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11 April 2015

Time for a Football Club Ownership and Governance Act

Tag(s): Sport, Politics & Economics
Today marks the start of Supporter Ownership week. The organisers believe that football clubs bring identity to our communities; make our towns and cities special, they are part of our identity. And so since there is already a feeling of ownership that should be translated into proper ownership with control in the community, not by foreign pirates.

This is from their website. http://www.supporters-direct.org/supporter-ownership-week
“Between the 11th and 18th April, 2015, we’ll be celebrating Supporter Ownership Week. We’ll be running a series of events and showing you how we make supporter ownership happen at a club, how supporter owned clubs work, and we’ll bring you the stories of the people who make it possible.

In advance of the formal launch of SD’s manifesto for the reform of English football, the following is a piece penned by writer and Spurs trust Co-Chair Martin Cloake, and the CEO of the Manchester United Supporters Trust, Duncan Drasdo. It outlines their view of the issues that affect the game in England, and offers some interesting, different and challenging solutions, all in the spirit of debate and search for ideas that the Trust Movement and SD actively encourages.

Time for a Football Club Ownership and Governance Act

Supporter ownership of football clubs is an idea that is catching the imagination. In practical terms, supporter ownership has saved a growing number of clubs from going out of existence – as fans of Exeter City, Wrexham and Portsmouth to name but three – will testify. And, at a time of growing disquiet over both the huge disparities of wealth within the game and the quality of leadership being exercised from too many boardrooms, supporter ownership’s allure seems ever more compelling. But is it just a pipe dream, or can practical steps be taken to enable it to happen at more clubs? And, in particular, is it practical to talk about supporter ownership at the 20 elite Premier League clubs named in the latest Deloitte Football Rich List as being among the 40 wealthiest sport clubs on the planet?

As supporter activists in fan organisations at our respective clubs, Tottenham Hotspur and Manchester United, we recognise the scale of the challenges facing supporters at clubs that have become global brands. And as football fans, we also recognise the variety of challenges facing clubs at different levels of the game. That’s why, when the government asked for submissions to its Expert Working Group on Football, our organisations were among those that submitted proposals. We thought it would be useful to précis our thinking here, in the interests of promoting discussion, and of focussing the minds of those who will be asking for your votes in the forthcoming general election.

We’ll be clear from the outset in stating our belief that Government needs to act if we are going to see meaningful and permanent reform in football. To what extent intervention is required is a debate that needs to happen and we would certainly not advocate complete state control of football. But football has been given multiple chances to reform itself, and failed. There now exists a major crisis of confidence in not only the ability but the very inclination of those bodies that claim to govern football to carry out that role. There can be no avoiding the conclusion that, if reform is to happen, that reform needs to become a requirement, not simply a vague aspiration.

Clearly the Premier League (and similarly the Football League) are controlled by their clubs but the power of the clubs also extends deeply into the FA and hence all attempts at self-reform have failed. That is why Government needs to legislate. It should be emphasised that such legislation could be very much light touch but a Football Club Ownership and Governance Act would create a peg on which to hang future amendments should football fail to respond to further voluntary invitations to progressive reform.

We’re aware that such a view will immediately provoke accusations of ‘interference with the free market’. And that leads us to one of the basic principles upon which our approach is based. Football is not a business like any other, and so needs a unique set of rules to be applied to it. The current legal framework does not recognise that Football Clubs are fundamentally different from ordinary commercial businesses in certain key respects. Like commercial companies, they have relationships with suppliers and customers and need to take into account the interests of employees. But, unlike most companies, most Football Clubs are integral to the local community. Uniquely, Football Clubs have a very important stakeholder – their supporters- but, unfortunately, the current legal framework does not recognise their existence.

It is the lack of special provision for Football Clubs in the legislation which has created a barrier to supporter ownership – especially at the higher levels.

The majority of Football Clubs are privately owned and non-transparently managed. Currently, an owner can sell the club’s stadium, re-locate the team, change the colour of the shirt, massively inflate ticket prices, sell the best players, increase the borrowings and extract massive dividends, without being accountable.

