Football in the Digital Age – Chapter 3

3. Reforming football’s boardrooms

Tom Cannon and Sean Hamil

Issues of governance and regulation are fundamental to the future of our national game. The structure of governance that has stood for most of the twentieth century is collapsing under a series of pressures. Some of these pressures result from internal changes in an increasingly international sport, where the gap between the grass-root supporters, the players and administrators is widening. Alongside this, there is a massive shift in the financial basis of a sport that is becoming, willingly or not, part of a complex leisure industry. These shifts are provoking a major debate about the ownership, control and future of clubs, leagues and the game itself.

At the heart of this debate are the extraordinary and complex changes that are occurring in the environment of a game which is fundamentally simple and which has a support base that is relatively conservative. The question to ask, therefore, is whether, in the new ball-game that we are seeing in football, with vast amounts of money swirling around the game, the money is going to be used for the good of the game. Currently it is unclear what is going to happen to this money. The choices, though, are relatively simple. Funds can flow out of the game into the profits of owners or investors and the wages of players or, some at least, can be employed to strengthen the game through improved facilities and better opportunities. So far the picture is pretty clear with ‘new’ investors extracting the value that has taken generations to create or simply squandering assets through conspicuous consumption and inefficiency.

What we are witnessing is a whole series of new challenges, which are going to affect not just the short-term viability of individual clubs but their long-term success. These challenges pose new questions, which take football into new territories. We need to be asking ourselves whether we have the skills or capabilities within the game to face up to these challenges. So what are the issues? Among the most important is the amateur tradition of football in the UK.

The ‘Amateur’ Tradition

Football in the UK has a deeply rooted ‘amateur’ tradition in its governance and management. Even today, despite the fact that we now have an increasing number of specialists, experts and accountants involved in the game, it is important to recognise that the fundamentals of professional football in the United Kingdom are amateur. An examination of the boards of even Premiership clubs will show that they are peopled largely by non-executive, amateur directors. Only a handful of clubs have chief executives who are directors. Some of the largest clubs have entirely non-executive boards.

When the structure of the clubs is examined more deeply, the amateur tradition continues to dominate, with few dedicated or qualified staff in key business areas and little dedicated training and development in leisure or sports management, marketing, customer service, media relations, finance or people management. This amateur tradition is suddenly faced with taking on new roles, which are expected of their enterprises, and of their fans (whom I would distinguish from their supporters), the shareholders, the directors and the employees of the businesses. The line between fans and supporters is important as it distinguishes between fans who have positive attitudes to a team but do not, usually, have any active involvement e.g. through attending games; and supporters who have an active involvement e.g. through attending games. Some analysts are using the terms secondary and primary support to make this distinction with secondary supporters akin to fans and primary supporters being close to the above definition of supporter. The distinction is important commercially but has a potentially greater importance in defining the relationship between the club and ‘its support’ (incorporating both groups). Some of the most recent changes – greater access to full games through cable TV, wider accessibility of merchandise – are targeted on the large fan-base rather than the much smaller supporter-base. In Manchester United’s case, for example, there are around three million fans but fewer than 150,000 supporters. Some planned developments, notably pay TV, seem likely to further discriminate in favour of fans against supporters. Other proposals such as ground moves and expansion of executive facilities at the expense of traditional space seem designed to reduce the opportunities of supporters to the benefit of fans. Reducing this ‘active’ involvement weakens the link between the club, its roots and its community. It seems likely to produce the type of passive link between ‘producer’ and ‘consumer’ that characterises most markets. This, in turn, changes the nature of the game as we know it.

These are complex and challenging issues, which pose dilemmas for those responsible for shaping the future of the game. Effectively and responsibly managed, the challenge of balancing these interests could strengthen the game. Badly managed, the failure to balance these interests could weaken the game for generations. It is fair to ask whether those with the responsibility or those whose task is it to deal with these challenges have the knowledge, skills and understanding to deal effectively with the task in hand. Equally important, do they want to deal with these challenges in ways that meet the long-term interests of the game or their own short-term interests?

