Written evidence submitted by Phil Gregory
SUMMARY
The
following report, written by Phil Gregory, only focuses on three
of the six "key points to address". There were various
other situations that I would have liked to include but with one
eye on the report length recommendations I mentioned issues that
I felt were the most pressing.
Sections
from this report have been loosely adapted into a series of articles
published on "Untold Arsenal", to raise awareness of
the issues themselves to a wide readership. The blog itself is
a multi-contributor, fan-run website that deals with the various
issues including the business of football and for which I am a
regular contributor in this area specifically.
In
the first section, I focus on "should football clubs in
the UK be treated differently to other commercial organisations?"
discussing how differences between football clubs and traditional
businesses underline a need for supplementary accounting standards
that take into consideration the complex nature of clubs. Then
I look at highly leveraged takeovers, how they don't have a role
to play in football and measures that should be taken to prevent
them happening.
The
second section is focused on the question "is there too
much debt in the game?" Here I argue against arbitary
limits on debt and illustrate that borrowing can be both good
and bad, using the examples of both Arsenal's and Manchester United's
respective debts.
The
final section of the report focuses on the question "is
government intervention justified and, if so, what form should
it take?" Here I look at the financial gulf between the
leagues caused by the television deal and the dangerous effects
of parachute payments on competition and financial stability in
the Championship.
In the following document, "n1" refers
to the numbered notes included at the end of the main body of
the report, while footnotes are used to give key references.
SECTION ONE:
ACCOUNTING STANDARDS
1. Given the complexity of football when compared
to a more traditional business, I have always found it strange
that it is subject to the current "one size fits all"
model of legislation. Few other businesses pay vast fees to secure
employees, nor do they pay their employees in a complex manner
that includes basic pay, image rights and performance-related
bonuses, and yet no special demands are made of football clubs
to disclose this variety of payments clearly in their annual financial
statements.
2. This greatly limits financial transparency
within the industry. With outside observers relying on measures
such as wages as a percentage turnover to gauge a club's sustainability,
the lack of breakdown of the "wage" means that any conclusions
drawn are unreliable at best.
3. A dramatic rise in wages could be because
of a significant outlay on players and the resulting salaries,
or it could be because of high bonus payments due to unprecedented
success. For this reason, I believe it vital that club accounts
at the very least list separate figures for basic salaries and
bonuses. Indeed, this situation arises despite the fact that a
significantly greater breakdown of the wage bill is offered to
HMRC yet only a very unreliable figure "wage" is made
public.
4. The lack of transparency goes beyond salaries,
however. Given the multi-million pound transfer fees paid for
many players and the significant percentage of turnover this represents
for many clubs, such expenditure has a bearing on the club's financial
situation going forward. Despite this, there is no requirement
to detail in club accounts the amount(s) and nature of incoming/outgoing
transfer fees for a financial year due to the unsurprising fact
that accounting regulations were simply not written with current
trends in world football in mind.
5. The sole measure of transfer spending offered
in the accounts is amortisation,n1
which can be used to gauge trends in transfer expenditure but
little beyond that. "Player/football trading" figures
are given in club accounts but are unreliable, often including
amortisation and other charges to mask the amount spent on transfers.
In addition, amortisation offers the club the ability to spread
the cost of a player in the profit and loss account over the life
of their contract, which doesn't reflect adequately when payments
are made. Of course as a cash-cost, such information should be
ascertainable by looking at the cash flow statement, but figures
are often hidden by being grouped with others, or seemingly not
even given.
6. It is my belief therefore that the profits
or losses of a club for a specific year should reflect much more
accurately the transfer expenditure for that year. There should
also be specific disclosure of the total level of transfer income
and expenditure during the year, with additional information given
on outstanding transfer clauses that may result in future income
or expenditure to aid financial forecasting of the club.
