Football Governance
Executive summary
This submission is made by Wimbledon Football Club Supporters Society Limited, the owner of AFC Wimbledon, a football club which plays in the Football Conference. It focuses principally on the financial issues facing supporter-owned clubs like ours.
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We believe that the role of government in football governance should be to encourage existing bodies to cooperate. Only if this fails should intervention be considered
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Football finances are imbalanced, with clubs running themselves into major financial difficulties in the pursuit of success
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There is no reward for financial virtue - clubs like ours which are run prudently on a sustainable basis cannot compete with clubs where owner-directors pump in short term loans which are spent on players’ wages
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We believe that this issue should be addressed by stronger financial regulation. Such regulation should be based on principles applied consistently throughout the football pyramid
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Our specific recommendations include:
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A requirement that clubs should be sustainable
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A governance framework that applies a licensing system to enforce regulations relating to sustainability
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Revoking the ‘football creditor’ rules which encourage poor business behaviour at the expense of others, especially the community and tax payers
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The governance body should have the authority to deny a takeover which is based on leveraged debt
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We believe that supporter-owned clubs are a force for good in football. They should be encouraged, at least in their early, formative years, by financial and tax incentives
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AFC Wimbledon was created as a response to a serious failure in football governance – we strongly recommend that no further franchising should be allowed in UK football.
1.
This submission is made on behalf of Wimbledon Football Club Supporters Society Limited (known as The Dons Trust - ‘the Trust’ in this document) which is an Industrial and Provident Society which owns AFC Wimbledon Limited.
2.
AFC Wimbledon was born following a serious failure in football governance. Despite advice to the contrary by governing bodies, the club was established by fans and in just over eight years has become the highest placed fans-owned club outside the Football League – and the one which has risen furthest in the football pyramid since it started. We feel we have a unique perspective to bring to the Select Committee inquiry.
3.
Our comments and recommendations are structured around the six questions published by the Committee, with one additional topic at the end of our document.
Should football clubs in the UK be treated differently from other commercial organisations?
4.
Football appears to be unlike any other business:
a.
in many cases, clubs are run with little or no intent to make a profit, but they are regulated by legislation which is aimed at profit-making organisations
b.
the experience that football clubs offer is very different from most other businesses and entertainments – for a large part of the fan base, a poor experience on one day may be a cause for grumbling and discontent, but it doesn’t affect the likelihood of them returning. This extreme loyalty is uncommon in the commercial world; a consequence is that it can lead to a certain laziness amongst clubs about the need to consider supporters because demand is inelastic
c.
the motives for running clubs are many and varied and include: serving the community; a means of fans retaining control of their local club; self aggrandisement for rich people; and to take money from the club, in some cases to the detriment of the club itself and the community
5.
Football clubs are already treated differently from other organisations, notably they can create preferential ‘football’ creditors in the case of insolvency, even ahead of HMR&C. A significant number of clubs have gone into administration or liquidation, paid their football creditors in full, but paid little or nothing to creditors generally and local businesses in particular. This is inequitable and it has had a direct and detrimental effect on the communities in which the clubs are based.
6.
Football needs a more formal regulatory environment which reflects the social and community roots of the clubs, while demanding responsible and accountable management. Specifically:
a.
A governance framework should be established to require clubs to run themselves in a sustainable way – the UEFA ‘Financial Fair Play’ initiative is a good step in this direction
b.
A licensing system for clubs at a certain level, say the Premier League, Football League, and Football Conference, should be introduced to require compliance with sustainability regulations
c.
A suitable regulatory body should be empowered to enforce the requirements
d.
The ‘football creditor’ rules should be revoked. A change would require clubs to be more circumspect in their dealings with each other, as they should be with any other business
Are football governance rules in England and Wales, and the governing bodies which set and apply them, fit for purpose?
7.
Our experience of governing bodies has been with the leagues in which we have competed over the last eight years, the two County FAs to which we are affiliated, and limited exposure to the FA itself. Our submission therefore largely reflects the view from lower down the football pyramid.
8.
AFC Wimbledon aspires to return the name of Wimbledon to the top levels of English football. In the eight years of our existence we have been promoted four times and we are currently in contention for promotion to the Football League. In that time we have developed a total of 22 teams of men, women, boys and girls, as well as and a range of other community activities. We have done all of these things while running the club on a sound, prudent and responsible commercial basis.
9.
