Written evidence submitted by Adam Franks
FCA CFA
1.0 Introduction
1.1 This submission is made by Mr Adam Franks
FCA CFA, a Director of Brighton & Hove Albion Football Club.
1.2 This submission is made entirely in my personal
capacity and doesn't necessarily reflect the views of the Club.
1.3 I am grateful to Mr Sean Hamil and Dr Geoff
Walters under whom I am currently studying for a MSc degree in
Sport Management and the Business of Football at Birkbeck, University
of London.
1.4 This submission therefore presents the realities
of the challenges faced by a Football League club, as seen through
the eyes of a serving Director, grounded in both finance and relevant
academic studies.
2.0 Executive Summary
2.1 The central theme to this submission is that
the function of Football League clubs is to both supply football
as a commercial product and also to play a key role in their local
communities. As such they should not to be regulated and taxed
as normal businesses, but rather as something special to be cherished,
a cultural asset.
2.2 For Brighton & Hove Albion, these twin
aims overlap at all levels of the club, stadium company and award
winning charitable arm, Albion In The Community. But while we
are fortunate to have found ourselves in a very healthy financial,
governance and ownership position, I increasingly fear that something
of the fabric of society is being lost alongside the "soul"
of football as the list of Football League clubs in financial
distress lengthens.
2.3 Five recommendations are made for your consideration
in the areas of;
a more
favourable taxation of investorsto recognise the real nature
and motivation behind investment into Football League clubs;
a relaxation
of planning rules for football groundsso that the costs
and uncertainty for the community are reduced;
a review
of the decision to move to all seater stadiaso that the
mix of fans in the stadium on match-day better reflects the community
the club serves;
a cap
on the maximum debt level a club can carry and a change to the
sporting penalties that are incurred when an administration event
happensso that the risk of damage to the community is mitigated;
and
the
implementation of salary caps on Football League clubsso
that the desire to win at all costs does not lose touch with the
financial cost of attempting to do so in a league where many other
adopt the same utility maximisation strategy.
3.0 Should football clubs in the UK be treated
differently from other commercial organisations?
3.1 Yes, absolutely because as will be illustrated
throughout this submission, football clubs, especially those in
the Football League, are fundamentally different to other commercial
organisations.
3.2 This is self-evident in the case of Brighton
& Hove Albion FC ("BHA") and, I suggest, many other
clubs by reference to its poor financial performance throughout
the business cycle, the special relationship we have with our
fans, our complicated relationship with competing clubs and a
desire to utility maximise.
3.3 These are explored further below, but beyond
these factors there are more fundamental reasons why clubs like
BHA are not like other commercial organisations and so deserve
to be treated differently. This can best be illustrated by exploring
the special position of the club in the context of its local community.
3.4 I am acutely aware of the role the club plays
locally in shaping conversation, in providing employment opportunities,
in providing a mechanism to deliver community services (adult
education, sports participation, social inclusion, disability,
health and community relations), to those in need or at risk,
in providing a focus for aspirations and in encouraging social
and community cohesion. Clubs can energise and mobilise communities
in a common goal in ways that no pub, supermarket or bank ever
could.
3.5 At the level of the family, I point to weddings
which have been delayed by over a year until our marriage license
will be granted in the summer of 2011, as well those families
who have urns of ashes stored temporarily as they await a final
resting place for their loved ones in our new stadium.
3.6 Within our Boardroom, I certainly feel a
weight of responsibility to our local community as well as our
fans and believe that it is therefore beholden on us to consider
these stakeholder groups and to manage the club so as best to
meet their needs as well as our own.
3.7 If my experience is replicated in Boardrooms
of other Football League clubs as well as other clubs who strive
to become Football League clubs, and I strongly suspect that it
does, then the footprint for good that clubs make is a matter
of national importance and pride.
3.8 We were delighted by the most recent annual
Christmas message in which Her Majesty stressed the powerful way
that sport can build communities and create harmony between people
of different backgrounds and parts of society. We could not agree
more and indeed this is a theme that repeats throughout this submission.
3.9 I suggest that protecting this rich cultural
and social heritage is too important to be left to market forces
alone and that the special status of clubs should be recognised
and protected.
