Written evidence submitted by Mark Usher
SUMMARY
This submission has been provided by the author Mark
Usher in a personal capacity. Mr. Usher is a lifetime supporter
of Watford Football Club in addition to being an enthusiastic
follower of the England National Football Team. As a result, part
of this response can certainly be viewed from the perspective
of a fan and a football community member at the club and country
level. Mr. Usher has also been a consultant to private and public
sector organizations for over fifteen years and, consequently,
this response has also been written from the perspective of an
individual whose professional responsibilities have focused on
guiding organizations through transformative change.
The submission to the Select Committee's Inquiry
into Football Governance has been provided in the form of answers
to the following six questions posed by the Committee in its Call
for Evidence:
— Should
football clubs in the UK be treated differently from other commercial
organisations?
— Are
football governance rules in England and Wales, and the governing
bodies which set and apply them, fit for purpose?
— Is
there too much debt in the professional game?
— What
are the pros and cons of the Supporter Trust share-holding model?
— Is
Government intervention justified and, if so, what form should
it take?
— Are
there lessons to be learned from football governance models across
the UK and abroad, and from governance models in other sports?
The first four of the above questions are answered
by the responses in Paragraphs 1-4 below. The last two questions
are answered in a combined form by the response in Paragraph 5
below.
1. Should football clubs should be treated
differently from other commercial organisations?
Numerous articles and reports have discussed the
transition of football clubs from purely sporting and socially
focused organizations within specific geographic communities to,
in the cases of some top-flight clubs, commercial enterprises
with global reach. One of the common themes—one with which
I agree—is that the pendulum in English football has swung
far too much towards commercial objectives as opposed to the social,
cultural and sporting objectives that originally defined the very
reason for existence of the first football clubs. Fans are now
customers, clubs are now enterprises, and football
is in the entertainment industry.
In the late nineteenth century when the Football
Association saw commercialism rearing its head in the game it
allowed all clubs in the Football League to form private limited
companies but restricted the profits that could be distributed
back to shareholders to a maximum of 5% of the value of shares
held. This and an accompanying regulation that disallowed payments
of salaries to directors formed the FA's Rule 34. The intent of
Rule 34 was to enable football clubs to operate basically as non-profit
businesses that served the ongoing social and cultural needs of
their communities while delivering a fair but conservative rate
of return back to their owners. The FA correctly believed that
because football clubs were serving an important community purpose
it was necessary to implement safety measures that ensured the
majority of any profits generated were reinvested in the club
and did not simply line the pockets of profiteering entrepreneurs.
The very presence of these safety measures also meant that, generally,
only true "football-loving" people would be interested
in owning a football club during these early days.
In addition to Rule 34 the FA, in collaboration with
the Football League, also implemented two other measures during
this period that kept football in balance. The first of these
was the maximum wage for players, set to prevent the escalation
of costs that might occur if clubs had to increase their players'
wages to prevent them being enticed away by competitors offering
them more money. The second was revenue redistribution. This required
that match day gate receipts—the only source of revenue
for clubs at that time—be shared between the competing teams
and that an additional percentage of the total receipts go into
a pot for redistribution among all Football League clubs. The
objective of revenue redistribution was to prevent smaller clubs
being at a disadvantage to those clubs from larger towns and cities
who could draw upon larger fan bases.
From the turn of the twentieth century to the early
1980s, Rule 34 and revenue redistribution succeeded in preventing
over-commercialism and profiteering within football. Throughout
this period the social and cultural needs of communities and fans
were successfully and affordably met by their local football clubs.
Even when the maximum wage was (rightly) abolished in 1961 there
followed a further 20 year period when the big clubs were still
able to pay the higher wages that many of their top players demanded
without drowning in red ink and the small clubs were still able
to match their cost structures to their revenue bases. And every
now and then one of the smaller clubs would manage its limited
resources particularly well and rise through the divisions to
become, well, a big club. This was important since it demonstrated
that enough of a level playing field existed to allow the smaller
club lacking the revenue generation power of its larger neighbor
to still harbor hope of achieving parity in sporting terms. It
should also be noted that it was during the sixties that the additional
revenue stream of TV licensing rights became available to clubs.
