Football Governance

Written evidence submitted by Dr John Beech, Head of Sport & Tourism, Applied Research Centre for Sustainable Regeneration, Coventry University (FG 69)

The views expressed are the author’s, and not necessarily those of the organisation.

Summary

The governance of football has evolved without any over-riding sense of strategic direction. As a consequence of this lack of direction it has become in part dysfunctional, and has in particular failed to address the issues of indebtedness, insolvent trading and disparity across the vertical dimension of the football pyramid.

The lack of initiative to drive the necessary fundamental changes as a result of self-regulation, combined with the European ‘specificity of sport’ debate, provides a unique opportunity for the UK government to seize the initiative in driving through reform and ensuring the sustainability of professional football.

1. Introduction

2. The current state of the English football sector [1] is a cause for considerable concern. The phenomenon of the English Premier League and its twenty clubs (and alongside it the Football League and its seventy-two clubs) is often presented as a success story, combining the best of football and financial success for the clubs who make up its membership. Deloitte (2010), for example, opens with the sentence ‘English football’s domestic and international profile and deeply rooted supporter commitment has underpinned stellar rates of revenue growth’. What this ignores is the stellar rate of growth in costs, to an extent that many clubs teeter on the verge of trading insolvently.

3. Since 1991, there have been fifty-two clubs which have played in the top ninety-two (i.e. the Premier League plus the three divisions of the Football League) which have suffered insolvency events, typically having to seek the protection of the courts from their creditors through going into Administration. The desired exit from Administration from the perspective of football’s governing bodies is the formation of a Company Voluntary Agreement (CVA) under which the company agrees to repay debts at a rate of so many pence in the pound over a specified period. In the case of football clubs, the emergence of a CVA which writes debts down typically provokes a change in ownership. Indeed, prospective new owners tend to hold back from taking over a club in financial difficulty until the CVA has been agreed. The frequency which this has happened in recent years has resulted in an increase in the number of owners of football clubs who lack experience in managing a business in this highly specific sector.

4. If we include clubs which have played in the Conference (the next Tier, with an additional twenty-four clubs), the number which have experienced insolvency events rises to seventy-three.

5. This rate of insolvency is unmatched in any other business sector.

6. The breakaway of the top 22 clubs to form the Premiership marked a watershed. The increased television revenues secured from BSkyB resulted in an escalation of players’ wages as a direct result of the obvious increase in revenues. The gap between revenues and expenses has never been successfully bridged, and the level of indebtedness is deeply worrying

7. The operating profits of Premier League clubs stand up well in comparison with top tier clubs in France, Germany, Italy and Spain, as is shown in Table 4.

2003/04 2004/05 2005/06 2006/07 2007/08 2008/09

England 222 240 200 141 234 93

France (102) (15) 37 23 (84) (64)

Germany 89 183 82 250 136 172

Italy (234) 1 (1) (40) (66) (116)

Spain 64 64 64 62 63 63

Abstracted from Deloitte (2010)

8. This data suggests that English, German and Spanish clubs in the respective top tiers have been operating successfully from a financial point of view, as opposed to French and Italian clubs. This is however misleading, as the debt level of clubs is not apparent. Pre-tax profit/loss figures over a five year period for the English Premier League clubs show a less healthy picture however.

9. In five seasons, the ninety-two clubs lost a total of £1,014,000,000, although it should be pointed out that Chelsea accounted for almost a quarter of this in the two seasons 04/05 and 05/06 alone, attributable to the ‘benefaction’ of Roman Abramovich. Abramovich had poured money into the club in the form of so-called ‘soft’ loans, which, with the approach of UEFA’s Financial Fair Play protocol, he has now converted into equity, the sum involved in the final purchase of shares amounting to £360 million.

10. This process of supporting a club through the medium of soft loans from its ‘benefactor’ has resulted in very heavy levels of debt being incurred. Over last two years for which data is available (barring Portsmouth in 2009, where accounts had not been filed because of the club going into Administration, with debts widely reported as being over £100 million), Premier League clubs have been operating with aggregate debt levels of over £3 billion. Whether operating with such high debt levels is sustainable is clearly open to question. Two scenarios need to be considered. The first is that the debt, albeit ‘soft’, is serviced. The examples of Manchester Utd. and Liverpool, with leveraged debt taken on as a result of new ownership by the Glaziers and Messrs. Hicks and Gillett respectively, suggest that, even where the underlying business operation is oriented to profit maximisation through the development of new revenue streams, most notably in the Far East, debt servicing remains highly problematic. The refinancing of Liverpool’s debt, for example, proved problematic ultimately, resulting in its sale again.

11. A key performance indicator for the financial health of a football club is its wages/revenues ratio. Here again, an initial glance would suggest that the Premier League offers an example of good practice. With the exception of a slight turn for the worse in the most recent season, the English figures hold up well against those for Italy, and are comparable with those for France and Spain, but are not as encouraging as those for Germany’s Bundesliga.

