clippedgull
Hotdogs, extra onions
Interesting piece. 
Football Governance
Football Governance
Written evidence submitted by Adam Franks FCA CFA (FG 53)
1.0 Introduction
1.1 This submission is made by Mr Adam Franks FCA CFA, a Director of Brighton & Hove Albion Football Club.
1.2 This submission is made entirely in my personal capacity and doesn’t necessarily reflect the views of the Club.
1.3 I am grateful to Mr Sean Hamil and Dr Geoff Walters under whom I am currently studying for a MSc degree in Sport Management and the Business of Football at Birkbeck, University of London.
1.4 This submission therefore presents the realities of the challenges faced by a Football League club, as seen through the eyes of a serving Director, grounded in both finance and relevant academic studies.
2.0 Executive Summary
2.1 The central theme to this submission is that the function of Football League clubs is to both supply football as a commercial product and also to play a key role in their local communities. As such they should not to be regulated and taxed as normal businesses, but rather as something special to be cherished, a cultural asset.
2.2 For Brighton & Hove Albion, these twin aims overlap at all levels of the club, stadium company and award winning charitable arm, Albion In The Community. But while we are fortunate to have found ourselves in a very healthy financial, governance and ownership position, I increasingly fear that something of the fabric of society is being lost alongside the "soul" of football as the list of Football League clubs in financial distress lengthens.
2.3 Five recommendations are made for your consideration in the areas of;
· A more favourable taxation of investors – to recognise the real nature and motivation behind investment into Football League clubs;
· A relaxation of planning rules for football grounds – so that the costs and uncertainty for the community are reduced;
· A review of the decision to move to all seater stadia – so that the mix of fans in the stadium on match-day better reflects the community the club serves;
· A cap on the maximum debt level a club can carry and a change to the sporting penalties that are incurred when an administration event happens – so that the risk of damage to the community is mitigated; and
· The implementation of salary caps on Football League clubs – so that the desire to win at all costs does not lose touch with the financial cost of attempting to do so in a league where many other adopt the same utility maximisation strategy.
3.0 Should football clubs in the UK be treated differently from other commercial organisations?
3.1 Yes, absolutely because as will be illustrated throughout this submission, football clubs, especially those in the Football League, are fundamentally different to other commercial organisations.
3.2 This is self-evident in the case of Brighton & Hove Albion FC ("BHA") and, I suggest, many other clubs by reference to its poor financial performance throughout the business cycle, the special relationship we have with our fans, our complicated relationship with competing clubs and a desire to utility maximise.
3.3 These are explored further below, but beyond these factors there are more fundamental reasons why clubs like BHA are not like other commercial organisations and so deserve to be treated differently. This can best be illustrated by exploring the special position of the club in the context of its local community.
3.4 I am acutely aware of the role the club plays locally in shaping conversation, in providing employment opportunities, in providing a mechanism to deliver community services (adult education, sports participation, social inclusion, disability, health and community relations), to those in need or at risk, in providing a focus for aspirations and in encouraging social and community cohesion. Clubs can energise and mobilise communities in a common goal in ways that no pub, supermarket or bank ever could.
3.5 At the level of the family, I point to weddings which have been delayed by over a year until our marriage license will be granted in the summer of 2011, as well those families who have urns of ashes stored temporarily as they await a final resting place for their loved ones in our new stadium.
3.6 Within our Boardroom, I certainly feel a weight of responsibility to our local community as well as our fans and believe that it is therefore beholden on us to consider these stakeholder groups and to manage the club so as best to meet their needs as well as our own.
3.7 If my experience is replicated in Boardrooms of other Football League clubs as well as other clubs who strive to become Football League clubs, and I strongly suspect that it does, then the footprint for good that clubs make is a matter of national importance and pride.
3.8 We were delighted by the most recent annual Christmas message in which Her Majesty stressed the powerful way that sport can build communities and create harmony between people of different backgrounds and parts of society. We could not agree more and indeed this is a theme that repeats throughout this submission.
3.9 I suggest that protecting this rich cultural and social heritage is too important to be left to market forces alone and that the special status of clubs should be recognised and protected.
