Football Governance

Written evidence submitted by the Arsenal Supporters’ Trust and Arsenal Fanshare (FG 26)

Introduction to the Arsenal Supporters’ Trust (AST)

The Arsenal Supporters’ Trust (AST) is an Industrial and Provident Society founded in 2003 with financial and administrative support from Supporters’ Direct. Its main objectives are to:

· Promote the interests of supporters who own shares in Arsenal Football Club

· Facilitate wider supporter involvement in the club

· Facilitate and promote mutual supporter ownership of Arsenal, thereby giving supporters greater representation and influence in how the club is run

Many of our members are already personal shareholders in Arsenal Holdings Plc (Arsenal’s holding company) and every member of the Trust shares in ownership of Arsenal Football Club through shares the Trust owns. The AST estimates that its members directly account for between 2 and 3% of the equity in Arsenal and we are recognised by the club as the main representative body for small shareholders. In total about 10% of Arsenal’s equity is held by ‘supporter shareholders’.

The AST works with its members, Arsenal executives, the club’s Board, major shareholders and other Arsenal supporter groups to help maintain Arsenal as a world class sporting institution.

The AST’s primary role is to provide opportunities for supporters to scrutinise and question how Arsenal is run. This is achieved through activities such as: the production of independent financial analysis of the report and accounts of Arsenal FC; representing supporters views to the club’s Board and executives, including attendance at the club’s AGM where supporters have an opportunity to ask questions; an annual end of season review meeting with the Chief Executive; and undertaking a detailed survey of supporters’ views on issues such as the ownership structure of the club, the club’s corporate governance and its footballing and commercial strategies, which was presented to all Board members.

The AST aims to act as a constructive challenger to the club. Among the issues we have raised, and subsequently seen positive development on, are our recommendations to make Stan Kroenke a Board member and calls for the club to make significant additional investment into its commercial and marketing infrastructure, which Chief Executive Ivan Gazidis is now implementing.

Arsenal's parent company, Arsenal Holdings plc, is a public limited company on the AIM market. Only 62,219 shares in Arsenal have been issued and they currently trade at a price of approximately £10,500, which sets the club's market capitalisation at approximately £650m.

The high price of each share is a considerable barrier to supporter ownership and the AST has long sought to introduce a scheme that would assist supporters in buying shares in Arsenal. Last August this objective was achieved through the launch of Arsenal Fanshare.

How Arsenal Fanshare works

Arsenal Fanshare is operated by the Arsenal Fanshare Society Board, an Industrial and Provident Society (IPS). The scheme itself is run by Equiniti, who administer investment plans for large companies and are specialists in shareholder plans. Equiniti Financial Services Ltd is authorised and regulated by the Financial Services Authority (FSA) (reference 468631). Arsenal Fanshare is an independent organisation separate from Arsenal FC. However, Arsenal Fanshare is endorsed by both Arsenal FC and the AST.

The AST welcomes the support that the Arsenal Board and Chief Executive have given to the scheme. In addition, the club's other major shareholders, Lady Nina Bracewell-Smith and Red and White Holdings (Alisher Usmanov) have also given their backing to Arsenal Fanshare.

The Arsenal Fanshare Society buys shares in Arsenal Holdings PLC and nominally divides each one into 100 Arsenal Fanshares. As the value of one share in Arsenal Holdings Plc is currently around £10,500, the value of one Arsenal Fanshare is currently around £105. The value of Fanshares varies according to the real time market price of a share.

Arsenal supporters join the Arsenal Fanshare Society by paying a one-off membership fee of £20 and deciding a set monthly contribution they would like to invest each month in Arsenal Fanshares. The lowest monthly contribution is £10 and the highest is £1,000.

Each participating supporter has a Fanshare account where their monthly contributions are saved until there are sufficient funds to cover the cost of a Fanshare, at which time the Fanshare is allocated to them. Any money left over is put toward the cost of the next Fanshare.

The specific benefits that members of the Arsenal Fanshare scheme receive are:

· A direct ownership stake in Arsenal

· Fanshare membership certificate

· Opportunity to attend the Arsenal AGM

· Quarterly shareholder email update from Arsenal Chief Executive Ivan Gazidis

· A vote on key club resolutions

· Access to the AST’s scrutiny of the club’s finances and opportunities to express their views directly to the club’s Directors and Executives.

Once a member has acquired 100 Fanshares, equivalent to one full share, their membership status within the scheme is amended to give them a guaranteed place at the club AGM and the full voting rights for one share.

Arsenal Fanshare has been a great success. It currently has more than 1,600 members, a larger number than those who own ordinary shares in Arsenal Holdings PLC. Arsenal Fanshare has already invested more than £350,000 into buying shares and 100 Fanshare members were granted priority access to the club’s October 2010 AGM.

The Arsenal Fanshare scheme has been widely praised across the football community as an important initiative for increasing supporter involvement, with endorsements from UEFA, Supporters’ Direct, the Premier League, the Minister for Sport and leading football commentators.

The ‘Fanshare’ brand name and scheme rules were designed and created by the Arsenal Fanshare Society Board. These could be made available to other supporters’ trusts and clubs who would like to replicate the model.

