Football Governance

Written evidence submitted by Supporters Direct (FG 35)

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 £30m in funding for clubs since 2000 for an investment in Supporters Direct of £4m 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.

27.1 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.

27.2 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.

27.3 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 abi l ity to build relationships with those delivering them. Given the importance to clubs of facility development, this has a major financial benefit.

27.4 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.

27.5 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.

27.6 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.

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 £2m 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