We are immensely proud of what we have achieved but our progress is increasingly hindered because there is no reward in football for financial virtue. We cannot, and will not, compete with clubs where substantial losses are funded by rich shareholders in the pursuit of success on the pitch As a result, the classic ambition of the little club, to rise through the ranks and reach the top – so brilliantly achieved by Wimbledon FC – looks well-nigh impossible.
10.
We believe that this imbalance should be addressed by stronger financial regulation, based on consistent principles throughout the football pyramid. We recognise that a ‘one size fits all’ solution cannot work given the differing resources available to monitor each competition’s regulations. To achieve this, there would need to be more consistent regulation within football since there are substantial differences in the approaches taken by the Premier League, the Football League and the Football Conference.
11.
To explain our concerns in more detail, it is widely recognised that at all levels of football, clubs run themselves into desperate financial positions. For example, drawing on publicly available information, in 2009 the Football Conference Premier division (in which we play) had:
a.
Nineteen of the twenty four clubs with net current liabilities, i.e. apparently not able to meet their short term debts
b.
Eleven clubs with negative net worth
12.
In practice, many of these clubs are ‘safe’ because their debts are to directors; but the underlying commitment of the directors is indicated by the fact that their loans are usually classified as short term, repayable on demand. Despite the loans being due on demand, some clubs will have entered into player contracts that extend for two or more years, with limited prospects of the clubs generating sufficient profits to cover such commitments.
13.
The Football Conference has put procedures in place to apply sanctions to clubs which fail to pay their taxes promptly. This initiative has had increasing success, and the Conference has recently expanded its monitoring to promote sustainability within clubs. Nonetheless, several clubs appear to be on the brink – it is hard to be certain because most clubs taking advantage of the reduced disclosure requirements offered under the Companies Acts.
14.
Any club is susceptible to over-reaching itself financially, but we believe that clubs which are unsustainable save for directors’ loans are much more likely to crash than those which are fans’ owned. This is because the absence of a director subsidy forces clubs to operate based on their trading income and effectively demands that the board actively governs to ensure that finances are managed properly.
15.
As for the adequacy of the governing bodies, our experience is that they are staffed by professional and motivated people who have been consistently supportive. Our concern is the lack of effectiveness in demanding sustainable clubs and the inconsistencies that are unavoidable when there are regulatory bodies with apparently conflicting objectives.
16.
Our exposure to the top levels of football governance is too limited for us to offer detailed recommendations for reform, but we strongly believe that government should use its authority to demand greater cooperation and consistency from these bodies. Otherwise the recommendations in paragraph 6 apply equally to this section of our submission
Is there too much debt in the professional game?
17.
Debt in itself is not a bad thing but in football it is all too often ‘the wrong kind of debt’.
18.
We have already commented on short term debt, usually as directors’ loans, which are used to pay wages and operating expenses. This is an unsustainable way of running a football club. Debt to fund capital investment is one thing; debt to fund higher wages in the hope that it will breed success is gambling. And it is gambling with the livelihoods of players, other clubs, and businesses in its local community.
19.
In a governance environment where a club has to be sustainable such lending would not be allowed, which is why we believe that regulation should move in this direction.
20.
Leveraged debt, i.e. where a club is bought by borrowed funds and then the borrowings are loaded upon the club may well be legal but it cannot be in the best interests of the club and its fans. We would expect a regulatory body to have the right to deny such a takeover, and be protected from a legal challenge when doing so. We are not experts in this area but we understand that the NFL takes a dim view of one of its competitor clubs being loaded with debt, and thus more of the sport’s incomes flowing out of it to creditors.
What are the pros and cons of the Supporter Trust share-holding model?
21.
Clearly we have extensive experience of the Trust-owned model.
22.
The major pros of this approach are:
a.
The club is controlled by one of the key communities it serves, namely its fans
b.
It cannot be run into the ground by a sugar daddy; the club cannot be sold or mortgaged without the agreement of the fans; where the club has land of its own, any asset strippers cannot benefit
c.
Fans have a closer involvement in how the club is run, especially with key decisions and thus greater buy in and ownership
d.
Fans’ oversight is much more likely to prevent financial over-commitment in a drive for success. In effect, the absence of a sugar-daddy forces a club to be businesslike and medium-term. While sustainable management is not an exclusive feature of community-owned clubs, that ownership model has much to commend itself in terms of sustainability
e.
There are greater benefits to the community due to the stronger links with the club
23.
In our opinion, there is only one major con, which is the difficulty of competing with clubs where rich owners can make substantial sums of money available for players’ wages. Our own club has faced this at every level from when we started until today. For example, despite having the highest trading income we were outbid for talent by clubs using directors’ subsidies, leading to the extraordinary result in our first season where we gained 111 points from 46 games – and came third in the league. As we move higher up the leagues the amounts being injected into clubs become much larger, but the problem is the same – we cannot prudently match them.