7. Unfortunately, there are further, broader
issues in regards to football and financial accounting. SSAP25,
which covers the reporting of the various segments of a company's
revenue, states that: "...in the opinion of directors,
the disclosure of any information required by this accounting
standard would be seriously prejudicial to the interests of the
reporting entity, the information need not be disclosed"[1]
(emphasis mine). By this, clubs can decide not to breakdown their
turnover into its constituent parts if they choose not to, severely
limiting the ability of an outside observer to understand the
inner workings of any football club which exercised this right.
In the wider business world, directors need the ability and freedom
to act in the interests of their company and there are credible
arguments that forced disclosure would at times be a hindrance
in this regard. However I once again emphasise the fact that football
clubs are unique entities with responsibilities to their supporters,
and the flexibility that directors possess in other lines of business
should not be granted to football. A simple solution to this issue
would be the compulsory requirement of full disclosure for clubs,
overruling SSAP25 in this regard.
8. Hence it can be seen that the current "one
size fits all" system of accounting standards is inadequate
to accurately account for a club's various activities. The solutions
proposed to the problems raised in this section could be introduced
as a supplementary standard to which football clubs must satisfy,
in addition to the existing regulation. Where the two standards
conflict on an issue (as with SSAP25 and the option of non-disclosure)
the supplementary standard must overrule the pre-existing legislation.
As part of this standard, I would also add rules standardising
the categorisation of match day, commercial and broadcasting revenue
to ensure that financial statements between clubs are easily comparable.n2
While the suggestions here are not exhaustive and there are other
issues that would need to be looked at for complete standardisation
of club financial statements, these changes would be a big step
in the right direction.
Leveraged Buy-outs
9. In addition to accounting standards, there
is a further area in which I believe there are substantial differences
between football clubs and traditional businesses, that of leveraged
buyouts (LBOs). Brought to the forefront of the public consciousness
by the controversy that surrounded Liverpool FC's former owners,
leveraged buy-outs are fairly common in the business world.
Their primary benefit is the fact that they offer an additional
way to change the management running of a company, while they
also act as an incentive towards best practice for the current
incumbents.
10. A person seeking to launch an LBO does so
considering the costs and benefits to themselves of such an activity.
In the longer term, if the LBO proves to be successful they will
benefit from profits they wouldn't otherwise have received, while
conversely if it fails they suffer the costs resulting from the
liquidation of their business. Such a model works well for traditional
business, where the impact on society of a firm of comparable
size to a "top four" football club by turnover (say
a large supermarket store) collapsing is not especially significant
on the national level.
11. However, one has to consider that a football
club is more than simply a business, and the effects of the liquidation
of a football club are much more profound than that of a similarly-sized
business. A club represents an identity for fans, who should be
viewed as "emotional stakeholders" in the club, whose
wishes and interests should be considered like any other stakeholders'
would be. It is unthinkable that in a highly risky business venture
the interests of any significant stakeholder would go completely
unconsidered, yet this is exactly what happens when we consider
the emotional stakeholder that every single fan is.
12. In my view additional regulation is needed
to rectify this weakness in the existing rules governing takeovers,
and it would not need to be especially complex. As an LBO poses
a risk to a club due to the high amounts of debt secured onto
it as a result of the takeover, the solution would be to simply
introduce a low limit on the amount of debt that can be used to
fund a takeover, for example no more than 20% of the funds
used can be borrowed. In addition to this, setting a limit on
the level of dividend withdrawal would close a further avenue
for withdrawal of funds to pay debt costs, as well as rectifying
the FA's error in allowing Rule 34 to be circumvented in 1983.n3
This would be in line with the approach taken by UEFA in
their Financial Fair Play proposals, under which dividends are
included as a "relevant expense". Such fairly simple
measures would render LBOs impossible, to the great benefit of
the English game.
