Written evidence submitted by Supporters
Direct
SUMMARY
— This
is the written evidence of Supporters Direct, which is the national
representative body for Supporters' Trusts. We request the opportunity
to give oral evidence to the Committee.
— We
also endorse the evidence submitted by our partners in the Football
Supporters' Federation.
— We
believe that professional football clubs should operate as sustainable
enterprises within healthy and competitive leagues, which enable
them to maximise their valuable contribution to society.
— We
believe that greater stakeholder participation not only better
fits the nature of football clubs as intrinsically public institutions,
but also actively contributes to better governance and thus financial
sustainability. We view co-operative models as ideally suited
to this task.
— The
governance of English football is in urgent need of reform. The
financial model pursued by most English professional clubs is
unsustainable, with 81 clubs having sought protection from creditors
since the current insolvency regime was created in 1986.
— Current
regulation of clubs relies on retrospective penalties rather than
incentives to encourage good financial practice and prevent clubs
getting into financial difficulties.
OUR PROPOSALS
— The
introduction of a new licensing regime to promote financial and
social responsibility and balance the sporting, commercial and
social objectives of clubs. Specifically, it should:
— Work
to bring costs and debt under control and incentivise good financial
practice to enable clubs to live within their means and penalise
those who do not.
— Recognise
the social and sporting dimensions of clubs by requiring clubs
to have supporter representation on their boards as part of good
governance measures to promote better decision-making and transparency.
— This
regime must be overseen by a regulatory body, operating within
a clear legal framework which recognises the specific requirements
of sport to ensure a level-playing field for healthy sporting
competitions.
— Government
intervention to this end should be focussed on driving this change
within football and providing support to overcome obstacles where
necessary.
— The
Coalition has pledged to take actions To meet their commitment
to "encouraging the reform of football governance rules to
support the co-operative ownership of football clubs by supporters",
Government should introduce a community right to buy and incentivise
supporter financial contributions through redirecting existing
tax reliefs to clubs with significant supporter influence, or
granted to individuals who invest via a supporters' trust.
— Supporters
Direct has driven supporter involvement since 2000 through its
work developing the network of supporters' trusts seeking to achieve
it. In addition to other measures to increase supporter involvement
and ownership, Supporters Direct should be appropriately funded
to continue this work.
ABOUT SUPPORTERS
DIRECT
1. Supporters Direct's mission is to promote
sustainable sports clubs based on community ownership and supporter
involvement. We believe that the issues of financial sustainability,
ownership and governance are linked.
2. We were formed in 2000 following a recommendation
of the Football Task Force, to encourage the formation and development
of groups of fans to take ownership stakes in their clubs.
3. We have overseen the creation of over 170
supporters' trusts, which like us, are registered as Community
Benefit Societies with the Financial Services Authority (FSA),
and who are our members.
4. These societies—commonly known as supporters'
trusts—have over 250,000 members and have been instrumental
in preserving football at over 30 clubs across the UK. They have
raised over £30 million in funding for clubs since 2000 for
an investment in Supporters Direct of £4 million in that
time.
5. Our work began in English football, but we
are now active in Scottish football and Rugby League and thanks
to support from UEFA, we are now working with groups in 14 other
European countries. We have also helped form trusts in Rugby Union
and Ice Hockey.
CURRENT BARRIERS
TO THE
GROWTH OF
SUPPORTER INVOLVEMENT
6. A series of factors militates against sustainability
and the growth of community ownership models. Various regulatory
and taxation policies combine with the unsustainable economics
of football to incentivise the ownership of clubs by dominant
individuals who continue to fuel the arms race of ever-increasing
player costs.
7. Wealthy owners who hold their football club
shareholding in a group of companies can in effect claim a subsidy
from taxpayers by writing off the losses in the football club
against profits in other group companies. This tax advantage is
not available to supporters' trusts.
8. In contrast to this, supporters' trusts who
aim to ensure prudent financial management face a number of regulatory
burdens in trying to raise capital for investment (see paragraph
37).
9. The combined impact of this has been to transform
a potentially diverse (and thus more robust) ownership landscape
into a monoculture in which clubs are over-dependent on the financial
performance of other sectors of economic activity from which their
owners derive the funds to subsidise the clubs' spending commitments.
Q1. Should football clubs in the UK be treated
differently from other commercial organisations?
10. We believe that football is different from
normal commercial activity, and its clubs are different from normal
companies.
