Written evidence submitted by Christian
Müller
Submission to the parliamentary committee looking
into the governance of football (DCMS) sent by Christian Müller,
from 2001 until 2010 Chief Financial Officer of the DFL (German
Football League), from 2007 until 2010 Member of the Managing
Board of the League Association (Ligaverband) and Member of the
Board of the DFB (German Football Association). Since 2002 he
is member of UEFA's club licensing committee and since 2007 member
of EPFL's Professional Football Finance Committee.
His duties included the administration of the
accounts at the League Association, the DFL and its subsidiaries,
and of the licensing procedure for the 36 clubs and joint-stock
companies belonging to the Bundesliga and Bundesliga 2. Christian
has overseen an ongoing process of development and adaptation
of the licensing procedure, which itself is held in high esteem
throughout Europe, and is outlined below. The fundamental aim
of the licensing procedure is to ensure greater economic stability
and promote the integrity of the professional game.
Christian is now working as an advisor to the
Board of the DFL and representing the league in several international
organizations, ie UEFA (Club Licensing Committee) and EPFL (Standing
Committee on Professional Football Finance)
EXECUTIVE SUMMARY
— The
Bundesliga and the Bundesliga 2 are governed by a trio of members'
associations, which take an active role in maintaining the stability
and integrity of the game.
— This
manifests itself in two main policy areas: the regulation of ownership
structures, and the licensing system.
— Clubs
are required to regularly prove their solvency and positive liquidity,
otherwise they will be refused a licence to compete.
— This
has created widespread financial health, diversified and growing
profit, an entertaining product, and extensive community integration.
The German Football Association (or DFB, formed in
1900 as a registered members' association) is responsible for
overall governance of the game in Germany, whilst the League Association
(Ligaverband e.V.) and its 100% subsidiary DFL Deutsche
Fußball Liga GmbH control the top two divisions (the Bundesliga
and Bundesliga 2), with each division containing 18 professional
teams. These 36 teams are all members of the League Association,
likewise a registered members' association that is an independent
member of the DFB—and is therefore governed by its statutes.
German sports policy has traditionally been defined by the socio-political
importance of sport itself. The government in principle follows
a non-interventionist sports legislation model, however the governing
bodies in football are actively involved in the legislation and
regulation of their members. This regulation takes the form of
two key areas: the ownership structure of clubs, and the licensing
procedure.(1)
Firstly, the regulated ownership structure, which
applies to all clubs competing in the Bundesliga and Bundesliga
2. Prior to 1998, all 36 clubs from the top two divisions were
structured as registered members' associations (eingetragener
Verein or e.V.). Under no circumstances were clubs
allowed to be run as privately owned companies or corporations,
a practice common in the Premier League and Football League. These
members' associations were and are not-for-profit organisations,
owned by their members who delegate decision rights to an elected
board of representatives. These representatives may act as the
executives of the association or as the body which engages the
executives. Starting in the eighties, clubs have begun to hire
high profile professionals as club executives. The original volunteer
organisation in German professional football transmuted into a
business environment with a skilled and well remunerated staff.
But still any revenue generated by a club in the legal form of
an association must be funnelled back into the club. These two
requirements ensure both accountability and stability. In 1998,
the opportunity for clubs to convert their professional football
sections into external limited companies (separate from their
parent association) has been made available. This decision was
taken by the General Assembly of the DFB in response to the increasing
commercialisation of football across Europe and satisfying the
increasing demand for more professionalisation from the biggest
clubs like FC Bayern. This means that there are now three additional
forms of limited company which football clubs can be run as, accompanied
by the traditional e.V.. still the legal form of big clubs like
Schalke 04, VfB Stuttgart and Hamburger SV).(2)
Firstly an AG, a public limited company which outside
the football industry is often, but not always, listed on the
stock exchange. Examples of clubs that use this structure are
FC Bayern and Eintracht Frankfurt, but their shares are not quoted
on stock exchange. Sport supplier Adidas and car manufacturer
Audi each hold almost 10% of the shares of Bayern, the remaining
80% belonging to the parent club FC Bayern e.V. Secondly, there
is the GmbH, a private limited company. Examples for clubs operating
in this legal form are Borussia Münchengladbach and TSG Hoffenheim
1899. The GmbH allows scope for a more corporate form of governance
whilst limiting the liability of the shareholders. Thirdly, there
is () the GmbH & Co. KG aA (a legal form of a private partnership
limited by shares with a limited liability company as a general
partner with the addition of elements of a joint stock company).