SECTION TWO:
DEBT
13. It is my view that debt in itself is not
a problem when it is both cheap (serviceable by the club's cash-generating
activities), long term and is used to strengthen the club in the
long term. While these criteria unfortunately don't apply to much
of the debt within football, I feel arbitrary limits on debt are
unwise as they would prevent debt being used at all, even if the
intention for the debt met the above criteria. In order to illustrate
how in certain cases debt can be beneficial to the game and shouldn't
be regulated out of existence, I'm going to examine the differences
between the debt burdens of both Manchester United and Arsenal
FC respectively, two clubs of similar standing in the Premier
League.
14. Arsenal used debt to fund the Emirates stadium
project and the redevelopment of Highbury into flats. Figure one
illustrates the impact this had on Arsenal's turnover, which increased
by over 46% between the years 2006 and 2007 thanks to their move
into the new ground. As can be seen on the same graph, this enabled
wage spending to not only rise, but to do so sustainablyn4
(figure two) thanks to the turnover growth. Finance costs were
low, so were no obstacle to debt repayment. The bank loans that
were initially taken out were replaced by long term bonds (maturities
of between 21 and 23 years), offering stability as well as saving
on interest, too. Debt incurred as a result of the redevelopment
of Highbury into apartments was cleared as a result of its own
sales, eventually generating significant funds for the club. From
this therefore it is clear to see that the debt itself was cheap
and long-term, while its use is already showing signs of having
improved the club's long-term financial and sporting position.
15. Manchester United, on the other hand, gained
their debts as a result of the Glazers' takeover in 2005. The
majority of the funds were provided by bank loans which were secured
against the club's assets, making it a leveraged buy-out. The
remaining balance was contributed by the controversial "payment
in kind" loans (PIKs) with a restrictive 14.25% rate of compound
interest, although these are secured against a parent company
rather than the club itself. In March 2010, Manchester United
refinanced with a £500m, seven year bond issue which costs
between 8.75% and 9% interest. When contrasted with Arsenal, Manchester
United's debt cannot be considered cheap, nor particularly long-term.
16 The question of whether the debt even improved
the club (by financing the takeover) does not have a clear-cut
answer. Looking at Manchester United's finances since the 2005,
it is clear from figure three that they have experienced a significant
growth in turnover since the takeover. However, much of the growth
is from TV broadcasting rights, negotiated by the Premier League.
Significant commercial revenue growth is laudable, but increases
in match day takings aren't given they are largely as a result
of the 47% rise in ticket prices between the start of Glazer ownership
and 2009.[2]
Such profiteering behaviour simply prices the local fan out of
supporting their team, shown by the almost total depletion of
the season ticket waiting list. Given these actions are undoubtedly
related to the significant funds required to service the takeover's
debts, it is an unacceptable situation and should lend further
weight to my earlier concerns regarding LBOs.
17. Given this, I think it would be an error
to place arbitrary limits on debt as these would have prevented
Arsenal carrying out their stadium work, and similar project by
other sides in the future. Moreover had the previously stated
LBO reforms existed in 2005 would have prevented the debt burdens
of Manchester United and Liverpool ever occuring, two of the clubs
most heavily indebted during in recent times. For the traditionally
smaller sides, debt is often incurred as a result of attempting
to compete, a situation I will examine in depth in the next section.
Overall, I believe excessive debt is merely a symptom of other
problems rather than a problem in itself, and the underlying
reasons for the excessive debts must be dealt with rather than
simply applying the sticking plaster of arbitrary limits on debt.
SECTION THREE:
TV DEALS, THE
FINANCIAL GULF
BETWEEN LEAGUES
AND GOVERNMENT
INTERVENTION
18. In my view, much of the overspending by football
clubs is as a result of the desire to get into the "promised
land" of the Premier League or indeed simply stay there.
With its vast TV and sponsorship deals in comparison to those
of the Championship, the current season's bottom-placed side in
the Premier League will get approximately £42 million. When
contrasted with the £2.3 million (plus sponsorship) that
the winner of the Championship will receive, it is clear why there
is such a huge incentive for lower-league sides to seek promotion
at any cost, literally.