3.10 Prior to 1992, when serious money first
began to flow into the sport, this was not problematic because
the absolute level of losses was low. Now though it is an acute
problem which means that a succession of investors in the vast
majority of other Football League clubs, have seen their equity
investment wiped out over time.
3.11 It is not obvious why new investors should
step forward to invest equity in clubs when the investment case
is so poor. BHA are fortunate to have source of equity funding
in the form of a businessman with deep local roots in the community
and club, our Chairman Mr Tony Bloom ("Tony").
3.12 Tony is the third generation of his family
to serve in the Brighton Board room. His motivation for investing
is not to obtain a fair return, although it's quite legitimate
for investors to expect a financial return for the risk they run,
but rather because the club is a vehicle through which he can
proactively "give-back" to his local community.
3.13 He is rightly proud of his birth place,
of the community where he grew up and of the club that he has
supported from childhood. His investment in the club and especially
into its new stadium will provide a lasting legacy and in his
words "ensures that my young son and his generation of Brighton
and Hove Albion fans can look forward to watching their team without
the fear that the club will ever again be homeless".
3.14 Sadly, other clubs are not in this fabulous
position and it leaves them open to lower quality investors obtaining
control.
3.15 Still, this begs the question; why should
investors in clubs not expect a financial return? One answer can
be illustrated by the aspirations of many club boardrooms which
hope to deliver excellence both on and off the pitch within the
context of financial break-even over the medium term. Even this
hoped for result would mean that club investors will forsake both
the interest they could have earned on their money and the opportunity
to have invested in other more financially sound businesses.
3.16 This again indicates that Football League
clubs are overwhelmingly run as philanthropic efforts. At Brighton,
in parallel with the efforts of the club to engage with school
children and other community efforts, we are very proud of our
award winning community scheme. In 2010 AITC delivered services
to over 60,000 people at a high level of quality as evidenced
by the three national awards won last year alone"Best
Community Project" at the 2010 Football League Awards, The
Football League Trust's "Make Every Player Count, Best Disabled
Player" and The National Deaf Children Society's "Best
Project Partner". AITC's work also provides a catalyst for
other businesses with a large local presence, for example American
Express, to meet their own Corporate Social Responsibility objectives
by partnering with AITC, our stadium company and our club. This
validates the view that BHA deliver excellence and continue to
play a key role within their community.
3.17 BHA have a special relationship with our
fans. Many clubs would have not survived the loss of their ground
(the Goldstone Ground was sold in 1996 in less than the best circumstances)
two seasons of playing "home" fixtures in Gillingham
and then 13 years playing in a rented ground at the Withdean athletics
stadium which is widely recognised as one of the worst grounds
in the Football League.
3.18 Through this long period fans have fundraised
in the "Alive and Kicking" campaign, marched, petitioned
and remained optimistic through the longest ever planning applications.
3.19 We suggest that no normal business would
get this level of support from its customers. This deep loyalty
of fans, "fan equity" to use terminology from sports
economics, arises from the apparent irrational behaviour of fans.
Simply put, clubs have something akin to a local monopoly because
fans are hugely reluctant to change their allegiance and switch
to an alternative team.
3.20 Monopoly holders normally seek to exploit
their market position by making excess profits but in the context
of a club committed to their community, fan equity presents challenges
and makes commercial decisions, such as ticket allocation &
pricing, contentious and even more difficult to consistently get
right.
3.21 I also recognise that while rivalry with
opposing teams is healthy and generates fan interest, this competition
is limited in a way that commercial rivalry is not. For example,
at the time of writing BHA are top and Walsall are bottom of League
1but we both need every other club in our league to be
financially sound since the product we produce, our performance
on the pitch, is also a joint product (the league table). I have
seen and the club has benefited from many example of cooperation,
off-the-field, with rival clubs in areas such as marketing initiatives,
stadia design and supplier recommendations.
3.22 While BHA are fortunate not to have suffered
an administration event since being founded in 1901, it is sad
to note the frequency of administration events at other Football
Leagues clubs. I suggest that this, in part, simply demonstrates
that the base economic assumption underlying commercial organisations
of profit maximisation is demonstrably not present in football
clubs. Rather it is utility maximisation; the desire to maximise
sporting success.
3.23 In conclusion, Football League clubs have
a magical ability to deliver services to and provide a central
rallying point around which communities can gather and draw strength.