3.10 Prior to 1992, when serious money first began to flow into the sport, this was not problematic because the absolute level of losses was low. Now though it is an acute problem which means that a succession of investors in the vast majority of other Football League clubs, have seen their equity investment wiped out over time.
3.11 It is not obvious why new investors should step forward to invest equity in clubs when the investment case is so poor. BHA are fortunate to have source of equity funding in the form of a businessman with deep local roots in the community and club, our Chairman Mr Tony Bloom ("Tony").
3.12 Tony is the third generation of his family to serve in the Brighton Board room. His motivation for investing is not to obtain a fair return, although it’s quite legitimate for investors to expect a financial return for the risk they run, but rather because the club is a vehicle through which he can proactively "give-back" to his local community.
3.13 He is rightly proud of his birth place, of the community where he grew up and of the club that he has supported from childhood. His investment in the club and especially into its new stadium will provide a lasting legacy and in his words "ensures that my young son and his generation of Brighton and Hove Albion fans can look forward to watching their team without the fear that the club will ever again be homeless".
3.14 Sadly, other clubs are not in this fabulous position and it leaves them open to lower quality investors obtaining control.
3.15 Still, this begs the question; why should investors in clubs not expect a financial return? One answer can be illustrated by the aspirations of many club boardrooms which hope to deliver excellence both on and off the pitch within the context of financial break-even over the medium term. Even this hoped for result would mean that club investors will forsake both the interest they could have earned on their money and the opportunity to have invested in other more financially sound businesses.
3.16 This again indicates that Football League clubs are overwhelmingly run as philanthropic efforts. At Brighton, in parallel with the efforts of the club to engage with school children and other community efforts, we are very proud of our award winning community scheme. In 2010 AITC delivered services to over 60,000 people at a high level of quality as evidenced by the three national awards won last year alone - 'Best Community Project' at the 2010 Football League Awards, The Football League Trust's 'Make Every Player Count, Best Disabled Player' and The National Deaf Children Society's 'Best Project Partner'. AITC’s work also provides a catalyst for other businesses with a large local presence, for example American Express, to meet their own Corporate Social Responsibility objectives by partnering with AITC, our stadium company and our club. This validates the view that BHA deliver excellence and continue to play a key role within their community.
3.17 BHA have a special relationship with our fans. Many clubs would have not survived the loss of their ground (the Goldstone Ground was sold in 1996 in less than the best circumstances) two seasons of playing "home" fixtures in Gillingham and then 13 years playing in a rented ground at the Withdean athletics stadium which is widely recognised as one of the worst grounds in the Football League.
3.18 Through this long period fans have fundraised in the "Alive and Kicking" campaign, marched, petitioned and remained optimistic through the longest ever planning applications.
3.19 We suggest that no normal business would get this level of support from its customers. This deep loyalty of fans, "fan equity" to use terminology from sports economics, arises from the apparent irrational behaviour of fans. Simply put, clubs have something akin to a local monopoly because fans are hugely reluctant to change their allegiance and switch to an alternative team.
3.20 Monopoly holders normally seek to exploit their market position by making excess profits but in the context of a club committed to their community, fan equity presents challenges and makes commercial decisions, such as ticket allocation & pricing, contentious and even more difficult to consistently get right.
3.21 I also recognise that while rivalry with opposing teams is healthy and generates fan interest, this competition is limited in a way that commercial rivalry is not. For example, at the time of writing BHA are top and Walsall are bottom of League 1 – but we both need every other club in our league to be financially sound since the product we produce, our performance on the pitch, is also a joint product (the league table). I have seen and the club has benefited from many example of cooperation, off-the-field, with rival clubs in areas such as marketing initiatives, stadia design and supplier recommendations.
3.22 While BHA are fortunate not to have suffered an administration event since being founded in 1901, it is sad to note the frequency of administration events at other Football Leagues clubs. I suggest that this, in part, simply demonstrates that the base economic assumption underlying commercial organisations of profit maximisation is demonstrably not present in football clubs. Rather it is utility maximisation; the desire to maximise sporting success.