These early TV rights deals were negotiated by the Football League
and, regardless of which team's match highlights were shown, the
revenue from these deals was distributed equally among all 92
clubs.
If this story ended at 1980 then one would have to
say that the FA and the Football League had successfully established
a model that proved football clubs could be run as financially
healthy commercial organizations that put the social, cultural
and sporting needs of their communities first. In other words
for almost 100 years football clubs were indeed treated differently
from other commercial organizations and it worked. So what went
wrong? Well, two things basically—greed and weakness. Greed
on behalf of a number of the larger clubs who, in response to
massive TV deals that were on the table, decided to break away
from the Football League and its revenue redistribution policy
and keep all the TV money to themselves. And weakness on behalf
of the FA who allowed this breakaway to happen. Prior to the breakaway
which ultimately led to the formation of the Premier League the
FA had also shown weakness some years earlier in 1983 when they
allowed clubs to circumvent Rule 34 by forming holding companies,
a loophole that enabled clubs to siphon off unlimited profits
in excess of the FA's limit on shareholder distributions. This
earlier lapse in the FA's resolve to protect the sporting and
cultural integrity of English football proved to be the first
breach in the dam that eventually led to the mutiny of the big
clubs and hyper-commercialism of the game.
Returning to today, the fact that the Premier League
places its emphasis squarely on commercial rather than social
and community objectives does NOT prove the rule as some might
think that football clubs can indeed be treated like any other
commercial organization. On the contrary, the Premier League proves
that the 100% commercially focused football club is NOT a financially
sustainable model due to the nature of its ever escalating cost
structure driven by player wages, the high risk associated with
an over-dependence on a single source of revenue (TV deal money),
and the commonplace practice of football club owners using leveraged
debit to finance the acquisition of clubs. The Premier League
has comprehensively validated the fact that football clubs MUST
be treated differently than other commercial organizations not
just to protect the social and cultural heritage of our game but
also to put in place the safeguards needed to protect clubs from
the potentially suicidal financial strategies of their owners.
2. Are football governance rules and the governing
bodies which set and apply them fit for purpose?
2.1 Reason 1: The vision and mission for
the governance of English football are at best unclear and at
worst completely undefined
The "Who We Are" and "What We Do"
pages of the FA's web site read like a laundry list of roles and
responsibilities and give no indication of the FA's most important
and urgent priorities. The closest to a vision statement that
can be found on the FA site is "we are committed to making
football accessible, enjoyable and safe for everyone, regardless
of race, religion, gender, sexuality, background or ability".
This is a commendable goal but surely represents only one dimension
of the FA's reason for existence. It is also stated that the FA
is responsible for "developing and regulating the game
at all levels...". Again this is clear in meaning but
does not define specific objectives or depict any ideal end state
against which the FA's efforts can be evaluated.
So how do we know if the FA's litany of responsibilities
listed on their web site are the right ones? Which are most important?
Which are a waste of time? We don't know unless a powerfully incisive
vision has first been created that describes in crystal clear
terms the "perfect result" we are aiming for in English
football, eg a professional game refocused on social and cultural
objectives as opposed to purely commercial goals, a resurgent
national football team, and integration of football into a broad
spectrum of community development activities and programs. Once
this vision has been developed only then can the primary purpose
and reason for existence of the governing body—its mission
statement—actually be defined. In the case of the FA a mission
flowing from a vision as described above could potentially revolve
around a need to manage with a firmer regulatory hand the over-commercialism
of the game, to place increased focus on youth development, and
to increase the degree to which clubs actively work to develop
and improve the communities of which they are part.
So how does the FA go about developing the "correct"
vision for English football upon which to base its mission and
ultimately its key roles and responsibilities? Well, I would argue
that the most compelling and relevant vision for English football
will result by polling the opinion of that constituency for whom
the first football clubs were originally created—the
community. By engaging with community stakeholders at the
club level (those with a vested interest in how policy decisions
will impact their local team), at the national level (those with
a stake in how the England National Team will be affected) and
the broader community level (social, cultural, infrastructure,
health and education for example) the governing body will ensure
it is structuring a vision, mission and related set of roles and
responsibilities that genuinely reflect the needs and wants of
those people for whom the game of football was by definition created.
