No Way to Run a Business?

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At your Leisure - 02 February 2004

In this 'At your Leisure' we'll look into the ownership structure of football clubs and trace their development. We'll find out more about football clubs and their revenues and about alternative systems of club ownership.

For most people the experience of supporting a team or club, no matter what the sport, is generally a form of masochism interrupted only by the very rare joy of winning.

But in football, where big business has not so much intervened as taken over, if your club is not one of the 'big boys' and even if it is, you are likely never to taste the sweetness of success.

Title: Darius Vassell of England scores the first goal. Copyright: Getty Images, available from Education Image Gallery (http://edina.ac.uk/eig)

As more clubs reel away from the big time having racked up huge debts and still failed (Sunderland AFC, Leeds Utd, Leicester City), perhaps it's time to look at the structure of club ownership and try to find a new model for survival, let alone success.

So, who owns football and its professional clubs?

Well, they're businesses aren't they? They should be owned by shareholders, who vote for a board of directors to control the business through the decisions it makes, say in appointing a new coach or manager.

These shareholders could be owners of a private limited company, able to sell shares to friends and family in order to raise more money, or capital as it's known. Or, they could be the owners of a public limited company, able to sell further shares on the stock market to the general public. They can generate more capital that way, but have to keep the shareholders happy by paying them a dividend.

Now, the general public aren't really the ones who buy and sell most shares on the stock market. No, the real players in stock market terms are the financial institutions; the banks, insurance companies and pension funds, with the money to buy large stakes in public limited companies.

So to try to get hold of some of these funds to inject capital into their clubs, football directors often seek PLC status, selling shares in their clubs to organisations operating on the stock market.

But what about the fans? Don't they really own the club they support? After all, these are people who go to watch their team play every week, paying money through the turnstiles and in effect paying the wages of the playing and non-playing staff employed by the club. Well, a look at one Premiership club's accounts tells us how much of a contribution the fans make.

Everton FC - 2003 Accounts

Right, so revenue from fans paying to watch this Premiership team play accounts for less than one-third of the club's total revenue. Well, maybe it's different with a smaller lower league club. Let's have a look at the same data for Walsall FC who play in Nationwide Division One:

Walsall FC - 2003 Accounts

At Walsall FC, the difference is even more pronounced. Here less than one quarter of all revenue is contributed by match receipts. In other words, the smaller club seems to be even less reliant on supporter revenue than the larger club. In fact, both clubs' accounts show a dependence on other sources of revenue - most notably revenue from broadcasting and sponsorship.

Another way of looking at supporters' contributions to their clubs' revenues is that fans cannot hope to have much of a say in the running and control of football clubs as long as their 'stake' in the club is limited to what they pay to watch their team play. And when you take into account the large sales of replica shirts at some football clubs, it's hard to see what influence is given to fans in return for their loyalty and custom.

Fans are not customers

'Proper' football fans can arguably be defined as having a close affinity for the club of their choice for reasons of place of birth, current location, family affiliation or childhood attraction. The key is the length of time served as a fan of that club and the constancy of your support. Proper fans do not suddenly change allegiance to one club, merely on the back of a poor season; in most cases they remain supporters in spite of all logic.

Many proper football fans think that, in reality, championships and cup wins are unimportant; what really counts are the results twice a season against your local rivals. Avoid relegation from your current league division and get a draw (at the very least) against the team the other side of the city/the neighbouring town/the opposite county, and you've got success.

But as some fans have found, it is the search by some clubs for success that has left them in a financial mess that may, in some cases, lead to long-term problems that affect supporters, communities and businesses.

Scunthorpe fans celebrate promotion to the Second Division in 1999
Title: Fans. Copyright: Getty Images, available from Education Image Gallery (http://edina.ac.uk/eig)

What's wrong with football?

Most football clubs exist as companies, many of the biggest of these have been floated on the stock market. This often sets the club and its supporters at odds with each other. This has long been the case:

In his 1992 book 'Football and its Fans', Rogan Taylor shows how Leicester Fosse (later Leicester City) encouraged supporters to participate in equipping the city with a football club capable of achieving success on the field. Local people at the turn of the last century were urged to 'raise a working man's subscription' to create 'a financial committee outside the directorate' to help the club buy the 'services of capable players'.