11. The psychology and loyalty of football fans
differs from that of normal consumers; the economics of the industry
do not operate like other sectors, and the financial performance
of the game, especially in the last 20 years, would have laid
the sport to waste had it been "just" commercial. Most
clubs have poor historic commercial performance and only exist
on subsidies from their owners.
12. We contend that clubs have inter-linked sporting,
commercial and social goals. Their primary purpose is to take
part in sporting competitions, but the historic reason for doing
this is because of their role in the social and cultural life
of their supporters and their wider community. In order to continue
to do this successfully, they need to be commercial, as professional
sport has always been.
13. The potential contribution of football clubs
to community wellbeing is documented in the report on the Social
and Community Value of Football commissioned by Supporters Direct
and published in June 2010 by Substance.
14. This more holistic view of clubs is recognised
in some countries through the creation of specific legal forms
for sports clubs that give them advantages and exemptions provided
they act to ensure that the sporting and social purposes are properly
addressed. In other territories, the national football bodies
have licensing systems to achieve a similar function. We have
neither.
Q2. Are football governance rules in England
and Wales, and the governing bodies which set and apply them,
fit for purpose?
15. We believe that neither is the case. Both
are the haphazard result of England's history as the first FA.
Its response to the major challenges of sport's development—professionalism,
safety, facility development, player development, financial sustainability
etc - have all been developed using a governance structure which
has consistently produced outcomes based on shifting balances
of power much more than independent, rational policy-making.
16. In key areas, the governing bodies (the FA
and its licensed leagues) have been captured by the interests
of the clubs they are supposed to regulate. The FA is built around
being a representive body, not necessarily an effective one.
17. The rules it has put in place to guide and
govern clubs are not adequate, not least because those clubs have
an effective veto.
18. There are many metrics one might use to demonstrate
this, but the most salutory and important is that since 1986 (when
the current insolvency regime was created), 81 clubs that have
played in the top five divisions in English football have been
declared insolvent.There are a great many more that have been
technically insolvent, if not legally so, as the large number
of clubs sold for nominal fees such as £1 demonstrates.
19. Whilst rules have been introduced belatedly
to address some of these issues, they are mostly retrospective,
geared towards penalising clubs after they have already entered
insolvency, rather than dealing with the individuals responsible
for club policy, nor incentivising sustainability and sound management.
20. In addition to the burden of poor structures,
English football regulation has taken it as axiomatic that clubs
cannot be compelled to act in ways contrary to wishes of their
shareholders, nor should they, as those shareholders are better
placed to judge appropriate actions than a regulator.
21. This idea forms the intellectual underpinning
to much debate about regulation in the game. However, the record
of insolvency shows that club shareholders cannot be relied upon
to make correct judgements, and that regulators must therefore
act.
22. The key requirement - following UEFA's lead
with its Financial Fair Play system—is to introduce a domestic
licensing regime. This would provide a framework for clubs to
become sustainable by controlling costs, limiting debt and ensuring
they are well governed and take the needs of their stakeholders
into account, as well as the wishes of their shareholders.
23. The test for whether there is a role for
government in achieving this depends on whether the FA is willing
and able to undertake this work, as football associations in other
countries have successfully done.
Q3. Is there too much debt in the professional
game?
24. There is clearly too much unsustainable debt,
as the number of clubs in insolvency shows. Whilst some clubs
have taken on capital debt which is serviceable through using
it to generate higher revenues, too many clubs have debts to their
owners, their suppliers and the state which are accumulated operating
losses from trying to keep pace with those for whom money is no
object.
25. Often, debt is secured against the most important
asset of the club, its stadium, and because the clubs fail to
generate any surpluses to pay their debt down, in increasing number
of grounds have become separated from the control of the club,
and in many cases been sold for development.
26. The current regulatory regime leaves debt
to the discretion of the club, its shareholders and its lenders.
As we have seen from ther chronic insolvency in the game, their
track record leaves much to be desired. Investigation and sanctioning
of club debt should be a major part of the licensing system we
recommend.
Q4. What are the pros and cons of the Supporter
Trust share-holding model?
27. There are two distinct contexts to consider
here. Firstly, where the trust is the majority or sole owner (eg
Exeter, AFC Wimbledon, Brentford, FC United) and secondly where
the supporters' trust is a minority shareholder (90 clubs including
Lincoln City and Swansea City).
A. Trusts with majority control
28. There are currently 21 clubs where the majority
shareholder is a supporters' trust. We identify six clear advantages
of community-owned clubs over traditionally owned clubs.