Money, Money, Money

So let us explore this amateur tradition a little further. We all have our own experiences of the amateur tradition in football. The following example relates to Everton FC but it could just as easily have occurred at any of the other English clubs in the recent past. As football supporters we have all been to those grim fixtures where your team is playing poorly against uninspiring opposition, such as Wimbledon. You have sat through a dreary nil-nil draw on a cold, wet Monday night. Towards the end of the game there’s a Tannoy message which tells you that tickets for the next away match are available after the game. So you trudge along in the rain to the box office to buy your tickets and there you are confronted with the living embodiment of the amateur tradition. Typically, there is no cover while you stand in line. Waiting there in the rain, with only the excitement of that nil-nil draw to keep you warm, facing you at the Goodison Park ticket desk is a sign which reads: ‘What is it about the word No you do not understand?’ Happily the sign has now gone, but this attitude towards supporters was an intrinsic feature of the amateur tradition. That was the kind of message typically coming out from clubs, and which, in some senses, is still the case.

The typical supporter makes a massive investment in his or her club. Over a lifetime, the direct expenditure of traditional supporters, those behind the goals, exceeds £20,000 excluding money spent on merchandise. Fans will spend £3,000 to 4,000 on merchandise, related products and occasional visits to the ground. For some, this outlay is the largest personal commitment outside of their home and food that they make in their life. This level of investment has, traditionally, been ignored by those running the clubs. In the past this mattered less as the administrators – at least at club level – were largely drawn from the same pool of support as those on the terraces.

Today, that amateur tradition manifests itself not just in the way the businesses are (and were) run, but is expressed by most directors’ lack of understanding of the relationships they need to manage between the organisation, the club and the different groups of people who are committed to the club. In this respect it is worth recalling the story about the great 1940s player Len Shackleton, who famously left a blank page in his autobiography under the heading ‘What club directors know about football’. Experience tells us that he perhaps should have added a second blank page covering what directors know about business, management and strategy.

Extracting the Value

In truth, the amateur tradition still dominates the boardrooms of most clubs. This explains why people like Alan Sugar, John Hall, Peter Johnson and others, none of whom have any real love for the game, can come along and capitalise on decades of amateurism and poor management to extract enormous capital value growth out of their investments in football clubs. The sharp increases in the value of their investments do not reflect great, outstanding or even competent management of their football interests. Their skills lie in extracting the value accumulated over decades in the clubs they now control. This economic value was vastly underestimated before first BSkyB, then others, discovered ways of exploiting the hidden assets of clubs. The process by which Martin Edwards, Alan Sugar, John Hall and Peter Johnson have, between them, added over £300 million to their personal fortunes for investments of less than £30 million has more in common with the asset-stripping of Slater Walker during the 1960s than any miracles of 1990s strategic management.

Wealth extraction rather than the greater good of the game is the reason most of the new breed of football club owners are in this business. Vast fortunes are being made – and they are not being made by the players for all that Alan Sugar and others whinge about spiralling wages. The people making the really serious money in football are those who have made enormous capital growth from investments in relatively under-utilised assets.

Alan Sugar, Martin Edwards, the Hall family at Newcastle United and others have seen the value of their shareholdings in their respective clubs soar. Even Jack Walker at Blackburn Rovers – who was unusual in acquiring a comparatively poorly supported club with no tradition of recent success and which required an extraordinary high level of investment – managed to make a positive return on his investment up until the time of Blackburn’s relegation from the Premier League at the end of the 1998–99 season. In 1997–98, the increase in the asset values of the investments of Peter Johnson at Everton (despite the team’s poor performances) exceeded the total player wage bill for the Premiership. The increased value of their shares between 1993–94 and 1998–99 of five of the new generation of owners exceeded the entire player wage bill for the Premiership and all divisions of the Nationwide League over the period.

Enormous capital gains have been made by relatively small numbers of people. They have tended to surround themselves with fellow board directors who are non-executive amateurs and who perceive their real role as ‘yes-men’ for the chairman or the majority shareholder. Where clubs do recruit credible non-executive directors, such as at Newcastle United, they rarely stay around when the fundamental disrespect for any sense of wider stewardship is revealed by some crisis or scandal. And who can blame them? What serious professional person would want to take on a role as a cipher for a domineering chairman?