24.
We are in our ninth year and despite these problems we have demonstrated that a fans-owned club can be successful while also being self-funded and operated in a pragmatic, sustainable way. To date we have overcome the problems of the clubs where massive sums of money are injected (as loans) in an unsustainable way – we have left most of these unsustainable clubs behind but as we rise through the leagues the amounts that are injected increase and our task becomes ever harder. To give an example of the scale of the problem, the published accounts of one club in our league in 2009 show an operating loss almost as great as our (and its) entire turnover.
25.
For fans-owned clubs to compete we need a level playing field and that means clubs being required to be sustainable. So long as the majority of clubs is owned in the traditional way such a change is unlikely to come from within. Appropriate regulation appears to be the only solution.
26.
For fans-owned clubs to be able to get started and thrive through the early years, we believe that financial and tax incentives should be made available to them. For example, grants should be directed towards the development of such clubs, provided that they meet other criteria, including totally transparent financial reporting, audited accounts and a demonstrated involvement in and benefit to the community.
27.
Similarly, fans-owned clubs with a turnover less than a designated amount should be exempted from VAT. Since much of their income is subject to VAT and they have limited input tax to recover (the major expenditure being players’ wages) there would be a substantial benefit to such clubs but, given the small number involved and a limit on turnover, the cost to the Treasury would be very limited. Similar financial reporting and community involvement would be required for clubs to qualify for the tax exemption.
28.
These recommendations will not be welcomed by clubs under direct ownership of wealthy individuals but they can so easily distort the economics of non league football, where most supporter-owned clubs play, that something needs to be done to counter the imbalance. Relatively small sums can have a big effect – to put it into perspective, our annual player budget is less than three weeks’ wages for a top Premier League player.
Is Government intervention justified and, if so, what form should it take?
29.
Football is the national game. It involves a significant proportion of the population and can fire the imagination of the nation. It has a substantial capacity for good in the community. But the leagues are currently dominated by owners who have limited, if any, credibility as representatives of their communities. They will not vote for change, yet their model has led to regular financial failures, losses to the communities they nominally serve, and a lack of recognition of the wishes of the fans.
30.
We believe that the government should not seek to impose its own solutions, but it should demand that existing bodies cooperate. The problem for the FA appears to be that it is deadlocked and can see no clear way forward. The government should corral the various parties, cajole and if necessary bully them into working together – only if this fails should it intervene directly in the name of public good.
Are there lessons to be learned from football governance models across the UK and abroad, and from governance models in other sports?
31.
Many sports other than football retain teams that are run as true members’ clubs; with 100% ownership retained by the paid up membership who elect a committee to run matters on their behalf. In Britain such clubs compete sustainably at a high level in Rugby Union, Rugby League and Cricket. Very few English football clubs have retained this structure at anywhere above local non-league level, but some examples exist overseas – Barcelona FC being by far the most famous. This model of ownership does ensure that key decisions remain with the fans (i.e. members) rather than with a single majority shareholder as found at most English clubs.
32.
One country that has imposed a strict licensing model for football clubs is Germany. The German League (the DFL), on behalf of the German FA (the DFB), operates the licensing of all professional clubs within the top four levels of the league pyramid (over 100 clubs). Their licensing system for professional clubs is aimed at maintaining competitive integrity and "clears" each club before the start of each season – failure to be licensed results in demotion or temporary expulsion.
33.
Special focus is traditionally placed on liquidity controls, i.e. a financial assessment of a club’s ability to operate throughout the season. This rigorous system is largely responsible for the fact that over 45 years into the competition’s history no Bundesliga club has filed for administration/bankruptcy during a season.
34.
Another facet of German football is that virtually all professional clubs have an ownership model where 51% of the voting shares rest with the fans – a status protected by law. Typically the clubs are run by a principal owner (who usually controls the remainder of the shares), but the ownership model ensures that key strategic decisions can be rejected by the fans if not in their interest. This ownership model, coupled with the prudent licensing approach, gives great stability and good competition within the German league system.
Other issues
35.
AFC Wimbledon was born as the result of a failure in governance. For obvious reasons, we strongly recommend that no further franchising should be allowed in UK football. Wimbledon FC was, wrongly, the first to suffer this. We recognise that this cannot be undone but we urge the regulatory authorities to ensure that nothing of this nature ever happens again.
January 2011
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