when these earnings were tax free, which is an extraordinarily privileged and dominant position. It is in conflict with the primary responsibility as directors. If that continues, the process of dealing with conflict must be seriously considered. If blue-chip clients had put down bids and were interested but could not get involved because of the activities of the company secretary, is it a problem for the Irish National Stud?

Chairman

Are they all the questions?

Deputy Michael Creed

No.

Mr. John Osborne

I mentioned that there were 24 stallions two years ago and seven stallions this year. Part of that is the fact that the money is not there to buy those horses. I have described the two mindsets, with one being the speculator who buys blindly and does not know if the horse is fertile, gets crooked or good foals or whether it can run fast. He is buying into an asset he hopes will work. Against this is the person who buys in at the end when all the risk is almost taken out of the process because the horse would be a proven sire.

How do we encourage somebody to make the blind bet at the start? One of the attractions of buying in at the very start is that there is a right of first refusal for the lifetime of the sire. By taking the long odds bet at the outset of the career, if anybody wants to sell the shareholding, it must be offered to all other shareholders, who have the equal right to match any offer for the share. That is subject to ballot and all shares are treated equally. If there is more than one share there is more than one shot, which is the same as the lottery. That is the reason for the process.

I am not sure I ought to specifically comment on somebody's commercial dealings but I do not want to be evasive on a subject. In the particular case referred to by the Deputy, the person involved submitted a bid for four or five shares before he was successful in buying the next one. In other words, he went through the ballot process the same way as everybody else and was knocked back on several occasions, which proves the validity and integrity of the ballot process.

When the person had a second share he had twice the chance of being successful the next time around. The more shares owned, the better the chances. This coincided with a time in his career when it suited him to make those investments. I very much understand and respect the Deputy's comments on the need to tighten this aspect of business. It is something we need to examine closely. I wish that happened on a yearly basis. It may not be something with which we will have to contend very often, but I respect what the Deputy says about the need for it to pass muster at a forum such as this.

Deputy Michael Creed

I take it that Tully House is the residence of the former CEO. Has it been vacated?

Mr. John Osborne

The former CEO lived on the premises. Tully House was built in 1970 and is very much in the centre of the facility. It is a five bedroom bungalow and is vacant at the moment.

Deputy Michael Creed

I noted in the articles of association that it is a legitimate function of the company to provide accommodation for staff. How many other employees would have a right of residence on site in their contract? Is this common?

Mr. John Osborne

A number of staff live on site. It is useful when we have 24 hour care, a foaling unit and stallions of high net worth. It is very useful from the point of view of security and care of animals.

Deputy Michael Creed

Mr. Osborne referred to a report commissioned on how directors were treated in respect of mares being covered by stallions in the national stud. Far from agreeing with the case made, the report concluded to the contrary. What was the reason for doing that study in the first instance?

Mr. John Osborne

We did it to demonstrate that everything was above board. There was obvious potential for an accusation of favouritism, so it was worth investigating how we measured up. The measure was that if one took the average fee to the general public and the average fee afforded to the directors, then one was worse off if one was a director. We were not trying to disincentivise anybody from coming on board, but we were trying to highlight that favouritism was not being shown, and that people in fact were going out of their way to do the opposite. The spirit of the board throughout all this was to act in the best interests of the company. The majority of people on the board acted from a genuine, old fashioned spirit of public service.

Deputy Michael Creed

On that basis, there should be no reason that the report——

Mr. John Osborne

If I can find the hard copy, I will send it to the Deputy.

Deputy Michael Creed

When was that commissioned?

Mr. John Osborne

It was about four or five years ago.

Deputy Michael Creed

Therefore, it does not cover the period from the day the report was published to the present day. Between then and now, have the directors paid the appropriate fee given to outside clients?

Mr. John Osborne

The code of conduct specifically covers the need not to give any advantage to any members of the company. The rule of thumb was that nobody got preferential treatment. If somebody can do their business with us at this rate, or they can go down the road and negotiate a better deal elsewhere, then that puts the company at a disadvantage. That is exactly the opposite to what the code of conduct requires.

The officers of the company are meant to behave in a manner that is advantageous to the company. That includes transacting business in a way that does not damage the reputation of the company, does not impinge on the integrity of the company, but does not put it at a financial disadvantage either by encouraging people to do their business elsewhere. That was the measure that was applied to shareholder transactions when dealing with the fee to be charged for the use of the various stallions. I will investigate the more recent stuff to see if it deviated from what we understood to be the situation. That is my understanding of how things will be from now on.

Deputy Michael Creed

Mr. Osborne mentioned a figure of €75,000, but I thought it was around €50,000 for a——

Mr. John Osborne

It is €45,000 this year, but the year after his stud fee went up to €75,000, it then went to €50,000 and now it is €45,000.

Deputy Michael Creed

Is that the fee outside clients would pay?

Mr. John Osborne

Yes. If someone owns a share, he can use the nomination on his own mare, or he can get the cash equivalent by having it sold on the market.

Deputy Michael Creed

If the fee is €45,000, that is what any director should pay.

Mr. John Osborne

There is an element of negotiation with all our clients on different fees within a small trading band. The advertised fee and the average fee may be slightly at variance, but only slightly.

Deputy Michael Creed

What is the structure for the syndicate that owns Amadeus Wolf?

Mr. John Osborne

Amadeus Wolf was trained by Kevin Ryan in Yorkshire. He was raced in the colours of Mr. John Duddy from County Tyrone. We took a quarter share in him when he was a two-year-old, because we figured he had the pedigree and the performance. He was already a group one winner and he had all the ingredients to be a good stallion. We stayed with him through his racing career. At the end of his racing career, there was bit of a resyndication of him and he retired to the Irish National Stud. We own about one third of him and there are various other shareholdings. Mr. Duddy is still a shareholder, as are others. Mr. Duddy still has a big say in the management of the horse. We have the biggest individual shareholding in him.

Deputy Michael Creed

Am I correct in stating that the company secretary also has a shareholding in him?

Mr. John Osborne

Yes.

Deputy Michael Creed

The company secretary's son is on the management committee of that syndicate.

Mr. John Osborne

Yes.

Deputy Michael Creed

He also works for another stud, so that could be perceived as a conflict of interest.

Mr. John Osborne

Many people in the business have their own stock. I am not sure of his contractual arrangements.

Chairman

Does Deputy Power have anything brief to add?

Deputy Seán Power

I apologise for being late. I intended to be here earlier, but I got delayed at a meeting.

Chairman

I thank Mr. Osborne for his presentation and for answering the questions. From what we heard from him today the board of directors has made a very good choice in appointing Mr. Osborne as chief executive officer. His performance today was excellent and we thank him and Ms Lawlor very much for attending today's meeting. We look forward to bringing them before the committee again.

Deputy Bobby Aylward

I propose that the committee visits the National Stud.

Chairman

I was just about to propose that. The clerk to the committee has taken note of it and will organise it through Mr. Osborne. We wish Mr. Osborne well in his new position.

The joint committee adjourned at 2.10 p.m. until 11.30 a.m. on Wednesday, 16 June 2010.