If a compelling and relevant vision is developed
from the ground up for English football then we are certainly
on the right path to creating a governance model capable of bringing
the commercial and community aspects of the game back into balance.
This on its own its own will not be enough however. To successfully
evolve even the most powerfully motivational vision into reality
we must also grapple with the fundamental structures and relationships
of the bodies that govern football in this country. This will
be the subject of tomorrow's post.
2.2 Reason 2: Effective leadership and
governance of English football is impossible with the current
structure and make-up of the FA Board of Directors
Let us assume for one moment that the FA has taken
the advice in my previous post and reached out to a broad spectrum
of community stakeholders to develop a vision for English football
and a corresponding mission and set of responsibilities for itself
in implementing this vision. Let us also assume that that the
community-centric approach has resulted in a vision and mission
that are elegantly "balanced" along the dimensions of
commercialism, social objectives, and community values. As a last
suspension of disbelief let us imagine that the FA management
team develop a set of policies and regulations based on this mission
that if implemented would result in a near-seismic shift in the
landscape of football in this country. Examples could include
re-instituting revenue redistribution (eg sharing EPL TV money
among all Football League clubs), repealing the holding company
loophole that sidestepped the FA's Rule 34, or restricting foreign
ownership of English clubs to below 50%. These are particularly
draconian examples (certainly from the view of the EPL) but they
are just to illustrate a point.
With the current FA governance structure such a set
of policies and regulations would be dead on arrival in the FA
boardroom. Why? Because half of the current FA board of directors
responsible for approving policy represent either EPL or the Football
League (the other half are from the FA). Clearly any new proposed
policies or regulations that are not in the interest of the EPL
or Football League will never be implemented (typically these
would be any proposals that attempt to reign in commercialism
and revenue generation), just as any proposals not in the FA's
interest would be blocked by the FA's own board members. So in
fact the current FA governance model is permanently gridlocked
with the professional league representatives and the FA representatives
each protecting their turf. The current situation is complicated
further by the absence of an FA Chief Executive (equivalent to
a corporation's CEO) since Ian Watmore left last year. Theoretically
a strong FA Chief Executive could lend some additional weight
behind FA-recommended policies that might not be palatable to
the professional game representatives.
One commonly proposed solution to the gridlock of
the FA board is to introduce independent directors who are not
affiliated with the FA or either of the professional leagues.
The idea is that the independent directors provide a balanced
view free of conflict of interest while the non-independents directors
provide the necessary input (but not steamrollering input) from
parties with a stake in the outcome. The new recently elected
FA Chairman David Bernstein is "quasi-independent" in
my view. Formerly Chairman of Wembley Stadium, an FA subsidiary,
Bernstein was actually proposed to the board by Phil Gartside,
one of the Premier League representatives on the FA board. You
figure that one out. If you believe that Chairman-Elect Bernstein
is genuinely independent (which I don't) even then we have a ratio
of only one independent board member to eleven non-independent
board members. Such a board structure would make it nigh impossible
for any truly transformative policies and regulations to see the
light of day since by definition transformative policies have
a habit of upsetting at least one stakeholder group. So, until
such a time that we have more independence on the FA board it's
going to be very tough to "rebuild the English game from
the ground up".
What to do then? Well, if we accept the premise that
the ultimate stakeholder for both the FA and the professional
leagues should be communities then the structure and make-up of
the FA board should be such that there must never arise a situation
where policy proposals with a community benefit are automatically
shot down arbitrarily by a negatively impacted party. To guard
against this eventuality there must enough independent representation
on the board to allow proposals to be evaluated impartially without
conflicts of interest perpetually leading to gridlock. To avoid
the possibility of "across the aisle" secret deals between
non-independent board members from the FA and the professional
leagues this means that the total number of independent directors
on the board must exceed the total number of non-independent board
members by at least one. This goes further than the Burns report
which, although recommending an increase in the number of independent
board members relative to the board make-up today, allowed the
total number of non-independent board members (including executive
directors) to outnumber the number of independent directors. This
still leaves open the possibility of secret deals and the shutting
off of any new strategies or policies that work against the interest
of FA and/or professional league stakeholders.