3.23 In conclusion, Football League clubs have a magical ability to deliver services to and provide a central rallying point around which communities can gather and draw strength. I suggest that if clubs can control, or be forced to control (see later), their utility maximising tendencies and live within their means then they can continue to play an important societal role.
4.0 Are football governance rules in England and Wales, and the governing bodies which set and apply them, fit for purpose?
4.1 I suggest that governance by the Football League and the Football Association in conjunction with all the laws and regulations governing UK companies creates an overly complex operating environment. This increases legal & compliance costs as well as raising uncertainly. My preference therefore would be a streamlined solution because I suspect that the current position is not sustainable but I suggest that this question would be better answered by the governing bodies themselves.
5.0 Is there too much debt in the professional game?
5.1 BHA currently carries no debt with both ongoing operations and the construction of our new home, The American Express Community Stadium, is being financed by a combination of equity and quasi equity (convertible loans carrying 0% interest) provided by our Chairman.
5.2 Not withstanding a fully developed and validated business model, significant levels of equity and equity commitment, strength in the boardroom and the new stadium being constructed to time and budget, I have had a very bad experience in talking to banks about debt finance.
5.3 Some institutions have taken the view that they simply will not lend to the sector and others have appeared open for business but in fact have no appetite.
5.4 Frustrating as this is, for I would like BHA to carry a reasonable level of serviceable debt, this reticence is the natural reaction to factors outside our control; specifically; the banking crisis and the poor record of lenders to the sector who have suffered both losses and poor publicity as a result of clubs failing to meeting their debt obligations.
5.5 However, I don't think that insolvency events, even the first Premier League club administration (Portsmouth), necessarily indicates that debt levels are too high, rather it indicates that lenders to the football sector have previously been too keen to lend on overly aggressive terms. This can be seen as a market failure by both the lenders and also by utility maximising owners.
5.6 Now, naturally, the pendulum has swung back the other way around to overly cautious lenders.
5.7 My view is that not all debt is bad and that debt at serviceable levels is acceptable. However owners need to be protected from themselves (or else they might chase sporting success at any cost). This is important both because of the joint nature of the product and also because league competitive balance is destroyed by some clubs taking an "all or bust" approach and using long-term debt to buy (short-term) player talent.
6. 0 What are the pros and cons of the Supporter Trust share-holding model?
6.1 I do not believe that my club has explored this option in any great depth. The reality for BHA was that the new stadium required over GBP90M of investment and so was beyond the means of our supporters to significantly contribute to in monetary terms.
6.2 Our boardroom discussions and our mix of directors, the majority of whom have actively supported the club as fans since their childhoods, keep this important stakeholder group very much central to our decision making progress. As necessary, we take soundings from key individuals & supporter groups (recently for example over proposed changes to our logo and the positioning of the supporters bar at the new stadium) and hold regular fans’ forums.
6.3 I suggest that the supporter trust share-holding model is best evaluated on a club-by-club basis, rather than by making broad statements about its applicability to clubs in general. In general though, I feel that clubs should be encouraged to make efforts to ensure that fans are not a voice excluded from the decision making process in "their club".
6.4 I would argue that the other side of this coin is, that fans are far too quick to call for managerial or boardroom change or to put pressure on the club to buy players on the back of a poor run of form.
7.0 Is Government intervention justified and, if so, what form should it take?
7.1 In the light of my stated position that clubs are special entities which have a unique philanthropic role to play in their local communities, I make five suggestions;
7.2 Firstly, the social purpose of clubs should be recognised as such by Government. To that end, we would welcome a change in the way that "investors" in clubs are taxed with their investment money being recognised as attracting tax relief. This would require HMRC to take a pragmatic view that the benefit that investors receive, typically in the form of free match tickets and boardroom passes, are negligible compared to a material investment.
7.3 A side effect, which some commentators would welcome, would be that this tax relief would make an investment into a club by a UK resident (as opposed to a foreign individual) more likely.
7.4 Secondly, as outlined above, obtaining planning permission for BHA’s new ground at Falmer, the American Express Community Stadium, was a very drawn out process which ultimately required approval by the Office of the Deputy Prime Minister. Even that, due to a small technicality, required a judicial review. I suggest that this was a severe and unreasonable test of fan equity, caused millions of avoidable costs and created uncertainty for all concerned.