The latter in particular has proven popular amongst professional
football clubs, although to date only one (Borussia Dortmund GmbH
& Co. KG aA) has been listed on the stock exchange. Whilst
these are quite different in terms of legal structure from the
traditional e.V, the process of transition and the subsequent
day-to-day running of the company are strictly monitored, in both
legal and practical terms.(3)
A clause known informally as "50 + 1" holds
that the parent club (ie the members' association) must hold a
majority voting bloc in the affiliated corporation—hence
the "50 + 1" moniker. This regulation is not relevant
for the by definition democratic structure of associations (one
man one vote principle) and thus applies only to affiliated corporations
of parent clubs. The clause has two main intentions. Firstly,
to safeguard the influence of the parent club on the affiliated
company, and to avoid the promotion of external influences (creditors,
lenders, minority shareholders and individual takeovers) over
those of the members. Secondly, to ensure that the sporting competition
of the national championship is not distorted. The clause is applicable
to all three forms of private ownership structure, with the central
principle of member/supporter ownership enshrined regardless of
whether the club is an AG, GmbH or GmbH & Co. KG aA. In practical
terms, the clause ensures that the dialogue between the club's
management structure and members of the parent club (always in
the legal form of an association) remains fluid and travels in
both directions, unlike in England, where supporters often find
themselves talking without ever being acknowledged.(4)
The second element of regulation that operates in
the Bundesliga and Bundesliga 2 is the licensing system, developed
on a co-operative basis by the German game's governing bodies.
The licensing system is arguably the main reason that Bundesliga
clubs have, without exception, remained solvent entities throughout
the past forty-seven years. Perhaps the most impressive feature
of the system which applies also to clubs in the amateur divisions
is that it is endorsed by all clubs and the public generally.
. In essence, the licensing procedure requires clubs to submit
economic data for scrutiny by the football authorities, thereby
ensuring an openness and transparency to the business aspect of
the game that is without parallel across Europe. The back bone
of the system is to force clubs to reduce overspending by implementing
specified planning procedures and seasonal application for a license.
Clubs apply first to the DFL, in case of problems to prove enough
liquidity to meet all obligations at any time the licensing committee
as the appeal body plays a part. It is the League Association
which then issues the license. Should a club be refused a license,
they can appeal to the licensing committee, and if the appeal
is unsuccessful the Court of Arbitration for German Professional
Football. Should their appeal be successful there the application
is returned to the licensing committee and, formally, the League
Association, to grant the license. If, after all these avenues
are exhausted a club has still not received a license, they are
banned from competing in the forthcoming season.(5)
For a club to receive a license, they must be solvent,
and be able to demonstrate enough liquidity. This is assessed
checking the following items:
— Assets.
— Receivables.
— Cash
and bank balances.
— Liabilities/provisions.
— Current
overdraft account facilities.
— Loan
commitments.
— Projected
profit and loss statements including planned income from ticket
sales, advertising and transfers and planned payroll costs for
match operations.
— Cash
inflows/outflows from investing and financing activities.(6)
Additionally, net equity must be present at the end
of each season or sanctions will follow. The forecast of liquidity
centres around three main requirements: that all payment obligations
can be met at all times, that regular match operations can be
guaranteed at all times, and that any financial problems can be
countered. There have been a number of recent instances in English
football where clubs have been unable to fulfil one or all of
those requirements, yet the same cannot be said for the Bundesliga.
This is due to the strict criteria listed above, as well as the
liquidity forecast undertaken by the DFL, using figures provided
by each club and commented by the clubs' auditors. This begins
with the audited club accounts as of the previous 31 December,
and incorporates the budgeted figures for the following 18 months.
Submission of accounts is a heavily legislated area, and clubs
are prevented from including anything that cannot be backed up
with a written contract. This seems particularly sensible given
the recent trend in England for clubs to base accounts on uncontrollable
variables such as promotion or season ticket sales. The licensor
has full discretion not only when deciding which figures to take
into account when compiling the liquidity forecast but also when
reducing projected income or increasing projected expenditures.
This cannot be done without well founded reasons, but it often
applies to budgeted income from ticket sale or intended cost cutting
for player salaries. All of which leads to one of the following
four outcomes:
1. Positive liquidity at the end of the season
to be licensed is proved: The financial criteria have been fulfilled—the
license is granted without any conditions or obligations.