This was not always the case. The journalist David Conn, writing in The Observer in 2007, sets out a compelling , independent summary of the root causes of the challenges the Expert Working Group has been set up to address. In that article, he draws attention to a set of values, established as the English game was being set up in Victorian times and enduring until 1983 in the shape of the Football Association’s Rule 34. It was this rule , said Conn, “that established the culture that being a club director was a form of public service, that directors should be ‘custodians’, to support and look after clubs”. It was this rule that “prohibited directors from being paid, restricted the dividends to shareholders, and protected grounds from asset stripping.”

In 1983, the then owner of Tottenham Hotspur, Irving Scholar, wrote to the FA asking if Spurs would be able to form a holding company, THFC plc, which would wholly own the football club – thus freeing the holding company’s directors from the responsibilities and restrictions of Rule 34. The FA never replied, and Spurs became the first club in the world to float on the Stack Exchange. The course of football history was fundamentally changed by a decision, or lack of decision, by the body that claimed to govern the game, and which has not explained its conduct to this day.

Once the FA surrendered the protection of Rule 34, there was only Company Law to fall back on and that is not fit for purpose when applied to Football Clubs. And that is because football is not a business like any other. One key reason is because of the historic culture of non-transferable loyalty of the fan base. Consequently, Football Clubs each operate as distinct micro-monopolies, with the fans being key stakeholders. But these key stakeholders find themselves outside a commercial company and without the equity required to give them a voice. They are treated as if they were customers of a business operating in an efficient competitive market.

This gradual transition to such commercial enterprises from entities which, regardless of legal status, operated more like Community Shield Social Enterprises or Members’ Clubs, is at the very root of the problems we see in the governance of our professional clubs. It is also precisely why many of these issues do not arise in member controlled clubs around Europe and most markedly in Germany which perhaps exemplify best practice.

What all this tells us is that it is possible to regulate football as the business it is, if the political will is there. We believe that will is there among the vast majority of supporters, and we would hope to see that will reflected by those we elect to Parliament. How this could be done leads us to our second basic principle – there is no ‘one-size-fits-all’ solution. What works at a big, globally-recognised club may not work at a small club more closely linked to its local community. And, at every level of the game, 100% supporter ownership of a football club may not be necessary, or even desirable. What we are advocating is based upon a third, and final, basic principle – that a ‘no overall control’ model may deliver the optimum solution.

What we mean by that is that measures to promote mixed ownership of football clubs may well provide the EWG with the best opportunity to successfully reform football in the UK nations. The absence of any single majority owner and/or no majority control of the board will lead, we believe, to better governance and avoid exploitation of the club for the benefit of owners. A mixed ownership model akin to that of Bayern Munich (50%+1 member club ownership but with major commercial investment) strikes a good balance between retaining a commercial drive and making the best interests of the Club paramount. The very existence of majority fan power discourages many of the abuses we see in English football.

Our advocacy of this model draws heavily on the experience of Manchester United supporters at the time of the takeover by the Glazer family. In 2005 the Glazers, with support of other shareholders, were able to effectively compel resistant Manchester United directors to allow the due diligence required by lending banks to open the door to a highly leveraged hostile takeover.

With no requirement for Football Clubs to have majority of independent directors (IDs) whose first duty, in the event of a conflict, would be to the Club, a majority of shareholders could simply replace any resistant directors with others who would do their bidding. So resistance became futile once that majority of shareholders had indicated they wished to see the offer proceed.

Furthermore, since the implementation of the Companies Act 2006, it is now unarguable that directors must look to shareholders’ interests before those of the Club or any other stakeholder. So the absence of a majority of truly independent directors (especially independent from major shareholders) in both a pre and post takeover (private company) scenario allowed a takeover which was clearly detrimental to the Club. It has so far resulted in a financial cost to the Club, including remaining debt, of more than £1 billion, but there have been many non-financial costs in addition.