7.5 I therefore argue for a relaxation of some restrictions &/or a fast-track process to planning laws in recognition of the cultural status of football clubs in their community.
7.6 Thirdly, football has noted a change in the demographics of fans who traditionally were working class but are now middle class. We suggest that one of the reasons for this shift was the decision to move to all-seater stadia following the Taylor reports which chronicled the Hillsborough disaster. An unanticipated result of this decision was that some fans, most especially in lower socio-economic groups, were priced out of the clubs and could no longer afford to be season ticket holders.
7.7 Twenty years later I suggest that, subject always to the Liverpool community’s wishes being respected, it is legitimate to ask if this restriction remains appropriate or if a move to "safe-standing", used widely in the German Bundesliga, could herald a return to authorised standing on the terraces. I note that this subject has recently been considered in Parliament as Don Foster MP tabled a private member’s bill in early December 2010.
7.8 Fourthly, due to the huge financial damage done to local businesses and the uncertainty it creates for communities (the typical victims of an administration event), I suggest that clubs should only take on reasonable levels of debt. I am not in a position to say whether this should be delivered in the form of government intervention, but it is within the remit of government to ensure that where possible HMRC work in partnership with clubs and recognise that forcing clubs to the wall has serious and far reaching effects.
7.9 It may be, as others have suggested, that the sporting sanctions applied to clubs in Administration could be tailored so that a distinction is made between those clubs which at one extreme just slipped into administration and another which went charging headlong into administration with a huge debt burden. It would appear that the number of pennies in the pound available to unsecured creditors is a good proxy for this as suggested by research at the Birkbeck Sport Business Centre.
7.10 Lastly, the labour market is an area of great concern. Players have monopoly power over their labour which in combination with utility maximising owners (win at all costs), has meant that the wall of money which has flooded into the sport since the first BSkyB deal in 1992 has largely gone to enrich players and their agents.
7.11 Somewhat obviously, if a club spends too much of their turnover on player wages then it will soon be in acute financial peril unless it has equity reserves or soft loans to utilise.
7.12 Football has flirted with the idea of a salary cap, enforced at the level of the club, which would allow spiralling wage inflation to be controlled. So while recognising that there are difficulties in both defining, monitoring and enforcing a cap as well as setting-in-stone a competitive advantage for bigger clubs, we would wish to see the voluntary cap of League 2 clubs extended to all Football League clubs.
7.13 Since Football League clubs are not as active in the international market for labour as Premier League clubs, I do not think that a European or Global implementation of this rule is a pre-requisite for its introduction in the Football League.
7.14 I also mention that there needs to be a mechanism which enforces the salary cap. One solution would be a form of luxury tax, as found many US Sports which are typically paid by a club whose payroll exceeds a pre-set limit or thresholds above a league average.
7.15 An alternative, drawing on how governments seek to control emissions by polluters, is to set a cap and then let a market develop for more frugal teams sell their unused "payroll capacity" to overspending clubs. I suggest that a "salary cap-and-trade" scheme along these lines would change the dynamics of the labour market.
8.0 Are there lessons to be learned from football governance models across the UK and abroad, and from governance models in other sports?
8.1 UEFA’s club licensing and financial fair play rules are seen by UEFA as crucial to ensure footballs long-term stability. These rules, designed to ensure that clubs break-even, are due to be phased in over the next three years. To quote the UEFA website downloaded on 11 January 2011 "Under the break-even requirement, clubs may not spend more than the income they generate. Clubs will also be assessed on a risk basis, in which debt and salary levels are taken into consideration. They will have to ensure from next summer that their football liabilities are paid punctually."
8.2 This appears to get to the heart of the financial concerns raised by many commentators and some of the questions raised by your Committee. What is less clear is how clubs who do not participate in UEFA competitions will be impacted and by what mechanism any benefits will flow down the football pyramid.
8.3 I close by stating that the promotion & relegation feature of the English football pyramid gives hope to every club, and their communities, that they could rise to the very top in seasons to come. This defining feature should not be lost.
