Dilemmas of Football Ownership: History and the Need for Change
For the second of our posts exploring the theme of football ownership, we are pleased to welcome Jon Keen, a long-standing supporter of Reading Football Club and founding memberÂ ofÂ STAR (the Supporters’ Trust at Reading). Jon is also aÂ regular contributor to Reading blog, The Tilehurst End. Here, Jon unpacks the issue while asking the inevitable question of how it came to all this? Jon can be followed on twitter at @urzz1871.
Remember the days when hardly anyone knew who owned their football club? Or if they did, they cared even less? When the only time you heard about a clubâ€™s owner was when they were pictured shaking hands with a new signing, or holding a trophy the club had won?
So how did we get from that situation to todayâ€™s, where every supporter knows the name of their clubâ€™s owner, and changes of owner are news as big as changes of player or manager? And how did local football clubs come to be the targets of all kinds of weird and wonderful ownership models beyond the comprehension of most supporters, such as leveraged buy-outs. And, why, to give one example out of many but an example close to my heart, would a second-tier team in the Thames Valley find itself being owned by a secretive consortium with a postal address in a brass plate office in Gibraltar?
Of course, income has always had a real effect on what happens on the pitch. It started with the rows over â€œprofessionalismâ€ in the late 1870s which led to the formation of the Football League in 1888, and has been with us ever since. But as the years have rolled on the impact and influence of money on results has become more and more critical, and never more so than today â€“ can anyone ever envisage a relatively small club winning the highest level league, as Ipswich, Derby and Nottingham Forest did in the 1960s and 70s? Blackburn, of course, won the Premier League title in 1995, but that was only achieved through the ownership and cash injection of Jack Walker. But ownership matters just as much for clubs not doing so well as those winning trophiesâ€“ and since 1992 we have seen more than fifty â€œinsolvency eventsâ€ in the top four tiers of English football.
Yes, ownership and club finances matter more now than at any time in the gameâ€™s history, and Iâ€™m amazed just how many supporters who are quite happy to call on their clubâ€™s owner to go, or to open their wallet, donâ€™t understand how the game got to this point, so I think the story is worth sharing. But I claim no credit for any research here, that is all down to David Conn, and Iâ€™d direct interested readers to his excellent book The Beautiful Game?: Searching for the Soul of Football.
For nearly a century from the formation of the Football League the financial structure of English football saw minimal change, with football clubs typically being owned by local businessmen, typically ones who had â€œmade goodâ€ and wanted to put something back into the community. So for instance, Liverpool was owned wholly or partly for over 50 years by the Moores family, who made their money from the locally-based Littlewoods pools and shopping empire, and Manchester United were majority -owned for over four decades from the late 1950s by Louis Edwards and his son Martin, local wholesale butchers.
This pattern of local, long-term ownership was widespread, for a very good reason that dates right back to the early days of the Football Association. Early administrators of the game were steeped in the concepts of Victorian philanthropy, mutuality, community and muscular Christianity, believed that sport and sporting activities brought great value to their communities, and especially the working-classes within the industrial cities where the founding clubs of the League were based. They believed in â€œmutual protectionâ€, where all clubs would be regarded as equals and revenues, including gate receipts would be shared equally. To them, football clubs were just that, â€œclubsâ€ â€“ â€œorganisations of people dedicated to a particular interest or activityâ€, in this case effectively a charitable exercise to provide recreational entertainment for working people.
So with this in mind, from 1899 the Football Associationâ€™s rulebook contained an extremely significant Rule, number 34. Whilst football clubs were now able to register as private companies, the provisions of this rule cemented them as not-for-profit organisations, protected from exploitation for financial gain. The provisions of Rule 34 were:
- No member of a football club could draw a salary as a director.
- No-one could take an income from owning share in a football club, and any dividends were restricted to just 5% of the face value of any shares.
- Any money remaining from the winding-up of a football club was required to be distributed amongst local sports finds or institutions.
Thus Rule 34 ensured that owning a football club was more to do with status and local prestige than money. Although owners were able to put money into clubs, and often did, they were unable to take out any more than theyâ€™d put loaned in, and frequently they ended up subsidising clubs. In practice a lower league club might need cash injections from a benevolent owner for several seasons, but should they sell a promising player to a higher league club for a good sum the owner might take out some or all of their loans.
Shares in a football club were therefore of minimal value as investments, and tended to be traded rarely if at all â€“ with families who controlled football clubs tending to retain them over several generations – for instance the Cobbold brewing family controlled Ipswich Town from its formation in 1878, through turning professional and joining the Football League in the 1930s right up until the 1990s.
This cosy situation lasted for over eighty years, a period through which the vast majority of money coming into football came solely through the turnstiles. In 1965, for instance, the BBC paid the Football League Â£5,000 for the rights to show match highlights on Match of the Day, a sum which was distributed collectively via Â£50 to each club in the league. But once the owners of the biggest clubs started to see the potential revenue from TV companies and as the sums involved increased, there was a new drive to â€œmonetiseâ€ their assets.
This process started in 1981, as the â€œBig Fiveâ€ clubs of the time – Arsenal, Everton, Liverpool, Manchester United and Tottenham – resented equal sharing of gate revenues, and managed to get this scrapped, via the threat of a breakaway to form a new â€œsuper leagueâ€. Henceforth the home club would get to keep all of the gate money â€“ the first stage in the biggest clubs getting bigger and the smaller ones poorer, and at the same time came the first dilution of Rule 34, as football clubs were now allowed to have a single paid director.