However, due to the regulatory burden of offering share ownership, Arsenal Fanshare has been very expensive to establish and maintain. In the submission below we set out how this can be addressed and also cover how both the Football Authorities and the Government can do more to assist with the introduction of schemes that reflect the Fanshare objectives to increase supporter involvement in football clubs.

Custodianship and supporter involvement in how clubs are run

At Arsenal, the concept of custodianship and plurality of ownership is central to the club's character. The AST sees custodianship as the responsibility of all Arsenal stakeholders to look after the club's values and keep them safe for future generations.

The AST recently surveyed its membership on their preferred ownership structure at Arsenal. 90% of AST members rate maintaining the club's custodianship and protecting the long-term future to be an important priority for Arsenal's Board.

There is little support for the club being taken private, with 84% preferring Arsenal's plural ownership model that includes supporter representation. There is also huge support for the club’s philosophy to be financially self-sustaining, with 89% of AST members supporting the club’s self-sustainability model even if it means struggling to complete with clubs that have a ‘sugar daddy’.

Arsenal has benefited greatly over many decades from maintaining stability in its ownership structure, and from having supporters who own shares and are actively involved in this structure. Plurality of ownership has served Arsenal well and is the best way to ensure the necessary checks and balances are in place to protect the club's long-term future.

Throughout its history, Arsenal has always looked to the future and has been at the forefront of important developments in football. Innovations have ranged from the introduction of floodlit football and the renaming of Gillespie Road tube station to 'Arsenal,' through to the building of a landmark new stadium and transformation of the game in England with the pioneering appointment of the first successful overseas manager in Arsène Wenger.

Arsenal Fanshare continues this innovation and sends a positive message to the wider football community about the importance of involving supporters in the game's future at an ownership level. Arsenal Fanshare meets the demand from Arsenal supporters that the club should remain in plural ownership and gives them a small but relevant – and growing – voice in the how the club is run.

Good Governance is how a club behaves, not just how it is owned

The AST would like to reiterate to the Select Committee that good governance isn’t solely defined by how a club is owned – just as important is how it acts. Some observers point to Barcelona and Real Madrid as good models for mutual ownership. The AST challenges this notion and does not believe that the Spanish clubs represent good practice in ownership or governance, and that many of their corporate actions should be subject to far greater scrutiny and challenge.

Barcelona, for example, operates under considerable levels of debt, propagates an individualistic model regarding the sale of television rights that sees it retain a vast proportion of the revenues (unlike the collective and redistributive structure in the Premier League and making a mockery of financial fair play rules), and its executives and directors frequently and consistently break football’s rulebook and engage in the inappropriate ‘tapping up’ of players under contract to other clubs.

We urge the Committee to note the failings that occur in this ownership model and to judge governance by how a club operates rather than just by its constitution. We would also ask the Committee to ask UEFA as part of its inquiry what it is doing to address issues like this as any introduction of financial fair play requires consistency across Europe and for all of football’s rules to be applied to all clubs.

The role of the Football Authorities and Government in promoting supporter involvement in Football Clubs

The AST is fortunate that at present Arsenal’s ownership structure enables its supporters to hold equity directly in the club. Further, the club’s Board and senior executives are keen to develop a working relationship with these shareholders and support the AST’s attempts to further increase supporter ownership.

This may not always be the case, and of course it is not an option open to supporters at many other clubs that have private ownership structures. The AST has therefore given careful thought to the questions that the Committee is posing on supporter ownership and have built our recommendations around the two core values we take from the Fanshare model. They are values that can be applied at every club regards of the specific ownership structure:

· Increasing opportunities for supporters to be directly involved in the ownership structure of their club

· Providing greater transparency on how the club is run so that supporters can scrutinise developments, with ongoing opportunities to hold those running the club to account

The following part of our submission sets out our recommendations on how supporters’ involvement in both ownership structures and having a greater understanding and improved representation can be enhanced through actions taken by Government and/or the Football Authorities.

1. Opportunities for Supporters to be directly involved in owning a stake in their club

The AST believes that the direct involvement of supporters in clubs’ ownership creates positive benefits not only for fans but also for clubs themselves. For clubs, it establishes an additional opportunity to raise capital through issuing equity to supporters. It also allows clubs to give supporters a real sense of belonging and involvement, which is likely to strengthen the bond between supporters and their club leading to greater commercial and sporting success.

Yet whilst the AST supports greater supporter involvement in ownership, we do not believe it’s right to achieve this through direct government intervention or interference in independent financial investment decisions. Such action could lead to the de-facto nationalisation of football and breaks the convention that Government does not intervene in the direct running of sport. In Arsenal’s case it could even lead to action that penalises the interests of existing supporter shareholders.