January 2011
Football Governance
Football Governance
Written evidence submitted by Adam Franks FCA CFA (FG 53)
1.0 Introduction
1.1 This submission is made by Mr Adam Franks FCA CFA, a Director of Brighton & Hove Albion Football Club.
1.2 This submission is made entirely in my personal capacity and doesn’t necessarily reflect the views of the Club.
1.3 I am grateful to Mr Sean Hamil and Dr Geoff Walters under whom I am currently studying for a MSc degree in Sport Management and the Business of Football at Birkbeck, University of London.
1.4 This submission therefore presents the realities of the challenges faced by a Football League club, as seen through the eyes of a serving Director, grounded in both finance and relevant academic studies.
2.0 Executive Summary
2.1 The central theme to this submission is that the function of Football League clubs is to both supply football as a commercial product and also to play a key role in their local communities. As such they should not to be regulated and taxed as normal businesses, but rather as something special to be cherished, a cultural asset.
2.2 For Brighton & Hove Albion, these twin aims overlap at all levels of the club, stadium company and award winning charitable arm, Albion In The Community. But while we are fortunate to have found ourselves in a very healthy financial, governance and ownership position, I increasingly fear that something of the fabric of society is being lost alongside the "soul" of football as the list of Football League clubs in financial distress lengthens.
2.3 Five recommendations are made for your consideration in the areas of;
· A more favourable taxation of investors – to recognise the real nature and motivation behind investment into Football League clubs;
· A relaxation of planning rules for football grounds – so that the costs and uncertainty for the community are reduced;
· A review of the decision to move to all seater stadia – so that the mix of fans in the stadium on match-day better reflects the community the club serves;
· A cap on the maximum debt level a club can carry and a change to the sporting penalties that are incurred when an administration event happens – so that the risk of damage to the community is mitigated; and
· The implementation of salary caps on Football League clubs – so that the desire to win at all costs does not lose touch with the financial cost of attempting to do so in a league where many other adopt the same utility maximisation strategy.
3.0 Should football clubs in the UK be treated differently from other commercial organisations?
3.1 Yes, absolutely because as will be illustrated throughout this submission, football clubs, especially those in the Football League, are fundamentally different to other commercial organisations.
3.2 This is self-evident in the case of Brighton & Hove Albion FC ("BHA") and, I suggest, many other clubs by reference to its poor financial performance throughout the business cycle, the special relationship we have with our fans, our complicated relationship with competing clubs and a desire to utility maximise.
3.3 These are explored further below, but beyond these factors there are more fundamental reasons why clubs like BHA are not like other commercial organisations and so deserve to be treated differently. This can best be illustrated by exploring the special position of the club in the context of its local community.
3.4 I am acutely aware of the role the club plays locally in shaping conversation, in providing employment opportunities, in providing a mechanism to deliver community services (adult education, sports participation, social inclusion, disability, health and community relations), to those in need or at risk, in providing a focus for aspirations and in encouraging social and community cohesion. Clubs can energise and mobilise communities in a common goal in ways that no pub, supermarket or bank ever could.
3.5 At the level of the family, I point to weddings which have been delayed by over a year until our marriage license will be granted in the summer of 2011, as well those families who have urns of ashes stored temporarily as they await a final resting place for their loved ones in our new stadium.
3.6 Within our Boardroom, I certainly feel a weight of responsibility to our local community as well as our fans and believe that it is therefore beholden on us to consider these stakeholder groups and to manage the club so as best to meet their needs as well as our own.
3.7 If my experience is replicated in Boardrooms of other Football League clubs as well as other clubs who strive to become Football League clubs, and I strongly suspect that it does, then the footprint for good that clubs make is a matter of national importance and pride.
3.8 We were delighted by the most recent annual Christmas message in which Her Majesty stressed the powerful way that sport can build communities and create harmony between people of different backgrounds and parts of society. We could not agree more and indeed this is a theme that repeats throughout this submission.
3.9 I suggest that protecting this rich cultural and social heritage is too important to be left to market forces alone and that the special status of clubs should be recognised and protected.