12. However the use of averages hides a less encouraging picture in the case of the majority of Premier League clubs. The table below presents a deeper analysis, looking at the individual clubs which constituted the Premier League in season 2008/09. It reveals that only five clubs have been operating within the 60% limit generally advocated as good practice. These include three of the so-called ‘big four’ of English football (Arsenal, Liverpool and Manchester United, but not Chelsea), who have the highest wages and revenues, thus skewing the average for the whole league. Just over half the clubs have wages. revenues ratios of over 70%, with worst practice at Wigan Athletic, with a five-seasons ratio of 87.5%. Among the data are some particularly worrying examples of ratios above 100% - Wigan with 100.3% in season 2006/07, Stoke with 105.9% in 2007/08, Portsmouth with 108.8% in 2008/09, Hull with 129.0% in 2007/08, and Wigan again with an amazing 208.3% in 2004/05.

13. Such figures are clearly unsustainable without the ‘bankrolling’ of a benefactor.

14. The benefactor model in practice

15. The commonest form of benefaction is the provision of ‘soft’ loans. These appear as directors’ loans in the company’s accounts, but they are made on the understanding that there will be no pressure for repayment. This in itself is slightly surreal, as at clubs where they are made there is no significant evidence that the club will ever be in a position to make repayments. They are made on the assumption that significant cash injections will result in success on the pitch, a version of one needs ‘to speculate to accumulate’. With the exception of such investment on the scale made at Chelsea and Manchester City, there is little evidence that on-the-pitch success can be bought. Examples of long-term failure by a ‘benefactor’ to buy success through benefaction include Middlesbrough (Steve Gibson) and Wolverhampton Wanders (Jack Hayward).

16. The author currently monitors the financial state of over two hundred clubs, and examples of ‘soft’ debts suddenly turning ‘hard’, i.e. requiring unexpected repayment, which the club is particularly badly placed to make directly as a result of operating with a high wages/revenues ration facilitated by the provision of the ‘soft’ debt’, are all too common. Examples to illustrate the potential unsustainability of support through ‘soft’ loans include:
Darlington – the owner was imprisoned for tax fraud;
Doncaster – the owner was arrested for arson, specifically the burning down of the club’s the main stand in order to collect the insurance money:
Harlow Town – a disputed divorce between the co-owners paralysed the finances of the club while a divorce settlement was reached;
Portsmouth – one ‘benefactor’ (Sascha Gaydamack) sold the club to another ‘benefactor’ who turned out to be not actually very rich (Ali Al Faraj), who quickly sold the club on to yet another ‘benefactor’ of a similar ilk (Suleiman Al Fahim).
Rotherham – two sons took over their father’s business interests as he grew old, yet lacked the genuine love of the club that their father had inherited. They arranged for the ownership of the club’s stadium to transferred to them as settlement of the ‘soft’ debt, and then pushed the rent up to a level that resulted in the club moving out and into exile.

17. The commonest reasons, however, seem to be that the owner’s primary business hits financial trouble and/or the owner simply loses interest in the club

18. ‘Benefactors’ make ‘soft’ loans not only to improve the club’s playing squad, but also either to facilitate stadium redevelopment, or the building of a new stadium. There is a naive ‘cargo cult’ belief which damages sustainability – that a club needs a new stadium, usually far too big a one, and that increased capacity will automatically be taken up by entirely new fans. A classic example of this occurred at Darlington, where the ‘benefactor’ financed a new stadium as the prerequisite for ‘bringing Premier League football to Darlington’. The capacity of the new stadium was 25,000, and the opening game attracted only 11,600 spectators (which is still the record attendance). Darlington has since been into Administration, the club is currently in the fifth tier of the English pyramid, the capacity is currently restricted to 10,000 (with large parts of the stadium unmaintained, and closed on health and safety grounds), and an average attendance is approximately 2,000.

19. The author’s scoping of the state of finance in English football clubs, and their problems with insolvency, has led to an ongoing research project into the nature of ‘benefaction’. It might be expected that people who have made their money through a successful primary business would apply the skills learned to running a football club as a secondary business with a similar acumen. It would appear that this is in general not the case.

20. The core of the problem

21. English football has progressed unchecked from a professionalised era (1888 to 1990) to a commercialised era (since 1990)

22. The surge in funding from broadcasting rights has been overtaken by a surge in costs, in particular, in transfer fees and in wages

23. This has resulted in pressure on ‘benefactors’ to assist clubs, generally through ‘soft debts’ in the form of loans

24. When the ‘benefactor can no longer (or for whatever is unwilling to) sustain expenditure, the club is in danger of losing its stadium in cases where the so called ‘soft debt’ has been provided against the stadium as security

25. As the scale of finance and hence debt increases, clubs turn increasingly to richer foreign ‘benefactors’. Although foreign investors per se do not present a problem, their increased likelihood of being owners who are absentee and/or unaware of the social construct surrounding a club in its community does. We have now reached a position where half the Premier League clubs are in foreign ownership.