28.1 They must live within their means as they
have no other means of support. As they have no dominant owner
with an overbearing drive for short-term success, the board is
more likely to take a medium-to-long term view in order to ensure
the club will continue to exist for future generations.
28.2 Their ability to trade is aided by their
greater ability to co-opt volunteers. If the club is owned by
a multi-millionaire, fans can develop an attitude which says "let
him pay for it". FC United of Manchester have over 10% of
their regular crowd volunteering, all motivated because they all
own a single share. This active community engagement could be
seen as an example of the Big Society in action.
28.3 They also have a boost from better relationships
with public authorities. Research from the Substance report referred
to in paragraph 13 showed that clubs with more dispersed community
ownership had a much wider understanding of public policy agendas
and a greater ability to build relationships with those delivering
them. Given the importance to clubs of facility development, this
has a major financial benefit.
28.4 They are also much more likely to understand
their role in the community more holistically and devote resources
to supporting that community. The research on social value demonstrated
that clubs make a contribution to their communities in everything
they do, not just through their community programmes. In addition
to being more sustainable (thus less likely to default on debts
to local suppliers) they are more aware of the importance of a
local supply or employment policy.
28.5 Unlike many clubs who have reduced the amount
of information about their operations that is publicly known,
community-owned clubs are transparently owned and managed. People
can have confidence about whom they are dealing with, and supporters
are aware of the club's financial affairs before it is too late,
and so are able to press for a change in policy.
28.6 Supporter-owned clubs also have a different
recruitment policy for Directors. For most clubs, the requirement
is to have several hundred thousand pounds and be sanguine about
never seeing it again, which is not a compelling proposition for
many. Having a means for able individuals to contribute regardless
of means is a major benefit, allied to a governance structure
which is not skewed by the wishes of a dominant shareholder and—crucially—accountable
to a wider membership for their actions.
29. These positives are, in our experience, outweighed
by a single negative, which is common to all clubs which are not
owned by a wealthy benefactor: all struggle in the face of a sport
where the main demand of any owner, over and above wisdom or ability,
is liquidity to support negative cash flow.
B. Trusts with minority shareholdings
30. There are 90 supporters' trusts who have
an equity stake in their club, and 64 with a seat on the club
board.
31. The ability of this involvement to bring
benefits to a club depends on its approach to good governance.
Where the club has proper procedures in place, supporter-elected
directors can play a very positive role as part of a balanced
board considering club strategy.
32. Conversely, where the club's governance is
poor, with dominant individuals making most decisions outside
of formal processes, the ability of any minority interests to
influence decisions is limited.
33. As noted, the trend is for more clubs to
be owned by dominant individuals due to the economic paradigm
in the game. There have been instances where trusts' shareholdings
have been diluted and their board seats removed by new financiers
less concerned with open dialogue, with a more dictatorial approach.
34. Addressing the wider financial issues through
a licensing system will help in this respect, but beyond that,
the benefits of regular dialogue and involvement need to be underpinned
by more than the inclinations of the current managers and owners
and the finance-raising capacity of trusts. UEFA's new licensing
system includes a provision that all clubs should have a Supporter
Liaison Officer, and authorities have a framework to go further.
35. Board representation for supporters should
be part of a football licensing system and clubs could be mandated
to provide places on the board of their clubs, be transparent
about their financial operation and hold annual meetings to discuss
those reports.
36. Clubs could also be encouraged to make shares
available to their supporters to build up their stake through
such a system, knowing that their position in the club was guaranteed
in the future.
C. Capital raising
37. Improving access to capital is a key issue
to level the playing field for supporter investment, which is
critical for all trusts, regardless of how many of the club's
shares they own.
38. There are regulatory burdens imposed on trusts
because they are raising funds to buy shares in a private company
and so treated like any other investment activity, which is unsatisfactory.
There are clear differences however which if recognised by the
FSA would make it easier and cheaper for volunteer-run trusts
to bring new equity into the game.
39. At the same time, the exisitng tax advantages
which support the increase in club losses or leverage buyouts
are not in the public interest as they contribute to unsustainable
cost inflation and unproductive debt. Tax policy should be refocussed
on incentivising fan investment.
40. FC United of Manchester are in the process
of developing a home ground, for which they had to raise £2
million of investment themselves. They have used the Community
Benefit Society to raise that sum on a one-member, one-vote basis.