3.10 Prior to 1992, when serious money first began to flow into the sport, this was not problematic because the absolute level of losses was low. Now though it is an acute problem which means that a succession of investors in the vast majority of other Football League clubs, have seen their equity investment wiped out over time.
3.11 It is not obvious why new investors should step forward to invest equity in clubs when the investment case is so poor. BHA are fortunate to have source of equity funding in the form of a businessman with deep local roots in the community and club, our Chairman Mr Tony Bloom ("Tony").
3.12 Tony is the third generation of his family to serve in the Brighton Board room. His motivation for investing is not to obtain a fair return, although it’s quite legitimate for investors to expect a financial return for the risk they run, but rather because the club is a vehicle through which he can proactively "give-back" to his local community.
3.13 He is rightly proud of his birth place, of the community where he grew up and of the club that he has supported from childhood. His investment in the club and especially into its new stadium will provide a lasting legacy and in his words "ensures that my young son and his generation of Brighton and Hove Albion fans can look forward to watching their team without the fear that the club will ever again be homeless".
3.14 Sadly, other clubs are not in this fabulous position and it leaves them open to lower quality investors obtaining control.
3.15 Still, this begs the question; why should investors in clubs not expect a financial return? One answer can be illustrated by the aspirations of many club boardrooms which hope to deliver excellence both on and off the pitch within the context of financial break-even over the medium term. Even this hoped for result would mean that club investors will forsake both the interest they could have earned on their money and the opportunity to have invested in other more financially sound businesses.
3.16 This again indicates that Football League clubs are overwhelmingly run as philanthropic efforts. At Brighton, in parallel with the efforts of the club to engage with school children and other community efforts, we are very proud of our award winning community scheme. In 2010 AITC delivered services to over 60,000 people at a high level of quality as evidenced by the three national awards won last year alone - 'Best Community Project' at the 2010 Football League Awards, The Football League Trust's 'Make Every Player Count, Best Disabled Player' and The National Deaf Children Society's 'Best Project Partner'. AITC’s work also provides a catalyst for other businesses with a large local presence, for example American Express, to meet their own Corporate Social Responsibility objectives by partnering with AITC, our stadium company and our club. This validates the view that BHA deliver excellence and continue to play a key role within their community.
3.17 BHA have a special relationship with our fans. Many clubs would have not survived the loss of their ground (the Goldstone Ground was sold in 1996 in less than the best circumstances) two seasons of playing "home" fixtures in Gillingham and then 13 years playing in a rented ground at the Withdean athletics stadium which is widely recognised as one of the worst grounds in the Football League.
3.18 Through this long period fans have fundraised in the "Alive and Kicking" campaign, marched, petitioned and remained optimistic through the longest ever planning applications.
3.19 We suggest that no normal business would get this level of support from its customers. This deep loyalty of fans, "fan equity" to use terminology from sports economics, arises from the apparent irrational behaviour of fans. Simply put, clubs have something akin to a local monopoly because fans are hugely reluctant to change their allegiance and switch to an alternative team.
3.20 Monopoly holders normally seek to exploit their market position by making excess profits but in the context of a club committed to their community, fan equity presents challenges and makes commercial decisions, such as ticket allocation & pricing, contentious and even more difficult to consistently get right.
3.21 I also recognise that while rivalry with opposing teams is healthy and generates fan interest, this competition is limited in a way that commercial rivalry is not. For example, at the time of writing BHA are top and Walsall are bottom of League 1 – but we both need every other club in our league to be financially sound since the product we produce, our performance on the pitch, is also a joint product (the league table). I have seen and the club has benefited from many example of cooperation, off-the-field, with rival clubs in areas such as marketing initiatives, stadia design and supplier recommendations.
3.22 While BHA are fortunate not to have suffered an administration event since being founded in 1901, it is sad to note the frequency of administration events at other Football Leagues clubs. I suggest that this, in part, simply demonstrates that the base economic assumption underlying commercial organisations of profit maximisation is demonstrably not present in football clubs. Rather it is utility maximisation; the desire to maximise sporting success.