2. Positive liquidity at the end of the season
to be licensed could only be proved after meeting some conditions:
The financial criteria have been fulfilled—the license is
granted with obligations valid in the respective season
3. Positive liquidity at the end of the season
to be licensed is proved but the balance sheet as of 31 December
t-1 discloses a net debt (negative equity): The financial criteria
have been fulfilled—the license is granted with the obligation
to improve equity in the balance sheet as of 31 December t by
a certain percentage
4. Conditions which were imposed to prove positive
liquidity were not met—the financial criteria have not been
fulfilled—no license is granted.(7)
As well as the pre-season examinations, the licensing
procedure also includes an in-season confirmation of economic
capability. This is a newly devised method which allows the authorities
to monitor clubs on a more regular and closer basis. All clubs
must submit revised and audited accounts as of 30 June, a revised
budget for the upcoming season, and an auditor's report until
31 October. Should a gap in liquidity emerge, clubs are given
four weeks to establish new income streams, and are barred from
operating in the January transfer window without the approval
of the licensor. Clubs are fined for late submission of the documents,
and also face points deductions should they fail to meet the requirements
to present fresh money. Again, the evaluation of the clubs's liquidity
is at the discretion of the licensor.(8)
As mentioned above, the licensing system also safeguards
against any financial problems that may arise. Accepting the license
from the League Association, all clubs agree upon a contingent
funding of financially suffering competitors out of the income
generated by the central marketing of media rights. This means
that well run clubs would receive less TV money than they are
entitled to just to generate financial aid for poor run rivals.
But this potential support is limited to the amount of a two month
pay roll and will inevitably lead to a point deduction for the
delinquent. In practise, no club asked for that support since
its inception in 2004. Crucially, this instrument is founded on
the ubiquitous understanding and acceptance that financial difficulties
of only one club can negatively impact the lives and businesses
of other people and institutions.
In essence, the licensing system is intended to safeguard
the integrity of the game and the league, as well as providing
a seal of good governance, a quality assurance for the clubs and,
as a side-effect, a benchmark from which both clubs and external
observers (such as UEFA) can measure against. The benefits of
implementing such a system are arguably self-evident, in commercial,
social and political terms. An examination of UEFA's latest Benchmarking
Report (published in January 2011) only furthers the notion that
the Bundesliga can provide a solution for many of the issues that
football across Europe (and the UK in particular) is currently
wrestling with. Germany's top division gathered the largest average
attendance of any league in Europe (42,500, over 8,000 more than
the Premier League), as well as the largest estimated total attendance
(13,005,000, again ahead of the Premier League). Given that there
are two fewer clubs contributing attendances to the Bundesliga
calculation, this is a telling statistic. Furthermore, of the
so-called "big five" European leagues (the Bundesliga,
the Premier League, Serie A, La Liga and Ligue 1), the Bundesliga
had the highest number of different champions between 2000-01
and 2009-10, with five. This competitive parity is a direct result
of the level playing field created by the regulations regarding
ownership and the licensing system.(10)
Bundesliga and Bundesliga 2 clubs continue to combine
financial stability with a keen eye for development and maintenance
of diversified revenue, which rose above €2 billion according
to Bundesliga figures. Transfers (8%), media rights (29%), gate
receipts (21%), sponsorships (28%) and merchandising etc. (14%)
are near-equal partners in the average turnover of the two divisions.
In the UEFA Benchmarking report, figures for Advertising and Sponsorship
revenue increased by over 10% during the 2009 financial year,
whilst overall revenue and operating profit also increased by
10%; which given the current economic state of Europe, is no mean
feat. This increase in profit was not spent on wages however,
with German clubs spending 52% of their reported revenue on employee
costs. These profits were also achieved without pricing fans out
of the stadiums: the Bundesliga had the cheapest average ticket
price out of the "big five" European leagues, at €21,
compared to €43 in the Premier League. In terms of overall
losses, the Bundesliga was one of just four European divisions
to break even in 2009, another indicator of its commitment to
financial stability.(11)
All of these successes are direct results of the
stringent licensing and ownership structure rules which govern
clubs competing in the Bundesliga and Bundesliga 2. In addition
to this, the tradition of members' associations in German footballing
culture ensures that all clubs, regardless of size, are deeply
rooted in their local communities. This can be seen in many different
features of the game in Germany, from the social activism of clubs
such as St. Pauli, to Borussia Dortmund's Westfalenstadion, which
houses the Südtribüne, Europe's largest still-existing
terrace, and the resulting spectacular atmosphere. In wider terms,
members' associations have traditionally held an important place
in German society, and as such are well-placed to positively impact
on the communities from which they draw their membership. Werder
Bremen and Schalke 04 and others have taken a leading role in
terms of community integration, with both clubs committing to
large-scale improvement projects intended to enhance public life
in their communities.(12)
January 2011
|