19. The prevailing reasoning amongst Football
League sides seems to be that excessive levels of spending can
be sustained for a few years within which promotion must be achieved.
After that, Premier League-level revenues can be used to pay off
all the debts accrued.
20. There are two main flaws to such reasoning.
Firstly, a club may not get promoted within the time frame nor
ever, given there are many more clubs that seek to be promoted
than can be come the end of the season. Secondly, upon arrival
in the Premier League, most clubs spend even more in order to
stay there, as well as incurring high bonus payments and basic
salary increases reflecting the new Premier League status of the
playing squad. Hence instead of securing the club's financial
position by clearing debts, clubs continue to spend unsustainably
as they now cannot afford to be relegated.
21. Of course, such a high-risk approach is fraught
with danger for the clubs, but unless a club spends on a similar
level to its competitors it will struggle to be promoted. Hence
promotion, by rewarding overspending, actually rewards bad practice,
something that should be anathema to anyone with an understanding
of economics. Arsène Wenger put it best when he stated:
"Something that is more irrational in football is that
sometimes non-rationality can be rewarded. But nine times out
of ten it doesn't work so nine times you are in a bad situation".
Unless the cause of this irrationality, the financial gulf between
the leagues, is dealt with football clubs can't be expected to
show restraint while their competitors have a competitive advantage
due to excessive spending. Financial sanity can only be
restored by eliminating the perverse incentives rewarding bad
practice.
22. Hence the problem lies in the financial gulf
between the leagues, a result simply of there being too much TV
money in the Premier League when compared to the Championship.
The Premier League's wealth is no bad thing; it creates a spectacle
seen all around the world with many of the best players plying
their trade in our country, all of whom are paying vast amounts
in tax to HMRC. While the Premier League is making more solidarity
payments to the Football Foundation than ever before,n5
the Football League's television and sponsorship rights are simply
much lower, resulting in Football League sides receiving vastly
smaller payments in comparison to their Premier League counterparts
(figure four).
23. The biggest impact of this is that the payment
received by a Championship side is dwarfed by that of a Premier
League side, as illustrated by figure five. From this, it is clear
to see that while TV money received by a League Two side is over
75% the amount of a League One side comparing a Championship club
to a Premier League club gives a figure of only 5%. Considering
the Premier League's distribution of its own money to Premier
League clubs is highly equitable,n6 and Richard Scudamore's
apparent awareness that a strong Championship is genuinely in
the Premier League's interest[3]
it is bizarre that they have allowed the Football League to fall
so far behind in the broadcasting money stakes, given three out
of 20 of Premier League are always previously Football League
sides the season before. Action needs to be taken to reduce this
financial gulf, but more needs to be done than additional payments
from the Premier League to the Championship. My proposal would
be the removal of parachute payments and the redistribution of
that money to the Football League, achieved via government interventionn7
if necessary. I will explain the issues surrounding parachute
payments and justify this course of action in the following section.
Parachute payments
24. Unfortunately, the gulf between television
and sponsorship alone does not account for all of the issues in
the Championship, parachute payments have a large role to play
too by distorting competition. Parachute payments are given to
relegated clubs out of the Premier League's revenues, designed
to soften the financial blow of dropping to the Championship for
recently relegated sides.n8 In practice, the payments
aren't used to reduce losses, going instead towards maintaining
a Premier League-sized wage bill despite Championship-level revenues,
in an attempt to maximise the chances of promotion. This drives
other promotion hopefuls to spend yet more money they don't have,
exacerbating an already unsustainable situation. Despite opposition
from Football League chairmen, the Premier League decided it would
be a wise idea to increase the amount of money in parachute payments
to £48 million over four years from £32 million over
two years.n9
25. When these payments are added to the club's
Championship television revenue, they are receiving a total of
£18.3 million of broadcasting revenue against a mere £2.3
million for their competitors. This clearly gives recently relegated
sides an unfair financial advantage ("financial doping"
to coin an apt phrase Arsène Wenger used to describe a
similar situation) in the promotion fight. The net result is the
non-recipients spending more money they don't have in an attempt
to remain competitive in the promotion battle, worsening an already
precarious financial situation. Again, hugely distorted incentives
are evident and failure is rewarded, culminating in a both economically
and socially undesirable outcome.