Many clubs followed this model and usually a Supporters Club was formed, channelling substantial funds into the club. Unfortunately many clubs failed to take the participation of supporters to its logical extent and involve them in the running of the club. Supporters' Clubs raised money on behalf of their football clubs, but received little or nothing in exchange. The money that they provided did not entitle them to any sort of say in the running of their club.

How did we get here?

In the nineteenth century (1800s) a battle of sorts was fought over the way that what is now the national and world game would develop. The southern-based guardians of the game and its rules thought that it was for gentlemen and therefore no professionalism should be allowed.

The way they saw it, allowing football to develop commercially by paying players for instance, ran the risk of encouraging cheating. This risk was maximised, they thought, if players depended on wages and bonuses based on the result of matches.

These advocates of the gentleman's game also thought it best not to encourage spectators. Crowds could lead to rivalry and abuse of players and match officials. The working classes should be deterred from watching football as a pastime because it would lead to excessive drinking and would encourage gambling.

It is all too easy to forget how class divisions segmented society at the time. But the controlling classes clearly thought that they had the right to decide what was right and wrong for the rest of society. If this meant that workers should be refused the same rights and privileges enjoyed by 'gentlemen', then so be it.

Anyway, this attempt to restrict football to its original amateur status failed. Football was a growing industry in the Midlands and in the North of England. Professionalism was adopted in 1885 and it was recognised soon after that organisation was required. At the time fixtures were often cancelled if clubs could earn more money playing other matches. So in 1888 the Football League was formed, with twelve member clubs: Preston North End, Bolton Wanderers, Everton, Burnley, Accrington, Blackburn Rovers, Aston Villa, West Bromwich Albion, Wolverhampton Wanderers, Notts County, Derby County and Stoke.

A fan at Ibrox stadium in Glasgow gestures in frustration while watching a football match between Celtic and Glasgow Rangers, 1949.
Title: Missed By A Mile. Copyright: Getty Images, available from Education Image Gallery (http://edina.ac.uk/eig)

Local businessmen who had set up clubs wanted to change the status of the new organisations into limited companies. The clubs were after all employers; they had wage bills and other costs to pay. They wanted to improve their football stadia and the services that were offered to fans. So it was that Small Heath (now Birmingham City) became the first football limited company in 1888. Aston Villa were next. Limited liability meant that directors could borrow from banks without being liable for the club's debts. This form of ownership was taken up by all the other clubs.

Having lost the battle over professionalism, and seeing the growing commercialisation of their 'gentleman's game', the FA began to regulate the clubs more closely.

Why did clubs become PLCs?

The need for capital can be seen as one of the prime motivations for clubs becoming PLCs. Just as a private limited company can raise large sums by 'going public', so too did some football clubs see the opportunity to grow and generate further wealth by being listed on the stock market.

Many companies' boards of directors find the lure of PLC status hard to resist and this of course extends to senior managers of football clubs.

But there is a more cynical reason; and to understand this point we have to go back to the dawn of the professional football age.

In the late 19th century, the FA saw the potential for conflict between football club owners and the wider community. They wanted to protect football's true stakeholders. So they introduced Rule 34, preventing club owners from taking too much money out of the game. A limit was set on dividend payments and directors were prevented from being paid for their services.

Football clubs were put off stock market flotation because the ceiling on dividend payments would make the shares unattractive to investors. This rule was eventually sidestepped by Tottenham Hotspur in 1983, when the FA allowed the club to create a holding company, which could be floated on the stock market.

At the time of writing, as well as Manchester United, the other clubs on the stock market's main list of football companies are Aston Villa, Celtic, Leeds United, Newcastle United, Southampton, Sunderland, Tottenham Hotspur, and Hearts.

The final word on the attraction of PLC status goes to the recent buyer of Chelsea FC, Roman Abramovich, who has been quoted as saying, "It's not about making money. I have many much less risky ways of making money than this. I don't want to throw my money away, but it's really about having fun and that means success and trophies. We like England because it has the most competitive league in Europe. It's easier to buy here because many of the clubs are publicly quoted. We examined several and chose Chelsea, partly because it was for sale".

The bursting of the bubble

The past decade has seen seismic change at many levels of the game - in 1992, spurred by an elite group of clubs, the then First Division of the English Football League broke away to form a separate Premier League. In time, this sparked massive increases in the sums that TV companies were prepared to pay for broadcasting rights, notably by the new market entrant, Sky (now BSkyB). More on this is included in Biz/ed's TimeWeb feature on football finances (note that the figures used are expressed in millions of pounds) (http://www.bized.co.uk/timeweb/digging/dig_mean_work7.htm).