So, there we have it. It's a lot easier said than
done but nevertheless the task is clear if the organization responsible
for governing English football is to lead us all towards a new
dawn. If we are to kill gridlock and neutralize conflict of interest.
We need our own Independence Day.
2.3 Reason 3: Those responsible for football
governance today at the club, league and FA levels regularly act
in their own interests and not in the interest of the broader
stakeholder community
At the heart of my third reason why the governing
bodies of football in this country are not fit for purpose is
the Principal-Agent Problem. The Principal-Agent problem refers
to when a Principal delegates authority to an Agent to carry out
a task in the Principal's interest but the Agent decides instead
to use its assigned authority to act in its own interest. A common
example in the business world occurs when shareholders hire a
board of directors to govern their business and the board of directors,
once installed, pursues policy that works counter to the objectives
of the shareholders rather than for them. Reasons why Agents will
act in their own interest include a lack of transparency into
the Agent's actions, misaligned incentives between the Principal
and the Agent, the absence of any perceived threat of punitive
action being taken against the Agent by the Principal, and in
some cases a genuine de facto power through the board themselves
owning the majority of the shares. Among the strategies that some
shareholder groups will take to avoid the Principal-Agent problem
are mandatory reporting requirements, performance incentives to
encourage board members to act in shareholders' interests, and
a clearly communicated threat to remove board members whose actions
work counter to shareholder objectives.
In the world of football governance the Principal-Agent
problem is observable at the club and governing body level. At
the football club level the fan community is analogous to the
shareholder community in the business example in that the community
acts as a Principal who has assigned authority to an Agent (the
club owner or major shareholders) to operate the football club
in its best interests. Whether the club's fans are actually shareholders
of the club or not (some may be) is irrelevant. Each fan is a
stakeholder in the club through his or her emotional and
financial investment and as such those responsible for governing
the club should be answerable to them. Can a Principal-Agent problem
arise in this situation? Sure it can! Take the very recent example
of Tottenham Hotspur. The major shareholder of Spurs is an investment
company ENIC International. ENIC wants to move the club from its
North London home to the Olympic Stadium in the East End after
the completion of the 2012 Games. Not surprisingly a significant
majority of the Spurs fan community want the club to stay put
at White Hart Lane. Even though the fans are the Principal in
this case, they are unfortunately at the whim of the Agent (ENIC)
when it comes to deciding the future of the club. Unfortunately
there are far too many other Agent-wagging-the-Principal stories
like Spurs around today and not just in the top flight. In the
House of Commons Debate on Football Governance on 16 December
2010, Labor MP John Mann described brilliantly the case of Worksop
Town and Mansfield Town playing their FA Trophy tie on the ground
of a recently liquidated neighboring club because both clubs'
owners had locked them out of their grounds.
A desire to wrest back some control from owners has
led supporters of some clubs to form supporter's trusts, not-for-profit
organizations of fans who raise financing to secure significant
share ownership and potentially seats on club boards. Today over
half of Premier League and Football League clubs have supporters
trusts although for only a small number of these clubs does the
trust have a meaningful influence over club governance. Most of
the latter situations are for smaller clubs where supporters stepped
in to save the club from bankruptcy (or resurrected the club altogether
after bankruptcy had already happened). Where successes have occurred
the achievements of those supporters involved must certainly be
applauded. For example, the supporters' trusts at Brentford and
Exeter City both have outright ownership of their clubs. For the
larger Premier League and Championship clubs, however, it is much
more difficult for a supporters' trust to attain significant influence
over owners and boards. When we look broadly across the game the
truth is that unless a completely new club governance model can
be found that facilitates genuine community influence over major
policy decisions effecting the club then there will be little
hope of achieving balance between commercial and social considerations.