I suggest that if clubs can control, or be forced to control (see
later), their utility maximising tendencies and live within their
means then they can continue to play an important societal role.
4.0 Are football governance rules in England
and Wales, and the governing bodies which set and apply them,
fit for purpose?
4.1 I suggest that governance by the Football
League and the Football Association in conjunction with all the
laws and regulations governing UK companies creates an overly
complex operating environment. This increases legal & compliance
costs as well as raising uncertainly. My preference therefore
would be a streamlined solution because I suspect that the current
position is not sustainable but I suggest that this question would
be better answered by the governing bodies themselves.
5.0 Is there too much debt in the professional
game?
5.1 BHA currently carries no debt with both ongoing
operations and the construction of our new home, The American
Express Community Stadium, is being financed by a combination
of equity and quasi equity (convertible loans carrying 0% interest)
provided by our Chairman.
5.2 Not withstanding a fully developed and validated
business model, significant levels of equity and equity commitment,
strength in the boardroom and the new stadium being constructed
to time and budget, I have had a very bad experience in talking
to banks about debt finance.
5.3 Some institutions have taken the view that
they simply will not lend to the sector and others have appeared
open for business but in fact have no appetite.
5.4 Frustrating as this is, for I would like
BHA to carry a reasonable level of serviceable debt, this reticence
is the natural reaction to factors outside our control; specifically;
the banking crisis and the poor record of lenders to the sector
who have suffered both losses and poor publicity as a result of
clubs failing to meeting their debt obligations.
5.5 However, I don't think that insolvency events,
even the first Premier League club administration (Portsmouth),
necessarily indicates that debt levels are too high, rather it
indicates that lenders to the football sector have previously
been too keen to lend on overly aggressive terms. This can be
seen as a market failure by both the lenders and also by utility
maximising owners.
5.6 Now, naturally, the pendulum has swung back
the other way around to overly cautious lenders.
5.7 My view is that not all debt is bad and that
debt at serviceable levels is acceptable. However owners need
to be protected from themselves (or else they might chase sporting
success at any cost). This is important both because of the joint
nature of the product and also because league competitive balance
is destroyed by some clubs taking an "all or bust" approach
and using long-term debt to buy (short-term) player talent.
6.0 What are the pros and cons of the Supporter
Trust share-holding model?
6.1 I do not believe that my club has explored
this option in any great depth. The reality for BHA was that the
new stadium required over GBP90M of investment and so was beyond
the means of our supporters to significantly contribute to in
monetary terms.
6.2 Our boardroom discussions and our mix of
directors, the majority of whom have actively supported the club
as fans since their childhoods, keep this important stakeholder
group very much central to our decision making progress. As necessary,
we take soundings from key individuals & supporter groups
(recently for example over proposed changes to our logo and the
positioning of the supporters bar at the new stadium) and hold
regular fans' forums.
6.3 I suggest that the supporter trust share-holding
model is best evaluated on a club-by-club basis, rather than by
making broad statements about its applicability to clubs in general.
In general though, I feel that clubs should be encouraged to make
efforts to ensure that fans are not a voice excluded from the
decision making process in "their club".
6.4 I would argue that the other side of this
coin is, that fans are far too quick to call for managerial or
boardroom change or to put pressure on the club to buy players
on the back of a poor run of form.
7.0 Is Government intervention justified and,
if so, what form should it take?
7.1 In the light of my stated position that clubs
are special entities which have a unique philanthropic role to
play in their local communities, I make five suggestions:
7.2 Firstly, the social purpose of clubs should
be recognised as such by Government. To that end, we would welcome
a change in the way that "investors" in clubs are taxed
with their investment money being recognised as attracting tax
relief. This would require HMRC to take a pragmatic view that
the benefit that investors receive, typically in the form of free
match tickets and boardroom passes, are negligible compared to
a material investment.
7.3 A side effect, which some commentators would
welcome, would be that this tax relief would make an investment
into a club by a UK resident (as opposed to a foreign individual)
more likely.
7.4 Secondly, as outlined above, obtaining planning
permission for BHA's new ground at Falmer, the American Express
Community Stadium, was a very drawn out process which ultimately
required approval by the Office of the Deputy Prime Minister.
Even that, due to a small technicality, required a judicial review.