The bandwagon having started moving, it seemed as if even the non-Premiership football clubs would get on board. But just before the end of the 2001/2002 season, ITV Digital collapsed. The firm had agreed a television deal with the Football League and the end of the deal left most lower league clubs with uncertain futures. Put simply, these clubs were not now going to receive money on which they were depending. The bubble was now well and truly burst, as many had predicted, including Biz/ed (!) in our 'Wanna Argument?' feature (http://www.bized.co.uk/current/argument/arg7.htm).

Other forms of football club ownership

A recent development in the corporate governance of football clubs is the formation and growth of Supporter Trusts. Supporter Trusts are legal entities that represent the interests of supporters in the running of a football club.

They have emerged out of a government initiative, Supporters Direct, funded with public money, to help people play a part in the life of the football club they support. They encourage Trusts to have influence on their clubs, gain representation on the Boards of Directors of the clubs and, by buying shares, to take ownership to some extent of the club.

The first democratically run Supporter Trust was established at Northampton Town FC in 1992. The Northampton Town Supporters' Trust was formed to save the club from bankruptcy and to ensure that the club would be properly managed in the future.

Other examples of Supporters' Trusts can be found throughout the game. The Arsenal Supporters Trust Web Page (http://www.aisa.org/news/trust.html) gives a useful summary of how they are set up and what each member of the Trust stands to gain from joining.

Across Britain, these organisations are encouraging fans to take part in having a say about how 'their' club is run. Some fans who already own shares in a club are shown how to sell these shares and buy into the club's Supporters' Trust. More about this initiative can be found on the Supporters Direct Web Site (http://www.supporters-direct.org).

Supporters Direct also helped attempts by some clubs and their fans to recreate the link between football clubs and their communities. In 2001, Lincoln City FC changed its structure to an Industrial and Provident Society, meaning that the club is run for the benefit of the community it serves and that the members and officers of the club are not allowed to profit from the organisation.

Other clubs have followed suit, with Chesterfield FC adopting mutual status through community consortia. AFC Bournemouth have a fans trust which costs £20 to join, giving members one vote each. Trusts often ask for a £250 contribution to a Loan Fund, which is used to buy shares in the club. The aim here is for the Supporters' Trust to eventually become the club's largest shareholder.

This is historic, in that in many ways, it is a return to football clubs being run by the communities they represent in non-profit making forms, in the way they were when clubs were originally set up.

What's in it for fans?

Why gain control of a club when so many of them are financially hopeless? As Roman Abramovich was quoted as saying earlier, there are many less risky places and markets in which to invest than football clubs. So what's the deal?

Many football clubs are unique as businesses, in that their shareholders often include many fans of the club itself. These fans are of course very attached emotionally to the club, its success and survival. But British takeover law presents a great threat to these supporter shareholders, who may be large in number, but small in terms of the control they have of the overall ownership of the business.

In law, once a buyer of a company has 90% of the shares of a target business, the remaining shares can be bought compulsorily. This would leave most fan shareholders without any legal stake in the club to which they are so attached.

Title: David Beckham of Manchester United. (At the time of taking the photograph - August, 2002) Copyright: Getty Images, available from Education Image Gallery (http://edina.ac.uk/eig)

In the case of Manchester United, the largest club in the world financially speaking, when BSkyB tried to take the club over in 1998, shareholding supporters had to fight their own Board of Directors' acceptance of the offer. This extended to sending detailed evidence to the Monopolies and Mergers Commission urging the take-over to be blocked. This was the eventual outcome in 1999.

Conclusion

Ending our tour of some of the issues surrounding ownership of the national and world game, some key themes emerge:

Finally, one case study illustrates the threat to communities posed by business decisions, as well as the opportunity offered by supporter power. Wimbledon FC's directors took the decision, supported by the FA to move the club seventy miles from its base in south London to Milton Keynes. Fans mourned the death of their club. But the very next season they celebrated the birth of a new club, AFC Wimbledon. As the new club's Commercial Director said, "...in the end footballers come and go, so do managers and owners. All that remains are the fans and in the case of Wimbledon, we never left".

At your Leisure - 02 February 2004