However, we do advocate far greater effort being put into introducing policy measures to increase the opportunities open to Supporters’ Trusts to secure an ownership stake. The three main policy areas we have identified are:

a. Action to remove regulatory and fiscal burdens currently placed upon supporters’ trusts being involved in ownership schemes. This specifically involves: looking at how current financial legislation works to the detriment of supporters’ trusts by imposing unnecessary costs and regulation (see FMSA example below); and creating a level playing field in the fiscal environment by either ending the scenario whereby private investors can secure tax breaks on their investment or creating additional incentives for trusts. This might include giving tax breaks for supporters’ trusts’ ownership schemes, such as exemption from stamp duty and allowing VAT paid on season tickets to be reclaimed for contributions to share save schemes.

We recommend that the DCMS establishes a working group that includes the Cabinet Office and Treasury, that has as its remit to review all the regulatory and fiscal structures that apply to fan investment schemes like Fanshare and recommend additional measures that can be taken to assist them to grow.

b. Trusts are voluntary bodies often relying on the goodwill of the professional members. Setting up schemes such as Fanshare incurs significant costs and therefore we recommend increased, and direct, financial assistance to be made available to trusts to support the costs of meeting the regulatory requirements of developing models such as Fanshare and running representative bodies that have to comply with financial legislation. Such funding could be provided by both the Government and Football Authorities.

c. More promotional activity and support from both Government and the Football Authorities of the benefits of supporters’ trusts to football supporters and the role they can play, including as vehicles for clubs to raise capital.

2. Supporter involvement in how a club is run; access to core financial and operational material and opportunities to engage with clubs’ owners

Whatever the ownership structure of a club, we believe that its governance will be enhanced if supporters have a greater understanding of decisions being made and the opportunity to meet executives and have an input into the key day-to-day and strategic decision-making.

The Government itself recognises these values through its commitment to publishing financial information about how Government works and the stated desire to give stakeholders a greater say in how services are run.

The simple objectives of improving information flows and introducing formal structures in which supporters can be represented does not require any new legislation or Government intervention, but can be introduced as self-regulatory measures within the rule books of the Football Authorities. We recommend that the Premier League introduces a rule that places a duty on their member clubs to engage with official supporters’ trusts. This engagement would specifically cover:

1. Providing a financial and reporting format similar to that required under the Companies Act -report and accounts for each six months (interim) and full year - supplemented with information already collected under UEFA licensing scheme and other tests that clubs are required to meet under Premier League rules.

2. Twice yearly meetings between representatives of the supporters’ trusts and directors and/or executives of the club, at which discussion can take place on the performance of the club and the views of the wider membership can be directly reported.

The second proposal would of course require an agreement for identifying official supporters’ trusts and ensuring that they reach minimum standards in the representation of their membership. The requirement to register as an Industrial and Provident Society should partly address this but we would also envisage a role for Supporters Direct to nominate the official trust at each club and act a quasi-regulator of their operations. This would include providing training and advice to trusts on the business issues faced by clubs and the high standards required in their own organisation and operation, such as minuted meetings, elected officials and audited accounts.

Case study: Amending the Financial Services and Markets Act (FSMA) to recognise the role of the Supporters’ Trusts

The establishment of Arsenal Fanshare has been a huge and expensive effort for a small team of volunteers to complete. This work has been greatly complicated by the inflexible nature of Financial Services Authority regulations.

The following sets out how financial services legislation, particularly the FSMA, is not flexible enough and in fact acts as a barrier to enabling supporters' trusts to make a broad appeal to fans to put equity into the club or supporters' trusts. It also shows how an amendment to the legislation could help.

The FSMA prohibits the offer of shares or investments without the trust itself complying with regulatory requirements that create significant financial and administrative burdens for voluntary organisations such as the AST.

The FSMA also prohibits the issue of any investment advertisement to a general consumer/supporter (eg an offer of shares in a company or to make an investment) unless that investment advertisement is authorised by an FSA authorised organisation or individual.

Additionally, supporter ownership models are likely to be classed as Unregulated Collective Investment schemes preventing the offer of shares to persons other than high net worth individuals, sophisticated investors and exempt institutions.

There are a number of exceptions to this legislation but none quite fits the specific supporters’ trust models. As a result, the AST had to establish a second IPS - the Arsenal Fanshare Society Limited - to do nothing but run Fanshare, and not by way of a business to fit with the legislation. We have to act very carefully to make sure it does not make any profit nor have any trading income so we can establish it is not a business and thus not an unregulated collective investment scheme. This is a tortuous issue that impeded our efforts for many years and means that we have had to put in place duplicate structures for AGMs, Boards, accounts and even legal advice, with all the effort and expense that entails.

There are other subsidiary issues by which we could also fall foul of FSA rules. Because of these complications we have engaged a management company, Equiniti, to administer the scheme on our behalf at considerable expense.

This issue could be addressed by Parliament introducing a statutory instrument widening the exemptions in the FSMA to include Industrial and Provident Societies or community interest companies raising money for sports clubs. This would of course need more detailed safeguards such as a sensible limit on the annual investment an individual can make. In the case of Arsenal Fanshare it is £12,000 a year.

There are clearly technical issues which would need to be resolved here, and that is why we have recommended that DCMS established a working group to cover these subjects.

Given our experience in developing Fanshare, the AST would be happy to provide further input on this issue and to join any working group the DCMS might establish to review the way forward.

26 January 2011