So how would the necessary changes be achieved? We believe that there are two routes available. One is to amend the Companies Act 2006. The other is to draw up and implement a new Football Cub Ownership and Governance Act. We would favour the latter approach, because a new Act would serve as a marker of intent and be more likely to appeal to any Government as it would pay a greater political dividend than low profile amendments to the existing Companies Act. Furthermore, a specific Act for football would pre-empt concerns that such reform would invite a flood of requests from other special interest groups.

The key reforms required are:
  • Require the controlling boards of all football clubs to have a majority of directors to be independent of both the executive management and of the shareholders, with at least one director elected by an accredited Supporters Trust;
  • Ensure that while the fiduciary duty of IDs remains primarily to shareholders, where a potential conflict of interest arises which might result in material detriment, the best interests of the club will precede those of shareholders;
  • Require IDs to promote supporter engagement and facilitate growth of supporter share ownership;
  • Require clubs to conform as a minimum with all appropriate sections of the UK Corporate Governance Code especially in relation to reporting, audit and accounting standards;
  • Set out a simple, model company structure for all Football Club Ownership structures to conform to so as to avoid attempts to bypass the above reforms or more general obfuscation, tax avoidance or unequal rights for some shareholders;
  • Require the consent, as a class matter, of the relevant Supporters Trust for any attempt to change the location of or sell the club’s home ground, or to change the club’s name or home shirt colours.
Additional beneficial reforms:
  • Require Clubs to conform appropriately with the Freedom of Information Act in certain areas to encourage general transparency over decision making unless there is a good reason why it should be kept confidential;
  • Remove tax reliefs on leveraged buyouts of Football Clubs except where the buy-out is by an accredited Supporters Trust and/or the only way to save a Club from extinction;
  • Removal of tax relief on Football Club debt interest. Clubs should be encouraged to live within their means and when capital is desired they should issue new shares to their fans. If investment isn’t forthcoming by that route then that suggests there is insufficient support for it and it would probably be imprudent.
We believe these measures are both desirable and possible. While the German model is often referred to in these discussions, and has been by us again above, we would also draw attention to the so-called “B Corporation” movement which is steadily gaining momentum in the US. In addition to changing the duties of directors of a company to represent stakeholders rather than shareholders, the B Corp certification system uses the B Impact Assessment to measure and access ‘the other bottom lines’. Social and environmental performances are measured so that they can be considered by Directors alongside financial performance.
 
This resonates in the context of Football Clubs in terms of directors representing “stakeholders” rather than exclusively shareholders. Football Clubs should not be sacrificed at the altar of “shareholder value”.
 
The views set out above are a set of proposals and we would encourage discussion of them at all levels of the game. They are not an unchangeable set of demands, but we believe that the basic principles represent a genuine way to reform the game. Cynicism about this latest attempt by Parliament to consider reform of football is understandable after so many past failures. But the thinking in our proposals is shared widely by supporter groups, and the fact that more and more grass roots supporter groups have the confidence and ability to put forward such detailed ideas is a signal in itself that the terrain has changed. Politicians have a unique opportunity to reform a game that remains at the heart of national life. That chance should not be wasted”.
 
I have been a member of the Manchester United Supporters Trust (MUST) since its inception following the Glazer appropriation of Manchester United. I fully support what Duncan Drasdo and his colleagues are trying to do. I blogged on this subject five years ago at which time MUST strategy seemed more about raising enough supporter capital to buy the Glazers out. (see my blog The Green and the Gold 10th March, 2010  http://www.davidcpearson.co.uk/blog.cfm?blogID=77 ) That is clearly impractical as since then the Glazers have reduced the debt by floating in the New York Stock Exchange where the market capitalisation today is $2.6 billion and to buy out the Glazers and other shareholders would require a substantial premium to that. Hence the revised strategy to find a solution in law and to accept that it will be a gradual process. It’s probably not top of mind for most parliamentary candidates at this General Election but it is one of those situations where government should intervene because of a market failure in a unique market.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



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