This is an astonishing and unprecedented sum for a club with average
gates of around 2,000. Crucially for this discussion, the offer
attracted Enterprise Investment Scheme (EIS) reliefs for investors.
The announcment of EIS reliefs came after the initial share issue
was opened, and caused a significant rise in take-up. We believe
that incentives like this would drive fan investment and influence.
41. There are obviously wider
policy implications, so we believe that an expert group convened
by the Minister for Sport could provide a way forward on these
issues. We would be happy to serve on such a group and believe
it is an area of activity which, by not requiring any discussion
outside government, would be a minor change with major implications,
if allied to a licensing system for the game.
Q5. Is Government intervention justified and,
if so, what form should it take?
42. Football is our national game and is a subject
of public concern, so it is a legitimate subject for Government
action and Parliamentary investigation.
43. The Coalition Agreement commits the Government
to action on club ownership and governance, so the issue is not
whether Government should intervene than what form intervention
should take.
44. In our view, this could be achieved through
a Right to Buy, modelled on the Scottish Land Reform Act 2003.
We see two situations where this might be appropriate: when a
club is insolvent, where changes to the Insolvency regime would
need to be made, and where existing owners offer a club for sale,
in which case a moratorium period would be necessary for the Community
to raise the required finance. There are already Right to Buy
proposals in the Localism Bill with respect to public assets and
services, and these could be extended to include non-public sector
community assets such as football clubs.
45. An alternative to that legislative route
would be to use the tax system to incentivise supporter influence
at their respective clubs, as we detail in paragraphs 37-41.
46. The tax system contributes to the poor financial
and governance performance in football and should be reviewed
as a matter or urgency. Any public assistance to football clubs
must be based on the provision of clear and demonstrable social
benefit, as we call for in our report on the social value of football.
47. In terms of the governance of the game as
a whole, Government intervention has often been necessary principally
because the game was incapable of making the necessary changes
due to its poor governance. The clearest case is to ensure supporter
safety through legislation in 1975 and again in 1991, the latter
accompanied by financial assistance.
48. Other national football associations have
put into place licensing systems to regulate club activity; that
the FA has not done so suggests that there are significant blockages
which will continue to prevent it unless they are tackled.
49. The issue for government is where can it
support the FA in achieving the necessary changes if it is either
unable or unwilling to deliver. The nature of the obstacles would
determine the precise nature of the intervention, but we would
suggest that such has been the historic failure that Government
must do more than simply urge reform upon football.
50. We suggest a time-limited Act which provides
powers for the Minister to take all necessary action to introduce
a thorough licensing regime should such not be introduced by football.
Experience suggests this latest impulse will similarly run into
the sands without this kind of motivation.
Q6. Are there lessons to be learned from football
governance models across the UK and abroad, and from governance
models in other sports?
51. In 2008, we published research on the system
of governance and regulation of football in six continental European
countries; Italy, Germany, Spain, France, Belgium and the Czech
Republic.
52. Most impressive was the German Bundesliga,
which commends itself on a host of factors. Critical amongst them
is a recognition that a stable sport flows from regulation at
club level of who makes decisions, and regulation by the league
to ensure greater possibility of clubs achieving success without
damaging the club or the wider financial operating environment.
53. The record of the Bundesliga speaks for itself;
it is the most profitable, solvent and well attended league in
Europe with has the highest ratio of commercial income to turnover.
There has never been an insolvency in the history of the Bundesliga,
which contrasts starkly with the record here.
54. A key component of this is the league's licensing
system which recognises that clubs are interdependent and so the
risky actions by one can cause problems for all. Specifically,
if one club decides to become unsustainably ambitious and buy
the best players, the impact will be to raise players costs which
impacts on other clubs.
55. That underpins their approach to the 50%+1
rule, which places ultimate controlling shareholdings in the hands
of a members' association of supporters. Whilst there are instances
of individuals making large payments to clubs, the level to which
this occurs is much much less than in England, because they cannot
control the assets.
56. The combined impact of these is that clubs
trade their way to sustainability confident that the league will
be able to act if another club tried to subvert the system.
57. We are also very much attracted to the Commission
model developed in many Australian and American Sports, which
stops regulatory capture whilst ensuring regulators have understanding
and experience of the sport without being beholden to it.
58. The lesson from these countries suggests
that if sustainability is a outcome we wish to see, it seems to
be necessary to have a licensing system, and that licensing systems
need to be independently managed and governed from the clubs who
will be subject to them.
January 2010
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