So, on the whole, most clubs are still run fundamentally by non-executive boards of directors with limited experience of the types of business issues facing modern soccer. Again, using Everton as an example, the club has faced the prospect of acquisition by an outside interest for most of 1999. There is, however, no one on the board, apart from Peter Johnson, with any direct experience of a friendly or hostile takeover. Johnson, however, is likely to be the primary beneficiary of a takeover, which maximises his short-term earnings – even if this is at the expense of the club’s long-term interests.1 Changes in ownership at Leeds United, Nottingham Forest and others were taken against a similar background.

Constrained by the Rules

There are reasons for this. Clubs which are not plcs are still governed by the FA’s Rule 34, which stipulates that the articles of association of clubs include a clause which, among other things, precludes club directors from drawing a salary as a football club director. As a result, you don’t see the traditional structure that you see in most organisations (especially commercial enterprises) where you have experts in marketing, finance and even human-resource management on the main board giving the board the benefit of their expertise. Instead, what you have is a collection of amateur, non-executive directors who come in and very often run their clubs the way they run their golf clubs.

Professionalising Football Club Management and Boardrooms

Modernising football club business management and overcoming the legacy of amateurism in the boardroom will require a fundamental change in the culture and ethos of the game. If you are going to have a professional game, frankly you need professional management systems and well-organised strategies to build up the value of the clubs and the businesses that underpin the game. That will require the transformation of the skill base at the top of football. By way of example, it is absurd that not one Premier League club has on its main board a human-resources/personnel director as a full-time executive member of staff, even though football clubs are a quintessential people business. Even Premier League chairmen describe their industry as a people business. It is not surprising that you get the kinds of problems that are the consequence of this amateur tradition in football club boardrooms. There needs to be a clearer view, or set of views from the top, about the levels of professionalisation and the true skills that are required to manage clubs efficiently. You can separate this management challenge, at some levels, from what is happening in relation to team affairs, but it is not completely independent from it.

A simple illustration of the problems lies in the career development of young players. It is generally accepted that the attrition rate among young players is very high. Every year a Premiership club might recruit up to 20 young people in some form of playing apprenticeship. Most clubs would be surprised if one in ten eventually make it to the first team. Even assuming that some end up in other teams, perhaps in lower divisions, most are forced to quit the game at the time when their peers outside football are completing their training or studies and moving on in a career. Few clubs make serious efforts to design policies to address this challenge. The issues are similar for senior professionals leaving the game. And players, actual or potential, probably get better treatment than other club employees.

Visions and Values

The challenges facing football clubs have to be addressed at a professional and strategic level. At the core has to be a strong sense in most clubs of the club’s purpose. It is true that most clubs have a general statement or club motto. A classic example is Everton’s Nil Satis Nisi Optimum – roughly translated as ‘Nothing But The Best Satisfies’ – which appears on almost all the club’s published materials. But, having said that, there is no real sense in which this, or similar expressions at other clubs, articulate a meaningful mission statement or sense of purpose for the organisation that is any different from a strapline on the bottom of a box of club-branded chocolates. These mottoes are vastly important to the fans, supporters and smaller shareholders but seem meaningless to those responsible for delivering their goals.

Achieving this fit between purpose and mission, role and responsibility demands a proper understanding of the relationship between the executive and non-executive directors. This is not to say that if you have a proper set of executive directors who understand and accept their executive responsibilities, you can’t then balance them out with non-executive directors who represent the other interest groups or stakeholders in clubs. Clubs must develop a more sensible approach to the relationship between chairmen, presidents, chief executives and the great plethora of job titles which are exploding across football. In truth, most clubs have a virtually non-existent skill base but any number of job titles.

Stewardship

At the same time, if you start then asking serious questions about the stewardship of the business, in corporate governance terms, you are confronted with serious confusion on the part of those with responsibility for such matters at clubs. Again the example of Everton is instructive on this issue.

In early 1999 a group of Everton shareholders was involved in some fairly complicated arrangements to force an extraordinary general meeting (EGM) at the club. This was prompted by the great dissatisfaction of most shareholders and supporters with the way the club was being managed. Over a decade the club had spent around £100 million on players while the team moved from being league champions in 1987 to relegation fodder in 1997. In just four years £25 million of new capital was invested in the club through new share issues, but the club’s indebtedness soared from under £5 million to around £20 million. In sum, this meant funds haemorrhaging at the rate of £10 million a year in a business with a turnover that barely averaged £10 million per annum over the decade.

