Football Governance

Written submission by Substance (FG 85)

Summary

· Football clubs are different from other commercial organisations due to its sporting nature, the relationship of fans (consumers) to clubs (companies) and the organisation of competition (leagues, cups).

· Football has demonstrated that it has been unable to reform its own governance adequately due to the competition between leagues and the FA and the dominance of major club interests.

· English football is inherently financially unstable, as evidenced by the chronic instances of insolvencies. Levels of debt create an uneven playing field giving advantage to private companies over community owned companies and which limits wider social benefit.

· There are distinct business and wider social advantages for mutual, community and supporter ownership models.

· Government action is both justified and long overdue and there are a number of different forms it can take.

About Substance

Substance (www.substance.coop) is an experienced social research cooperative whose staff have backgrounds in leading university research institutes, that works in the sport, youth and activities sector. We undertake major national research projects, including a 2 year study for Supporters Direct on the Social and Community Value of Football (3 reports attached), and the Football and its Communities research for the Football Foundation (2006: attached). Substance also works with a majority of professional football clubs to deliver the evaluation of their community schemes including those managed by the Football League Trust, Kickz and the Home Office Positive Futures programme.

Dr. Adam Brown was a leading member of the Government Football Task Force from 1997-2000 and co-authored the FTF Majority Report; has published widely on the governance of football and the relationships of fans to their clubs; and has previously presented evidence to the Monopolies and Mergers Commission inquiry into BSkyB’s Manchester United takeover (1999) and the All Party Parliamentary Football Group inquiry on football governance (2009).

Q1 Should football clubs be treated differently to other commercial organisations?

1. Football clubs differ from ‘normal’ commercial organisations in two key ways.

2. Firstly, the organisation of competition in the football industry is unlike normal commercial competition. Clubs/companies are organised into leagues, competition is focused around set fixtures and success or failure is determined by sporting endeavour rather than the sale of goods and achievement of market share. This was recognised by the MMC’s BSkyB/Manchester United inquiry in 1999 as well as European Commission Competition Directorate inquiry into the collective selling of TV rights by the FA Premier League (in which the league was regarded as a ‘cartel’, although ultimately given exemption from action).

3. Secondly, the relationship of supporters to their clubs is radically different from the normal relationship of consumers to suppliers. The emotional and usually life-long attachment of supporters to their clubs means that normal relationships of supply, demand and value for money do not apply to the same extent. Although a club’s attendances may drop when the team performs badly, support – or custom – is rarely transferred to another supplier – or club. The existence of, and continued support for, 92 professional league clubs, and significantly more in the non-league pyramid - many of whom will never achieve on-field ‘success’ – is testimony to this.

4. Substance’s research for Supporters Direct into the Social and Community Value of Football included surveys of supporters of four clubs [1] , two supporter-owned and two private limited companies. In this we asked supporters to submit three ‘keywords’ that exemplified the value of the clubs to them. The results were notable in their similarity and in that the key benefits fans received from their association were social in nature: a sense of locality, a source of friendship, being part of a ‘community’, and something that bound both family and friendship relationships. There were no references at all to the success (on-field or financial) of their clubs, suggesting that the value fans get from their ‘consumption’ of their clubs was specifically social in nature.

5. In our three-year research for the Football Foundation, Football and its Communities, we also found that football clubs are the site for the formation of communities amongst fans which outstrip and outlast the desire for success and which suggest radically different relationships than those associated with more typical consumer-company relations.

Being a football supporter is a regular, structuring part of their lives which enables them to experience a real sense of belonging in an otherwise uncertain world. As such, for many supporters, being part of a fan ‘community’ is far more substantial than merely an escapist form of momentary bonding. [2]

6. Whilst football clubs are undoubtedly partly commercial in nature, the evidence form these research projects supports the view that football clubs must be regarded as different to other commercial organisations.

Q2: Are football governance rules in England and Wales, and the governing bodies which set and apply them, fit for purpose?

7. The governance of English football has been in dispute for well over 100 years. For most of this time, that dispute was due to the unique situation in English football in which there has been a governing body – the Football Association (FA) – and a club based organisation – the Football League (FL) [3] . The historic failure to reconcile these and the subsequent FA sanctioned formation of the Premier League (PL) as a break-away from the FL has resulted in a three-way ‘competition’ for control of the game.

9. The emergence of PL dominance within the governing structures of the FA has further clouded and undermined the ability of the FA to govern the game independently. The failure to implement the limited recommendations of the Burns Review, the chronic instability in the executive of the FA and the undermining of attempts to reform how football is governed in a way independent of club interests amount to a structure that is not fit for purpose.

10. The examples of Leeds United (who went into administration and whose real ownership is still unknown), Portsmouth (who had four owners in a year followed by administration), Liverpool and Manchester United (both of whom were the subject of heavily leveraged buy-outs) in recent years exemplify the problems that a governance structure dominated by major clubs can result in.