3.23 In conclusion, Football League clubs have a magical ability to deliver services to and provide a central rallying point around which communities can gather and draw strength. I suggest that if clubs can control, or be forced to control (see later), their utility maximising tendencies and live within their means then they can continue to play an important societal role.
4.0 Are football governance rules in England and Wales, and the governing bodies which set and apply them, fit for purpose?
4.1 I suggest that governance by the Football League and the Football Association in conjunction with all the laws and regulations governing UK companies creates an overly complex operating environment. This increases legal & compliance costs as well as raising uncertainly. My preference therefore would be a streamlined solution because I suspect that the current position is not sustainable but I suggest that this question would be better answered by the governing bodies themselves.
5.0 Is there too much debt in the professional game?
5.1 BHA currently carries no debt with both ongoing operations and the construction of our new home, The American Express Community Stadium, is being financed by a combination of equity and quasi equity (convertible loans carrying 0% interest) provided by our Chairman.
5.2 Not withstanding a fully developed and validated business model, significant levels of equity and equity commitment, strength in the boardroom and the new stadium being constructed to time and budget, I have had a very bad experience in talking to banks about debt finance.
5.3 Some institutions have taken the view that they simply will not lend to the sector and others have appeared open for business but in fact have no appetite.
5.4 Frustrating as this is, for I would like BHA to carry a reasonable level of serviceable debt, this reticence is the natural reaction to factors outside our control; specifically; the banking crisis and the poor record of lenders to the sector who have suffered both losses and poor publicity as a result of clubs failing to meeting their debt obligations.
5.5 However, I don't think that insolvency events, even the first Premier League club administration (Portsmouth), necessarily indicates that debt levels are too high, rather it indicates that lenders to the football sector have previously been too keen to lend on overly aggressive terms. This can be seen as a market failure by both the lenders and also by utility maximising owners.
5.6 Now, naturally, the pendulum has swung back the other way around to overly cautious lenders.
5.7 My view is that not all debt is bad and that debt at serviceable levels is acceptable. However owners need to be protected from themselves (or else they might chase sporting success at any cost). This is important both because of the joint nature of the product and also because league competitive balance is destroyed by some clubs taking an "all or bust" approach and using long-term debt to buy (short-term) player talent.
6. 0 What are the pros and cons of the Supporter Trust share-holding model?
6.1 I do not believe that my club has explored this option in any great depth. The reality for BHA was that the new stadium required over GBP90M of investment and so was beyond the means of our supporters to significantly contribute to in monetary terms.
6.2 Our boardroom discussions and our mix of directors, the majority of whom have actively supported the club as fans since their childhoods, keep this important stakeholder group very much central to our decision making progress. As necessary, we take soundings from key individuals & supporter groups (recently for example over proposed changes to our logo and the positioning of the supporters bar at the new stadium) and hold regular fans’ forums.
6.3 I suggest that the supporter trust share-holding model is best evaluated on a club-by-club basis, rather than by making broad statements about its applicability to clubs in general. In general though, I feel that clubs should be encouraged to make efforts to ensure that fans are not a voice excluded from the decision making process in "their club".
6.4 I would argue that the other side of this coin is, that fans are far too quick to call for managerial or boardroom change or to put pressure on the club to buy players on the back of a poor run of form.
7.0 Is Government intervention justified and, if so, what form should it take?
7.1 In the light of my stated position that clubs are special entities which have a unique philanthropic role to play in their local communities, I make five suggestions;
7.2 Firstly, the social purpose of clubs should be recognised as such by Government. To that end, we would welcome a change in the way that "investors" in clubs are taxed with their investment money being recognised as attracting tax relief. This would require HMRC to take a pragmatic view that the benefit that investors receive, typically in the form of free match tickets and boardroom passes, are negligible compared to a material investment.
7.3 A side effect, which some commentators would welcome, would be that this tax relief would make an investment into a club by a UK resident (as opposed to a foreign individual) more likely.
7.4 Secondly, as outlined above, obtaining planning permission for BHA’s new ground at Falmer, the American Express Community Stadium, was a very drawn out process which ultimately required approval by the Office of the Deputy Prime Minister. Even that, due to a small technicality, required a judicial review. I suggest that this was a severe and unreasonable test of fan equity, caused millions of avoidable costs and created uncertainty for all concerned.