The response to the proposed EGM indicated that key officials, like the club secretary, were seriously confused about their roles and responsibilities. The role of the company secretary seems relatively clear. Formally, he or she is accountable to the shareholders who own the club, who have rights according to corporate law and rights according to the articles of association of the business. In practice, is the company secretary accountable to the people with whom he or she deals with on a day-to-day basis, typically the directors and the chairman? In calling for the EGM, the rights of the shareholders were very clear. The club’s articles of association were clear. In the face of their demands, the club first denied their rights then delayed calling the meeting until the normal AGM was called.

There has to be a proper sense of the stewardship role in football. As the Everton example illustrates, that is not there at the moment. Instead, there is a reluctance to implement fundamental tenets of the law on corporate governance. The situation is made worse by the limited resources available to the typical smaller shareholder in soccer. They simply cannot afford to execute their rights in law. Alongside this, the authorities, notably the FA and the Premier League, are reluctant to back fans, supporters or small shareholders against those in control of the game.

Again, the difficulties at Everton illustrate the problem. Some years ago, the football authorities regulated to prevent any one individual taking a controlling interest in more than one club. Five years ago, Peter Johnson, then chairman of Tranmere Rovers, acquired a controlling interest in Everton. At the time, he issued a prospectus clearly stating that he had divested himself of his controlling interest in Tranmere. Four years later, faced with a financial crisis at Tranmere, it emerged that Johnson still controlled the club. In response to protests from supporters and shareholders in both clubs, the football authorities have completely failed to act. This failure has made it impossible for those regulating company law to act. The fans, supporters and small shareholders have lacked the resources to force action through the courts.

That’s why, when we are talking about a system of governance, that system of governance has to be articulate, explicit, accessible and actionable. The current system of governance in English football meets none of these conditions. Effective action on the stewardship of the people’s game is out of the reach of the people.

Stakeholder Vision

Strategic vision is required at the top of the game in the FA, at individual clubs, and most of all in the Premier League. This means leadership, which is based on recognising the authorities’ responsibilities to everybody in football. It does not mean having at the head of the Premier League or the FA someone whose job is basically to be non-threatening to a group of chairman who don’t want to be threatened by anything or anyone.

Fundamental to this strategic vision is some concept of football clubs as ‘stakeholder’ corporations. We need to articulate and internalise the notion of a stakeholder view of our clubs and our sport and that stakeholder vision means recognising who the legitimate stakeholders are.2

We need to understand that those stakeholders have a vested interest in understanding who is really building value in professional football in the United Kingdom, and how this value is being created. They need to understand the internal and external portfolios of businesses that exist in soccer. The internal portfolios are those directly involved in delivering the game to its core support. This means the team, its grounds and the immediate activities. The external portfolios are all those activities, which surround the club from the merchandise to the credit cards.

What is happening at the moment is that there are two main business drivers reaching different groups of people and serving different needs. Firstly, there is the primary or core support, the people who actually go to the game. And, secondly, there is the new external, secondary, group who mainly watch the game on television (on BSkyB TV) but who nevertheless still participate in supporting clubs, and who represent an increasingly important source of emotional and financial support. By and large both drivers draw on ordinary working people. It is a misconception, and a ridiculous one at that, to try and argue that simply because there is money in the game, it is simply a rich man’s game. Football clubs, if properly managed, do not need rich benefactors to bail them out.

This is vividly illustrated by the scale of investment and expenditure in the Premiership era and BSkyB TV-related changes. Traditional supporters investing by traditional means through tickets remains by far the dominant source not only of total revenues for Premiership clubs but the growth in this income exceeds all other sources in the years since the start of the Premiership. The new investors (i.e. the new owners like John Hall, Alan Sugar and Peter Johnson) have provided the smallest share of both total income and the increase in income. Over this period, revenues from merchandising have exceeded the investment of the newly enriched owners. Less than 10% of the growth in capital values of Premiership clubs has been reinvested.