Q3: Is there too much debt in the professional game?

11. The financial model of professional English football is clearly inherently unstable. Since 1992, the year the Premier League was formed and the distribution of wealth in the game was radically changed, there have been 61 insolvencies in a professional league structure of 92 clubs – or two thirds of all clubs.

12. In our Social Value research we surveyed ten chief executives of clubs ranging from the Premier League to Step 7 of the national game and we also interviewed executives of the four case study clubs. In all but three cases in the preceding ten years, the club had either gone out of business and been reformed, or been in administration, or been the subject of destabilising ownership changes. In every case bar one the executive made reference to the financial pressures and problems they faced in the current model.

13. The ability of clubs to spend more than they earn, the levels of debt allowed and the demands of increasing player wages were barriers identified by both supporter-owned and non-supporter-owned clubs in both our survey and our case studies. Furthermore, executives of all clubs suggested that meeting these financial challenges restricted their ability to deliver wider social value to local communities.

14. In particular, community-owned clubs complained that the debt that privately owned clubs could take on created an ‘unlevel playing field’ which restricted their ability to progress and to compete as the following quote illustrated.

‘The madness that exists - unsustainable wages and all the rest - has to stop in order for clubs like us to be proper clubs. We can keep plugging along and doing our best, but ultimately something needs to happen structurally so that the game comes towards us rather than us just getting submerged beneath this mass of debt that nobody can sustain. It’s all right the Football League legislating to punish failure but they are not legislating to prevent failure.’ (CEO, Club C, supporter owned) [4]

15. As such, the levels of debt allowed in football is unfair on and a deterrent to other forms of ownership, it creates endemically unsustainable and unstable finances, and it creates public harm by limiting the potential social value of the game.

Q4: What are the pros and cons of the Supporter Trust share-holding model?

16. Our research for Supporters Direct reviewed existing literature about the advantages and disadvantages of mutual ownership and this informed our primary research into football.

Advantages of mutual and community ownership in general

17. In our Interim Report [5] for the Social Value research we cited numerous studies that argue that mutual and community forms of ownership offer some distinct advantages.

18. Post et al [6] say that there is evidence of the benefits of involving stakeholders in businesses more generally. Wheeler and Sillanpaa [7] argue that available evidence suggests that companies that are run with a view to the long term interests of their key stakeholders rather than a short term interest in their shareholders are more likely to prosper.

19. Hutton (2007) has argued that a better and more direct route to gearing the business to its stakeholder interests is by making stakeholder groups owners.

20. The advantages of mutual ownership suggested by the Building Societies Organisation research [8] included:

· Profit is invested back into the business

· An absence of external investors focused on increasing returns means businesses can be aimed at sustainable medium-term growth

· Being perceived as more trustworthy

· Tending to have more focus on corporate social responsibility

· Tending to have greater commitment to assisting community initiatives

· Increased accountability associated with member ownership

· Being more personal

· Run in the interests of its customers or users

21. Research by Mills [9] suggested further advantages of mutual ownership:

· Community ownership encourages decision making on interest and livelihoods of those that will be affected.

· Increased democracy encourages local participation

· Encouraging citizenship and transparency

· Encouraging employee participation

· Long-term thinking

22. Finally, Bruque et al. [10] argue that democratic ownership and control (of which supporter trusts are one form) results in motivations for long term and sustainable return on investment and the satisfaction of common socioeconomic goals – arguably far more appropriate for the kind of sport-commercial-social form of business in football.

Advantages of mutual and community ownership in football (the supporter-trust shareholding model)

23. A key aim of the brief we were given by Supporters Direct was to identify advantages and disadvantages of different ownership structures in terms of the social and community value that football clubs can generate, as well as identifying some of the business advantages of supporter ownership. This primary research involved a survey of ten CEOs of clubs at all levels and in depth case studies of four clubs.

24. These are summarised in our Final Report [11] and include distinct advantages of supporter trust models for football, its fans and its communities, notably:

· A recognition that concerns for and impacts on local communities can be generated by all activities of the club – including its core operational aspects such as ticketing, purchasing, employment, and environmental policies.

· The horizontal integration of wider community interests across club operations and its core business (as opposed to a ‘ghetto-ising’ of community concerns in community departments).

· Better relationships with local authorities and a closer alignment of public interest aims.

· A more long term approach to club development and one which is less dependent on satisfying shareholder/investor interests.

· Increased transparency of club administration and accounts.

· The democratic involvement of supporters as owners, resulting in greater buy-in of supporters and increased commitments to the club, such as levels of volunteering

· A greater sense of buy-in, engagement and inclusion of a wider cross section of local people than with privately owned clubs

· More in-depth relationships with local communities including informal, ad hoc and non-institutional relationships

· Distinct business advantages – such as preferential treatment by local authorities when developing new facilities

· Longer term partnerships delivering local community value.

· Less ability to raise finance/debt against equity.