7.5 I therefore argue for a relaxation of some restrictions &/or a fast-track process to planning laws in recognition of the cultural status of football clubs in their community.
7.6 Thirdly, football has noted a change in the demographics of fans who traditionally were working class but are now middle class. We suggest that one of the reasons for this shift was the decision to move to all-seater stadia following the Taylor reports which chronicled the Hillsborough disaster. An unanticipated result of this decision was that some fans, most especially in lower socio-economic groups, were priced out of the clubs and could no longer afford to be season ticket holders.
7.7 Twenty years later I suggest that, subject always to the Liverpool community’s wishes being respected, it is legitimate to ask if this restriction remains appropriate or if a move to "safe-standing", used widely in the German Bundesliga, could herald a return to authorised standing on the terraces. I note that this subject has recently been considered in Parliament as Don Foster MP tabled a private member’s bill in early December 2010.
7.8 Fourthly, due to the huge financial damage done to local businesses and the uncertainty it creates for communities (the typical victims of an administration event), I suggest that clubs should only take on reasonable levels of debt. I am not in a position to say whether this should be delivered in the form of government intervention, but it is within the remit of government to ensure that where possible HMRC work in partnership with clubs and recognise that forcing clubs to the wall has serious and far reaching effects.
7.9 It may be, as others have suggested, that the sporting sanctions applied to clubs in Administration could be tailored so that a distinction is made between those clubs which at one extreme just slipped into administration and another which went charging headlong into administration with a huge debt burden. It would appear that the number of pennies in the pound available to unsecured creditors is a good proxy for this as suggested by research at the Birkbeck Sport Business Centre.
7.10 Lastly, the labour market is an area of great concern. Players have monopoly power over their labour which in combination with utility maximising owners (win at all costs), has meant that the wall of money which has flooded into the sport since the first BSkyB deal in 1992 has largely gone to enrich players and their agents.
7.11 Somewhat obviously, if a club spends too much of their turnover on player wages then it will soon be in acute financial peril unless it has equity reserves or soft loans to utilise.
7.12 Football has flirted with the idea of a salary cap, enforced at the level of the club, which would allow spiralling wage inflation to be controlled. So while recognising that there are difficulties in both defining, monitoring and enforcing a cap as well as setting-in-stone a competitive advantage for bigger clubs, we would wish to see the voluntary cap of League 2 clubs extended to all Football League clubs.
7.13 Since Football League clubs are not as active in the international market for labour as Premier League clubs, I do not think that a European or Global implementation of this rule is a pre-requisite for its introduction in the Football League.
7.14 I also mention that there needs to be a mechanism which enforces the salary cap. One solution would be a form of luxury tax, as found many US Sports which are typically paid by a club whose payroll exceeds a pre-set limit or thresholds above a league average.
7.15 An alternative, drawing on how governments seek to control emissions by polluters, is to set a cap and then let a market develop for more frugal teams sell their unused "payroll capacity" to overspending clubs. I suggest that a "salary cap-and-trade" scheme along these lines would change the dynamics of the labour market.
8.0 Are there lessons to be learned from football governance models across the UK and abroad, and from governance models in other sports?
8.1 UEFA’s club licensing and financial fair play rules are seen by UEFA as crucial to ensure footballs long-term stability. These rules, designed to ensure that clubs break-even, are due to be phased in over the next three years. To quote the UEFA website downloaded on 11 January 2011 "Under the break-even requirement, clubs may not spend more than the income they generate. Clubs will also be assessed on a risk basis, in which debt and salary levels are taken into consideration. They will have to ensure from next summer that their football liabilities are paid punctually."
8.2 This appears to get to the heart of the financial concerns raised by many commentators and some of the questions raised by your Committee. What is less clear is how clubs who do not participate in UEFA competitions will be impacted and by what mechanism any benefits will flow down the football pyramid.
8.3 I close by stating that the promotion & relegation feature of the English football pyramid gives hope to every club, and their communities, that they could rise to the very top in seasons to come. This defining feature should not be lost.
January 2011