26. If parachute payments are a reward for failure
and an impediment to good practice then it stands to reason that
removing them would improve the overall situation. While clubs
will have budgeted for the payments which prevents their immediate
removal, I would propose doing so from as early a date as possible
and redistributing the money to the Football League. I'll illustrate
the greatly beneficial impact this redistribution would have on
the Football League in the following paragraph:
27. While parachute payments can total a maximum
of £48 million for a single club, they stop if that team
is promoted back to the Premier League, hence the amount received
may only be £16 million if a side is goes back up immediately
after relegation. From analysing sides relegated from the Premier
League between the Millennium and the 2005-06 season,n10
it can be seen that a relegated side on average take three years
to get promoted.n11
28. Hypothetically, complete removal of parachute
payments for next season would therefore save £120 million
over three years that could be redistributed equitably amongst
the Football League sides. Doing this would raise the amount received
by every club in the league by £1.66 million in 2011-12 season,
to £3.96 million, nearly doubling the size of the Football
League TV deal in relation to the Premier League TV deal in the
first year of redistribution (the percentage improves to 9.36%).n12
29. The amount would increase by an additional
£1.66 million for season 2012-13 and the same again for 2013-14,
reflecting the additional money coming in from subsequent years
of parachute payment funds being saved and added to the Football
League's funds. By the 2013-14 season, the Football League TV
deal would plateau at £7.3 million, which would be more than
17% the size of the money received by 20th placed side in the
Premier League. Solely by removing parachute payments and redistributing
the money fairly, with no additional payments required from the
Premier League, the size of the Football League's broadcasting
revenue has more than tripled in relation to the Premier League,
reducing hugely the financial gulf between the two leagues. When
that is considered alongside the benefits in terms of competition
resulting from the removal of the unfair parachute payments, the
financial health of the Championship going forward would be greatly
improved by the adoption of these measures.
30. Premier League clubs would naturally protest
such a change, as it gives lower league sides an opportunity to
break their hegemony. In addition, they could attempt to point
to the large difference between Premier League and the Championship
revenues as evidence that they need parachute payments. While
these reforms would reduce that financial gulf, a gap would still
remain and relegated clubs would have to cut their costs substantially
in order to remain financially secure. Instead of an undesirable
yearly fire sale of players from relegated sides, all that is
needed is contract clauses whereby player wages are cut in the
event of relegation. Such clauses already exist but are not universally
utilised, as it may be an obstacle to a obtaining a player's signature
in the first place. If this proves to be the case, it will be
needed to legislated that all player contracts must include such
a clause, so that clubs don't gain a competitive advantage by
not using them. Such a change is perfectly in line with the wider
world, as any business that experiences a fall in revenues is
forced to cut costs drastically. Indeed if the playing squad gets
paid more for an exceptionally good league position, does it not
make sense that relegation results in wage reductions?
NOTES TO
THE REPORT
1. Amortisation is calculated as the value paid
for a player divided by the number of years on their contract,
High transfer spending will therefore result in high amortisation
charges. The year on year changes in amortisation gives an indicator
of whether transfer spending is rising or falling, but offers
no insight into payments for individual players.
2. Clubs could for example logically categorise
executive box revenues as either commercial or match day income,
leading to difficulty in cross-comparison of financial statements.
There are also other less logical categorisations distorting financial
statements, such as Birmingham listing a compensation fee received
for manager Steve Bruce under "commercial revenue" when
it is surely a one-off payment.
3. Rule 34 prohibited directors from being paid
salaries and limited dividend payments to shareholders. In effect,
it stopped clubs being taken over and stripped of cash by their
owners, ensuring football's money stayed within football. The
rule can be bypassed by forming a holding company above the club
itself, and so the rule is easily evaded nowadays.