The Principal-Agent concept can be applied just as
relevantly at the governing body level. Surely it cannot be a
stretch to say that the FA together with the Football league and
the Premier League exist to develop and implement a policy for
football in this country that serves the interests of all of those
communities having a stake in the game? Whether the community
in question is Manchester, Scunthorpe, Worksop Town, or the England
National side? Or women's football? Or the disabled? Or inner
city kids? Is it not the case then that we—all we communities—have
in effect hired the management teams of these three organizations
to work together in support of our individual and collective objectives
related to the game? We are again a Principal, this time assigning
responsibility to an Agent in the form of the FA and the two professional
leagues, effectively the FA Board from a decision-making point
of view (since the FA Board is made up of representatives from
all three organizations). To act in our interest this particular
Agent needs to accomplish a greater number of things across a
far broader spectrum than in the previous case where the individual
football club was the Agent. In the case of the FA Board we as
a collective community will require more rigorous due diligence
of potential buyers of clubs, control over rising ticket prices,
bringing financial stability back to football, improving consistency
of refereeing decisions, improving supporter representation, and
building an England national side capable of winning a World Cup.
It is as clear as day that just as a Principal-Agent
problem exists at the club level it is also present with the governing
bodies of English football. Why? Well, for many of the same reasons
as we see everywhere else. In the case of the professional leagues—particularly
the Premier League—it is about misaligned incentives. The
game is TOO successful right now from a financial point of view
for the leagues to take a breath and worry about, oh, those social
and cultural objectives. And the England team? Just an annoying
distraction. With the FA it's about an absence of any perceived
threat of action. A complete lack of accountability. The public
and the government may moan and groan about us but it's just sticks
and stones, see. My bones are fine.
In my remaining responses to the Select Committee
questions over the next few days I will begin to frame a solution
for tackling the Principal-Agent problem in football. For rooting
out the misaligned incentives and hammering them back into alignment
again. For instilling some long-needed accountability into a performance-free
zone. For giving us a voice again. The solution I'm talking about
won't be popular with everyone, but then being popular is not
the point. Bringing football back to us is the point. Bringing
it back to our communities. Where it belongs.
3. Is There Too Much Debt in the Professional
Game?
Back in the seventies my father operated a very successful
bakery shop in St. Albans, just outside of London. One day he
decided he wanted to expand the business and buy a second shop
in Harpenden, about five miles away. My father went down to the
High Street to see his bank manager about getting a loan for the
second shop. Before the bank manager would give my father, or
tell him how much of a loan he could have, he wanted the answers
to the following four questions:
1. What is the operating profit of your business
today?
2. What interest payments are you making on debt
do you already have, if any?
3. What additional sales will the second shop
bring in?
4. What additional operating expenses will the
second shop incur?
The bank manager asked the above questions because
he wanted to assess whether my father would be able to cover the
loan payments with the operating profits from the business. The
first question about the profitability of the business today was
to see whether my father was capable of running a fundamentally
sound operation that made money in the first place. The second
question was intended to reveal how much of his profits were already
allocated to servicing existing debt and the third and the fourth
questions were to confirm that the second shop—the new asset
that would be financed by the loan—would generate positive
incremental profits that, together with the profits my father's
original shop, would successfully service the loan charges. With
the answers my father provided the bank manager determined that
the total profits from the two shops would indeed cover the loan
charges and my father got his loan.
How does the above story help us answer whether there
is too much debt in football? Well, it doesn't so much answer
the question as tell us that we are asking the wrong question.
The right question should be is the debt in football good debt
or bad debt? To know this we need to ask the following:
1. Are English football clubs running fundamentally
sound businesses today that are generating sufficient cash from
operations to service the debt they have today?
Any debt for which the
interest payments cannot be covered by profits from current operations
is bad debt. For example, if a club has
£100 million in total debt and £50 million of it cannot
be serviced from operations then the £50 million is bad debt.
2. Are English football clubs that take on additional
debt doing it for the right reasons?
Any debt that is taken
on to pay expenses as opposed to investment in assets is also
bad debt. For example if a club invests
£10 million in stadium improvements and another £15
million in player's wages then the £10 million is good debt
whereas the £15 million is bad debt.
Notice by the way that it is possible for debt to
be covered by cash from operations (which would seem to make it
good debt) but that if is it subsequently used to pay expenses
it is still bad debt.