I suggest that this was a severe and unreasonable test of fan
equity, caused millions of avoidable costs and created uncertainty
for all concerned.
7.5 I therefore argue for a relaxation of some
restrictions &/or a fast-track process to planning laws in
recognition of the cultural status of football clubs in their
community.
7.6 Thirdly, football has noted a change in the
demographics of fans who traditionally were working class but
are now middle class. We suggest that one of the reasons for this
shift was the decision to move to all-seater stadia following
the Taylor reports which chronicled the Hillsborough disaster.
An unanticipated result of this decision was that some fans, most
especially in lower socio-economic groups, were priced out of
the clubs and could no longer afford to be season ticket holders.
7.7 Twenty years later I suggest that, subject
always to the Liverpool community's wishes being respected, it
is legitimate to ask if this restriction remains appropriate or
if a move to "safe-standing", used widely in the German
Bundesliga, could herald a return to authorised standing on the
terraces. I note that this subject has recently been considered
in Parliament as Don Foster MP tabled a private member's bill
in early December 2010.
7.8 Fourthly, due to the huge financial damage
done to local businesses and the uncertainty it creates for communities
(the typical victims of an administration event), I suggest that
clubs should only take on reasonable levels of debt. I am not
in a position to say whether this should be delivered in the form
of government intervention, but it is within the remit of government
to ensure that where possible HMRC work in partnership with clubs
and recognise that forcing clubs to the wall has serious and far
reaching effects.
7.9 It may be, as others have suggested, that
the sporting sanctions applied to clubs in Administration could
be tailored so that a distinction is made between those clubs
which at one extreme just slipped into administration and another
which went charging headlong into administration with a huge debt
burden. It would appear that the number of pennies in the pound
available to unsecured creditors is a good proxy for this as suggested
by research at the Birkbeck Sport Business Centre.
7.10 Lastly, the labour market is an area of
great concern. Players have monopoly power over their labour which
in combination with utility maximising owners (win at all costs),
has meant that the wall of money which has flooded into the sport
since the first BSkyB deal in 1992 has largely gone to enrich
players and their agents.
7.11 Somewhat obviously, if a club spends too
much of their turnover on player wages then it will soon be in
acute financial peril unless it has equity reserves or soft loans
to utilise.
7.12 Football has flirted with the idea of a
salary cap, enforced at the level of the club, which would allow
spiralling wage inflation to be controlled. So while recognising
that there are difficulties in both defining, monitoring and enforcing
a cap as well as setting-in-stone a competitive advantage for
bigger clubs, we would wish to see the voluntary cap of League
2 clubs extended to all Football League clubs.
7.13 Since Football League clubs are not as active
in the international market for labour as Premier League clubs,
I do not think that a European or Global implementation of this
rule is a pre-requisite for its introduction in the Football League.
7.14 I also mention that there needs to be a
mechanism which enforces the salary cap. One solution would be
a form of luxury tax, as found many US Sports which are typically
paid by a club whose payroll exceeds a pre-set limit or thresholds
above a league average.
7.15 An alternative, drawing on how governments
seek to control emissions by polluters, is to set a cap and then
let a market develop for more frugal teams sell their unused "payroll
capacity" to overspending clubs. I suggest that a "salary
cap-and-trade" scheme along these lines would change the
dynamics of the labour market.
8.0 Are there lessons to be learned from football
governance models across the UK and abroad, and from governance
models in other sports?
8.1 UEFA's club licensing and financial fair
play rules are seen by UEFA as crucial to ensure footballs long-term
stability. These rules, designed to ensure that clubs break-even,
are due to be phased in over the next three years. To quote the
UEFA website downloaded on 11 January 2011 "Under the
break-even requirement, clubs may not spend more than the income
they generate. Clubs will also be assessed on a risk basis, in
which debt and salary levels are taken into consideration. They
will have to ensure from next summer that their football liabilities
are paid punctually."
8.2 This appears to get to the heart of the financial
concerns raised by many commentators and some of the questions
raised by your Committee. What is less clear is how clubs who
do not participate in UEFA competitions will be impacted and by
what mechanism any benefits will flow down the football pyramid.
8.3 I close by stating that the promotion and
relegation feature of the English football pyramid gives hope
to every club, and their communities, that they could rise to
the very top in seasons to come. This defining feature should
not be lost.
January 2011
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