25. It should also be noted that those who we spoke to from non-fan owned clubs said that slower decision making and the ability to raise finance (and debt) against equity were the disadvantages of the supporter trust model.

Q5: Is Government intervention justified and, if so, what form should it take?

26. This Select Committee inquiry follows a number of previous government level inquiries into the governance of football:

· In 1990 Lord Justice Taylor published his Final Report into the Hillsborough disaster in which he argued that the introduction of all-seater stadiums should not result in disproportionately increased ticket prices for supporters. No government action was taken to support this and by 1999 the average season ticket price had increased by 312% in a period where the cumulative RPI was 54.8% [12] .

· Following labour’s Charter for Football, which sought to unify football’s governance, between 1997 and 2000 the Football Task Force investigated how best to regulate the commercial aspects of football. The FTF Final Report [13] was split between the football authorities on one side - promising voluntary codes of conduct to improve ‘customer relations’ - and almost all other FTF members on the other. The majority recommended independent regulation of the football authorities’ governance performance, a ‘football ombudsman’ and other sanctions to ensure reformed governance. The then government chose to side with the football authorities but promised that if governance had not significantly improved within two years it would act [14] . No further action was taken despite the expression of ongoing concerns about the game’s governance.

· In 2009 the All Party Parliamentary Group of MPs published English Football and its Governance, which recommended annual reports on governance performance from the PL and FL; annual FA reports on club governance performance; that debt and fitness of club business plans are considered part of Fit and Proper Person tests; and that the FA introduces club licensing for all clubs along the lines of UEFA’s system and that ‘a key element should be related to expenditure not exceeding revenue’ [15] .

27. The point of highlighting these is to emphasise that although some minor improvements have been made, football has demonstrated itself to be largely incapable of reforming itself in terms of its governance and that government action to ensure the proper regulation of the national sport is therefore not only justifiable, it is very long overdue.

28. Although football authorities and others may argue that football should not be treated differently under the law to other sports (or indeed businesses), there is already ample precedent for government action including the Safety at Sports Grounds Act 1975, the Football Spectators Act 1989 and the Football (Offences) Act 1990. As James and Miettinen argued in their paper for the Social Value research:

Despite claims to the contrary by both the government and the football authorities, Parliament can, and has on a number of occasions, passed football-specific Acts. The current lack of enthusiasm for legislation in this area is more a lack of political will than there being a constitutional barrier to action. [16]

29. Having shown itself unable to reconcile the inherent conflicts of an essentially free market commercial approach to the governance of club football, the game is now in need of government action to ensure reform. This should be used to:

· Regulate the regulators and ensure, with legislative backing, that all stakeholders and the public interests are met and that both debt and profiteering are restricted.

· A re-introduction of rules (such as the FA Rule 34) to limit profit making from clubs.

· Promote alternative models of club ownership that are inclusive, sustainable, democratic and participatory.

· Introduce a regulatory regime for the proper reporting of social and community impacts of the actions of clubs and leagues as recommended in the Social Value of Football report.

· Require football clubs to introduce company objects relating to their community obligations and for them to report against these objectives – especially where they are in receipt of public funds, or preferential treatment by public bodies.

· Resolve the inherent financial instability in the game through root and branch reform.

30. Furthermore, the government should explore options in upcoming legislation to promote the benefits of community ownership. The Localism Bill currently passing through Parliament should be strengthened to ensure that:

· Football supporters are able to require their local authorities to list clubs – including land, buildings and businesses – as ‘community assets’

· There is provision for a genuine right to buy – i.e. a first refusal – for fans when clubs are either being disposed of by existing owners or entering administration.

· Provide an adequate moratorium on the transfer of the club to any other owner in order for communities to secure the necessary finance.

31. In addition, the government should:

· Introduce measures in which fans and communities can more easily raise finance for the purchase of clubs or shareholder stakes within clubs – such as assistance in setting up community share schemes (as being developed by FC United of Manchester) and preferential regulation by the FSA

· Designate clubs owned by Community Benefit Societies in similar categories as charities to ensure business rate reductions

· Give preferential treatment of clubs owned by Community Benefit Societies by HMRC

· In insolvency cases, utilise HMRC recovery of deficit to encourage community purchase

· Utilise the Big Society Bank to encourage supporter and community ownership

Q6: Are there lessons to be learned from football governance models across the UK and abroad, and from governance models in other sports?

32. There are numerous examples of more equitable and sustainable models of regulation and of club ownership than those which dominate in English football. These are referred to in other submissions but include:

· The German 50%+1 ownership rule ensuring member ownership of clubs [17] .

· The club licensing system implemented in Northern Ireland, which requires community development managers and reporting at all clubs.

· Equitable revenue sharing amongst clubs in the North American Football League.

· The new UEFA club licensing system to ensure clubs cannot spend what they do not earn, which should be extended to all clubs in England.

January 2011