26. The increase in final scale at the top of the pyramid has, through a lack of altruism in dividing out broadcasting revenues, has led to a distortion across the layers of the pyramid. For example, in the top three layers of the pyramid there is now the following disparity in guaranteed minimum income through central league funding:
Premiership - £41 million (minimum)
Championship - £4.9 million
League 1 - £1 million
The introduction of parachute payment has to some extent eased the burden facing clubs on relegation, but, without ‘rocket payments’ to assist promoted clubs, they stand on an uneven playing field in the new higher league, while the club h=they have replaced starts life in the lower division with a substantial subsidy – clubs are rewarded for failure and constrained by success.

27. The continued dependency on the ‘benefactor’ model and the lack of effective financial regulation has, as identified in a report by the Financial Action Task Force (FATF), an inter-governmental body, made football particularly vulnerable as a vehicle for money laundering.

28. The contexts for addressing the issues

29. There are three frameworks within which the football sector is regulated.

30. The most immediate of these is the context of self-regulation. While in theory the ultimate governing body in England is the Football Association, their authority has been eroded through their complex committee structure, and the representation on those committees of league representatives. The chances of reform through self-regulation seem slim; the appointment of a new Chairman whose background is as a Premier League does not suggest that there will be an agenda of radical change.

31. Self-regulation with respect to insolvency has so far been dysfunctional. The author has produced a research paper analysing the effectiveness of the points deduction system. It is clear that deducting points does not deter clubs from becoming insolvent, and it is ineffective in preventing repeat occurrences at the same club. Furthermore, as the ownership of clubs tends to change hands during a period of Administration, the sanction is imposed upon a new ownership who have no responsibility for the causes of the insolvency, and who are attempting in many cases to simply ensure the survival of the club. A classic case in this respect is that of Luton Town.

32. At the other end of the spectrum there is a European context, both in the form of the European Union and UEFA. UEFA are taking appropriate action to regulate through the Financial Fair Play protocol, which requires control of indebtedness and trading solvently. The effectiveness of this protocol will, however, be limited in the English context because the only sanction for non-compliance will be a ban from European competition, a sanction which is only a threat to the top dozen clubs or so. The desired outcomes of the protocol are thus highly desirable but will have little impact further down the football pyramid. It should be borne in mind that the English pyramid has five to six levels at least of professional football, more than in other European countries, and UEFA regulations and protocols are designed for the more typical country.

33. The European Union offers hope for the regulation of professional sport in general through the introduction of the concept of the ‘specificity of sport’ in the Treaty of Lisbon. UEFA has responded through a position statement which is encouraging, but the prospects of UEFA driving through radical change in English football are not immediate.

34. The Treaty of Lisbon does however open the door on the possibility of the United Kingdom government shaping the future of football governance in the home nations.

35. Possible remedies

36. The specific areas in which change in the governance of football are necessary to ensure the sustainability of the sector are:
returning the culture of football clubs to one in which the sporting ethic is recognised as much as the profit motive
club ownership;
the practice of indebtedness and solvent trading;
the distribution of broadcasting rights;
the reunification of lead authority in a single governing body which is not unduly influenced by leagues of clubs.

37. Realistic objectives of UK government-driven change include:

37.1. Taking the initiative in shaping a definition of the specificity of sport which not only embraces employment law but also competition law, but recognises that a) competitive balance is an essential component of sport and b) financial doping is ethically unacceptable in sport.

37.2. Promoting ownership of clubs which is locally based and fan-based.
This can be achieved through incentives for clubs to form as mutuals or as community interest companies (CICs), and to offer fan involvement through supporter’s trusts which have a majority of seats on a club’s board.

37.3. Prohibiting the practice of financial doping, in order to maintain competitive balance and equality of opportunity.

37.4. Ensuring that effective ‘fit and proper persons’ criteria are practiced, and that the rules are not circumvented by the use of de facto shadow directors.

37.5. Reigning in the repeated high levels of debt to HMRC.

37.6. Enforcing the requirement that companies in the football sector trade solvently.

37.7. Ensuring that the football sector does not practice tax avoidance.

38. It is recognised that he UK government cannot in practice directly influence the distribution of broadcasting rights or the relationships of the governing bodies, but it would be naive to imagine that HMG lacks the power to exert substantial indirect influence.

39. A licensing scheme for professional sports organisations, as already practised in German football for example, could go a long way to meeting these objectives

40. Given the contexts discussed above, the UK government not only has a unique opportunity to effect change in football governance but also finds itself in a situation where professional sport needs to change if it is to survive. If self-regulation continues in its present form, the decline of the football sector will continue and may indeed fail, a situation that would be in nobody’s interests. While it is certainly not imperative that the UK government should take an active part in the overall governance of sport, it needs to seize the initiative in implementing change – it appears that no-one else will.

References:
Deloitte (2010) Annual Review of Football Finance, Deloitte Sports Business Group, Manchester

January 2011