Now let's look at Premier League and Football League
clubs and determine whether, on average, their debt is good and
bad. The numbers below are approximate only and are based on financial
data presented in the highlights of Deloitte's Annual Review of
Football Finance 2010 (for the 2008-09 season).
Premier League Clubs
Total Revenue £1.981 billion.
Total expenses £1.902 billion (£1.327 billion
wage costs + £582 million non-wage costs).
Operating profit £79 million.
Interest charges £184 million.
Debt Liability £3.3 billion of which about £1.4
billion is "soft" interest-free debt from owners.
Football League Clubs
Total Revenue £550 million.
Total expenses £625 million (£475 million
wage costs + £150 million non-wage costs).
Operating loss £75 million.
Interest charges Over £50 million.
Debt liability Over £500 million
From the above it can be seen that there is a
significant amount of bad debt in English football.
Based on the 2008-09 season, £105 million of the Premier
League's total interest charges of £184 million cannot be
met by the combined operational profits of the 20 clubs. Who is
paying the £105 million then? Benefactor owners and directors
through so-called "soft loans" that generally require
no interest payments today but which can be called in at any time
should the benefactor eventually tire of his or her return-free
investment. Calling in of soft loans is one of the most common
triggers for sending a club into administration.
The Football league is far worse—the 72 Football
League clubs make a combined loss of £75 million before any
interest payments are made. So all of the Football League's
debt is, by definition, bad debt. By far the single biggest
problem in the Football League is the fact that players' wages
represent an unmanageably high percentage of revenues (86% in
2008-09). With non-wage costs (rent, utilities, maintenance, food,
players' kit & equipment, general supplies, etc) usually representing
around 15-25% of revenues this means that it is fundamentally
impossible to run a profitable club in the Football League. This
is why insolvencies and administrations have been all too commonplace
in the lower leagues for some time now and will continue until
a sustainable financial model is adopted that is capable of consistently
generating positive cash flow from operations.
In summary then, the question of whether there is
"too much debt in football" is at best moot and at worst
irrelevant until the fundamental operational model of English
football is addressed. This means finding a way for Premier League
and Football League clubs—particularly the latter—to
bring their cost structures more into line with their revenue
models. Managing the wage bill is part of this but so is managing
revenue in terms of estimating it better, diversifying revenues
sources and being generally more conservative about revenue before
aligning costs against it. Only when you are running a business
that is consistently putting "more money in the till"
than is being paid out should it make any sense for you to be
asking for a loan. It should make even less sense for someone
to actually lend it to you. And perhaps that's the main point—all
debt is bad debt if you shouldn't have it in the first place.
That's what my Dad would have said!
4. What are the pros and cons of the Supporters'
Trust share holding model?
The Supporters' Trust model was a noble effort to
counter the tide of commercialism in football by providing opportunities
for fans to own blocks of shares in their clubs and thereby—theoretically—to
increase their influence over board decisions. In essence the
Supporters' Trust model attempts to mitigate the impact of the
Principal-Agent problem discussed in one of my earlier responses
whereby club owners and boards will generally make decisions in
their own interest rather than those of the broader stakeholder
community at large. The ultimate goal of any Supporters' Trust
is to achieve an adequate level of share ownership such that the
Trust is able to secure its own seat on the board and indeed a
number of Trusts have succeeded in this. Some Trusts have even
taken ownership of their clubs but this has usually been in situations
where the club faced extinction (or had actually been made extinct
already). There are even cases where Supporters' Trusts have started
up new clubs in direct opposition to an existing club's owners
as with FC United, born as a result of supporter dissatisfaction
with the Glazer regime at Manchester United.