Stakeholder Corporations, Not Carpet-Baggers

In truth the search which has occurred in soccer, the preoccupation with seeking out more and more rich men to come and put money into the game, is a nonsense. These so-called ‘investors’ have made massive sums while giving little back to the development of their clubs. At the same time, the supporters and fans have poured vast sums into the clubs with virtually no return in terms of better facilities, superior quality or greater responsiveness to their needs.

In key aspects of the football business, the track record of the multi-millionaires going in and buying football clubs is appalling. Totalling up what Alan Sugar has invested in Tottenham against its current market value, carrying out a similar calculation for Jack Walker at Blackburn Rovers, the Hall family at Newcastle United, Peter Johnson at Everton, and all the others like them; and comparing their extraordinary financial gains with the paltry number of trophies their clubs have won, it is clear that for the clubs the involvement of these ‘entrepreneurs’ represents an appalling investment. The track record of the rich entrepreneurs who have bought into football clubs has been poor when compared to the track record of those enterprises and those organisations that have actually been built up by a proper understanding of the dynamics of the business they are in. You need financial strategies at football clubs which are not just based on capital growth but which are looking for returns over the long-term for everybody who has invested in the game, including the supporters; we need a better balancing act in terms of rewarding all stakeholders than has hitherto been the case.

The mediocre capabilities of most club directors is borne out by the poor historical financial performance of most clubs. The old saying ‘I think I would probably function much better if someone more qualified than I was in charge of me’ probably sums up the inherent problem. Nevertheless, the efficient execution of the director’s role is central to the effective management of a football club. We need to understand the nature of the current breed of directors, how they have been recruited from too narrow a base, their shallow knowledge, their lack of dedicated expertise and the pervasive culture of amateurism alluded to earlier, as well as what shape their involvement should really take today.

Critically, in many cases directors appear to have the most rudimentary understanding of the obligations imposed upon them by legislation such as the Companies Act, and sensible attitudes to stewardship. Their relationship to team affairs is often that of Pontius Pilate. They frequently authorise huge investments in player transfer fees and wages and then wash their hands of the problem, leaving the team manager to carry the can when these investments fail to produce a return.3 Directors have to learn to balance their different roles and face up to these challenges. In my view we need a new generation of directors. That is the kind of challenge which exists in professional football at the moment.

Conclusion

What is the solution? First and foremost it is to internalise the challenge. Gerry Boon of Deloitte & Touche has made the valid point that football is still a small industry and most of the businesses that exist in football are small businesses. But the reality is that most small businesses are proprietor-owned and proprietor-managed. The person who founded them is usually running that entrepreneurial concern. Therefore it seems to us not unreasonable for that risk-taker, the Richard Branson at the Virgin Group, or the Anita Roddick at the Body Shop, the people who started the business, to generate an entrepreneurial profit.

What is not acceptable is the situation in football where people are buying up largely undervalued assets and making massive returns because of poor stewardship and poor standards of governance. They are taking value out, without putting value in through bringing to the game the kind of professional and strategic expertise which is essential for any organisation to prosper.

What do we do about it? What is required is to open out the ownership base of football. Clubs need to open their share register to a much wider range of shareholders drawn from the communities they support. In this regard the decision of Fergus McCann in October 1999 to sell the majority of his holding in Celtic to season-ticket-holders and existing small shareholders was progressive and welcome. It was in marked contrast to Martin Edwards’ decision, in the same month, to sell £41 million worth of his shares in Manchester United exclusively to institutional investors in the City of London. Shareholder rights have to be reinforced as currently the rights of small shareholders are abused by dominant majority investors. There is an excellent case for government support for football trusts. The reform of company law which is in train at the moment needs to take more account of the unique nature of businesses like soccer.

Football needs an efficient system of corporate governance and regulation. Well-crafted state intervention, as was demonstrated through the work of the Football Trust in facilitating the reconstruction of Britain’s stadiums from 1990 onwards, has a role to play. But football’s existing governing bodies and the boards of football clubs must also play their part. Pressing requirements are that basic standards of corporate governance best practice be applied within the clubs and some form of stakeholder philosophy should be encouraged to take root. The game needs to professionalise but not at the cost of forgetting its sporting roots and its obligations to the wider communities that have sustained it.