4. Wages as a percentage of turnover only exceeded
50% the year before the Emirates was opened, likely in anticipation
of the jump in revenue which pushed it back down to its target
range.
5. Prior to the current agreement, 5% of the
broadcasting and sponsorship revenues went to the Football Foundation.
Now, after government intervention, 6% of the first £1.1
billion, 7.5% of the next £300 million and 10% of any money
raised in excess of £1.4 billion goes to the football foundation.
With domestic, highlights, and international rights as well as
sponsorship money coming to nearly £3.5 billion, this is
a vast contribution to the Football Foundation and fantastic for
the grass roots game.
6. Domestic rights are divided as: 50% equally,
25% according to number of televised appearances and 25% according
to league position. All money raised by selling rights abroad
is divided equally
7. Government intervention proved invaluable
in securing the changes specified in note 4, and so has a good
track record of results. Labour MP and former Minister of Sport
Richard Caborn negotiated directly with Richard Scudamore, Chief
Executive of the Premier League to extract the concessions for
the Football Foundation.
8. The fact that such a thing even exists is
testament to the gulf between the Premier League and the Championship.
You don't need a parachute to drop between the leagues that make
up the Football League, for example.
9. This was dressed up as a solidarity payment,
but as demonstrated in this section of the report it is actually
greatly detrimental to the Championship, and Premier League clubs
likely voted for it as they desired the money to get back promoted
in the event of their relegation. They were simply voting to create
a more closed shop and dressing it up as an act of charity.
10. Data ended at 05/06 in order to allow sufficient
time to see if a club got promoted within four years of relegation.
Using any more recent seasons would have meant that the data cut
off after three, two or one year(s), distorting the results.
11. The average is slightly deceptive here, as
the results tend towards the extremes, however it doesn't affect
the results. The majority of clubs that get promoted after relegation
do so after one year, the rest after two. The remaining clubs
didn't get promoted at all, so would've drawn on the full four
year allowance of parachute payments, and so were entered as a
"four" for the purposes of the average.
12. The downside not mentioned in this example
is that by solely increasing the money in the Championship, the
gap between that league and League One has now increased. Hence
any increase in money to the Championship must also result in
a proportional increase in money to the other leagues. This would
slightly reduce the money available for the Championship, and
therefore lower the comparative percentage against the Premier
League slightly.
13. Given the increased revenue in the Football
League as a whole, perhaps 25% of the total could be paid on a
performance-related basis, or in the event a club reports an operating
profit (prior to the payment, of course). Such a change wouldn't
distort competition but the former would reward success and the
latter sustainability incentivising desirable behaviour.
APPENDIX
Figure one

Figure two

Figure three

Figure four
BEAR IN MIND THAT FOR THE GRAPH BELOW, IF
A TEAM FINISHED HIGHER THAN 20TH IN THE PREMIER LEAGUE, THEY WOULD
RECEIVE EVEN MORE MONEY, WHEREAS FOOTBALL LEAGUE FUNDS ARE DIVIDED
EQUALLY WITHIN EACH LEAGUE

Figure five

Note how each TV deal is relatively smaller than
that of its "parent" league as you go up the Football
league.
January 2011
1 http://www.frc.org.uk/images/uploaded/documents/SSAP%2025.pdf
Quote taken from paragraph number six, found on page 3 of the
document itself. Back
2
http://www.independent.co.uk/sport/football/premier-league/manchester-united-announce-large-increase-in-ticket-prices-446230.html
Yearly increases between 2005 and 2009, to a similar level as
those reported in the link given, have been the norm for Manchester
United fans when renewing season tickets. Accessed online 15/1/2011 Back
3
"The Premier League clubs felt a stronger Championship would
be greatly beneficial to both competitions" http://news.bbc.co.uk/sport2/hi/football/eng_prem/8886558.stm
accessed online 15/1/2011 Back
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