The primary drawback to the Supporters' Trust model
is the difficulty and the cost involved in securing an adequate
number of shares to achieve meaningful influence over the decisions
of the board, particularly for the larger clubs. Even with the
help of money from the UK government's Supporter Direct initiative
it requires a ludicrously large amount of cash to buy a seat on
the board of a Premier League club. It is obviously easier with
smaller Football League clubs but then the issue here is that
the Trusts in these cases are often taking over after the previous
owners have driven the club into the ground. Clearly for the supporters
of these clubs the Trusts have saved something worth saving but
should we really be satisfied with the ultimately evolved role
of Supporters Trusts being to clean up the mess of asset stripping
former owners? Again I draw attention to the very current case
of Tottenham Hotspur's owners wanting to take over the 2012 Olympic
Stadium after the Games. A model that gave Spurs fans more influence
over board decisions than their Supporters Trust currently does
would have given the club's North London-based supporters more
of a voice in the outcome. The Tottenham example illustrates what
I believe will be a continuing dilemma for those fans of larger
Premier League clubs who still associate their club with the local
community. As top flight football becomes ever more global in
its reach it is only natural that club owners, if allowed to drive
their decisions based on purely commercial criteria, will continue
to de-emphasize the needs of a club's "indigenous" fan
base. The current Supporters' Trust model will have less ability
to influence this trend than a rafter in white water can avoid
going over the falls with only spoons in his hands for paddles.
In my final two posts tomorrow and Wednesday I will
introduce a governance model that, in my opinion, strives for
identical objectives as the Supporters' Trust model but without
the Trust's limitations. It is a model that would support the
governance and operation of competitive and financially healthy
football communities at the highest levels of both the domestic
and the international game. It would not be possible to implement
this model without resistance from some quarters but then my understanding
is that this Inquiry is not about making friends. My understanding
is that it's about doing what it takes to get our game back. Agents
beware, the Principals are re-taking the asylum!
5. Is Government Intervention Justified and
Can Lessons Be Learnt from Other Governance Models?
In my previous responses to the Select Committee
Call for Evidence questions I have discussed many of the underlying
reasons why the governing bodies of football in our country are
not fit for purpose. I have addressed the issue of rampant over-commercialism
that has relegated the social and cultural aspects of football
to an afterthought and brought the game to near financial meltdown.
I have also talked about the misaligned incentives and conflicts
of interest that plague the FA board and the inability of the
FA to implement effective policy through its lack of vision, leadership
and accountability.
Apart from the above, all is well.
No, seriously action is required and not the type
of action that involves further root and branch reviews, a fat
report and a promise that action will be taken. The type of action
needed is the type that will produce measurable results. Results
such as local communities being able to keep their football clubs
(whether the football club in question is Worksop Town or Tottenham),
clubs only being owned by persons with the club and community's
best interests at heart, and a successful England national side.
What these results all have in common are communities. Each result,
when it happens, is in the best interest of a community whether
the community in question is that of a non-league club, a Premier
League club, or the whole country for the national side. So the
litmus test of any proposed action plan resulting from the Select
Committee Inquiry must, in my opinion, be "will this action
plan with 100% certainty benefit all football communities?"
The challenge with plans intended to benefit communities
is that communities generally wield little power. Particularly
football communities. It's been said that football clubs possess
greater brand loyalty than, well, anything. How many times have
you said after your team has played like drains again "that's
it! I'm done with this lot!" only to return loyally the following
week. Football clubs have monopoly power in their communities
so fans themselves have next to no leverage when it comes to unscrupulous
owners taking advantage of their beloved club.
What this all means is that we will need help from
a higher power to make any changes in football governance that
primarily benefit supporter communities. And yes, this means regulation.
But it doesn't have to be heavy handed regulation that places
all kinds of draconian restrictions and reporting requirements
on the entities in question. All it has to be is low-touch regulation
that protects the interest of the stakeholder groups least able
to protect themselves—fans and the broader communities within
which clubs are situated. This regulation specifically needs to
make sure that the assets and profits of the club are retained
primarily for the benefit of the football club and its community
as opposed to profiteers with little real interest in the game.
The regulation still needs to allow investors in the club to make
at least a conservative return though, and it should still be
possible to pay the salaries required to hire the players, coaches
and management staff required to produce a competitive team. And
there should be no barrier to the club generating handsome revenues
and making attractive profits provided again that the majority
of these profits are reinvested in the club.
Well guess what...I just happen to have just such
a low touch regulated governance model handy. It's called a Community
Interest Company. Community Interest Companies (CICs) are
limited companies created specifically for the use of people who
want to conduct a business or other activity for community benefit,
and not purely for commercial gain. CICs operate to all intents
and purposes like normal commercial enterprises with the exception
that certain built-in safeguards exist to ensure that the majority
of profits are reinvested in the community. The ability to
form CICs has only been around since 2005 when the UK government
introduced them under the Companies (Audit, Investigations and
Community Enterprise) Act 2004. A surprisingly readable online
CIC Fact Pack providing a detailed description of the CICs business
form and how to form a CIC has been published by the government's
CIC Regulator. The benefits and advantages of the CIC business
form over can also be found online here. There are currently 4,491
CICs registered (including 10 football clubs) and a list of all
CICs can be found on the Community Interest Companies web site.
Although no Football League sides have yet adopted the CIC form
there is absolutely no reason why any English professional club
or for that matter any football governing body could not operate
under the CIC model. To all intents and purposes the clubs and
the FA could operate like any other private business meaning they
could:
Generate as much revenues and make as much profit
as they want.
— Hire
the best people (whether players, coaches, management, marketing,
finance or other job types needed at football clubs and governing
bodies) at whatever salaries the job market demand that they be
paid.
— Raise
capital by selling shares and access the debt market for loans
and bonds.
Are there catches? Yes, two. But both catches are
designed to protect the community stakeholders for which the CIC
is designed. The first is an asset lock which basically ensures
that the CICs assets cannot be transferred out of the community
(for example to a holding company, the loophole that killed the
FA's Rule 34) and the second is a cap on dividend distribution.
To encourage investment (but not profiteers) the dividend cap
is 35% of distributable profits, not actually that restrictive.
For investors who care about football but still like the idea
of an attractive return this isn't a bad deal.
An example of how CICs could work in English football
is shown in Figure 1 below with all 92 clubs in the Premier
league and Football league operating as CICs together with the
England National team. The idea is that the professional league
clubs and the England side would still operate as profit generating
businesses but with the controls that would ensure both that the
profits flowed back into the respective communities and that community
stakeholders had a strong say in the direction of the club. Again,
these controls would apply for the Arsenal and Walsalls of the
world as much as they would for England.
The other key element of the suggested organization
structure in Figure 1 is the reporting relationship between the
professional leagues and the FA. In the structure shown the Premier
League and the Football League report into a FA Corporate entity
that is responsible for setting the vision, mission, strategy
and policy of the English game. This model is similar to the German
Football Association which has succeeded in maintaining control
of the German professional league the Bundesliga. The benefit
of this for German football is that no conflict exists between
the Bundesliga and the German national team. When the German national
side suffered a temporary dip in form in the late 1990s/early
2000s the German Football Association (with the involvement of
former Germany world cup player Jurgen Klinsmann) worked closely
with the teams in the Bundesliga to implement a new playing style
that would be suitable for the German national side. This resulted
in a resurgence of form for Germany and an excellent run to the
semi-finals of the 2006 World Cup. The failure of the FA to prevent
the breakaway of the Premier League from the Football league in
1992 has resulted in the Premier League having too much influence
over the direction of English football. The strategy pursued by
the German Football Association and Jurgen Klinsmann would not
be possible today in England because the Premier league would
not allow it. The absurdity of the current football governance
model in this country is highlighted by the fact that Sir Dave
Richards is both Chairman of The Premier league and of Club England.
It is absolutely essential that the Premier League has no role
in matters concerning the national side if the problems surrounding
England's performance at international level are to be resolved.
In summary the combination of the CIC business model
and the bringing of the professional leagues under a FA Corporate
entity will address both the over-commercialism of English football
and the misaligned incentives and conflict of interest at the
root of the problem with football governance in England today.
Such a transformation will undoubtedly meet much resistance from
certain quarters but this must not blunt the resolve
of those powers possessing the authority to implement such change.
Anything less than a complete overhaul of today's football governance
model will be guaranteed to result in business as usual. The heritage
of our beautiful game and the legacies of the proud footballing
communities that have gone before us deserve far more.
Figure 1
SUGGESTED ORGANIZATION STRUCTURE FOR FOOTBALL
GOVERNANCE IN ENGLAND
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