But two years later came the moment when the dam burst and all hopes for footballâ€™s future governance went down the Swanny. Tottenham Hotspur, under Chairman Irving Scholar, found a neat and extremely simple way to completely circumvent the provisions of Rule 34. A separate holding company which owned the football club as a subsidiary would be completely unfettered by the restrictions of Rule 34, and free of restrictions on taking money out of clubs.
The FA had no answer to this, and without a whimper or any significant debate Rule 34 was removed from the rulebook over subsequent years, except for the provisions regarding the winding up of clubs, which remain. But the genie was now out of the bottle, with clubs now out in the brave new world of 1980s Thatcher-era market forces. Club owners rushed to form and float holding companies, and many fortunes were made â€“ not least by the Edwards family, by Scholar and by David Dein at Arsenal. When Dein purchased 16.6% of the club for Â£292,000 in 1983 the long-time, â€œold-schoolâ€, Arsenal Chairman Peter Hill-Wood described him as crazy, saying that “to all intents and purposes it’s dead money. But in the new world of holding companies and flotations that money was no longer dead, and when Dein sold his 14.58% of the club in 2007 it was for the sum of Â£75 million!
In terms of responsible governance it was all downhill from there, and the bigger clubs wanted a greater share than ever before. The old principle of â€œmutual protectionâ€ got trampled under the feet of market-forces and monetisation, and in 1985 another breakaway threat meant that the 22 First Division clubs now received 50% of the greatly increased TV revenue. But greed leads to greed, and in 1992 the long-threatened breakaway happened, and the First Division clubs formed the Premier League in order to reap the riches of satellite TV income.
And itâ€™s all been downhill from there. The circumventing of Rule 34 showed the FA to be toothless as a regulator, and football finance was effectively unregulated. As the sums of money within the game increased exponentially, so did the number of speculators out to make a quick buck from the game, and the â€œold-schoolâ€ local businessman putting something into the community became fewer and fewer.
But after the boom to be made from the initial sell-off of football clubs, it became clearer and clearer that the only real money to be made was in the first sell-off of a club â€“ owning it and running it was generally not a profitable exercise. As playersâ€™ wages spiralled upwards â€“ a process greatly escalated by Roman Abramovichâ€™s purchase of Chelsea but one which has spread down all the divisions â€“ and supportersâ€™ demands for success in the media-age became ever more voracious, itâ€™s become harder and harder, except in a few limited and short-term cases, to actually make money from owning a football club.
Instead, owners have typically taken on a football club in the expectation of prestige and riches, but have usually found neither. A perfect example is Venkys who purchased 99.99% of Blackburn Rovers in November 2010, having apparently been told that after an initial cash investment of Â£1Â million the club would be â€œself-financing.â€ In reality it was anything but, and after a torrid period the club is now one league lower and in December 2012 was estimated to be losing Â£2 millionÂ a month.
As John Madejski said, â€œThe only way to make a small fortune from owning a football club is to start with a large oneâ€ and time and time again owners have purchased football clubs and come unstuck once they realised what they had purchased. This situation is just made worse by the lack of effective checks on the bona fides and credentials of potential owners. Although the Leaguesâ€™ and The FAâ€™s Owners and Directors Tests (previously the Fit and Proper Persons tests) are regularly being tightened, theyâ€™re still very relatively easy to pass, and the problem is especially acute in the Football League, who lack the finances to perform proper in-depth and far-reaching forensic financial investigations, especially in the cases of overseas purchasers. Similarly, it is frequently said that the Football Leagueâ€™s financial position means they lack the appetite to intervene in dubious cases for fear of litigation.
It is notoriously difficult to fail the Owners and Directors test, as shown by Anton Zingarevich who passed this in May 2012 when purchasing Reading but subsequently â€œdisappearedâ€ without, it is said, putting any of the promised funds into the club. Similarly, Massimo Cellino was cleared to purchase Leeds United, after an appeal, in April this year despite having been found guilty beyond reasonable doubt of an offence under Italian tax legislation.
As the years have gone by, ownership models have become more and more convoluted and more and more creative, as owners look for more and more elusive ways to make money from football clubs. Some owners such as Alex Hamilton at Wrexham and Douglas Craig at York City have realised that the land value of the football ground is worth more than the club itself and have tried to cash in, whilst Bill Archer at Brighton succeeded, leaving them homeless for 12 years. At a higher level, the Glazer family pulled off an audacious raid on Manchester United in 2005, purchasing the club by way of loans secured on the clubâ€™s assets, together with â€œpayment-in-kindâ€ loans and re-financing via overseas hedge funds. At a stroke, the family turned one of the most profitable, completely debt-free clubs into one owing over Â£207Â million and paying interest on this at a rate of over 14% per annum.
What hope does the average fan have of understanding such byzantine and torturous ownership structures, especially when holding companies are typically registered overseas â€“ weâ€™re back to that brass plate company address in Gibraltar, again! For me, the lack of transparency of ownership is one of the most worrying developments of the changes to ownership â€“ why do owners need to be so very secretive about their finances if they donâ€™t have anything to hide? Fans â€“ and authorities â€“ find it hard to be sure that such elusive owners arenâ€™t involved with a club for nefarious purposes, such as tax evasion or money-laundering.
Although it does seem that over recent years the previously plentiful supply of idiots prepared to purchase football clubs is drying up somewhat, there still seem to be enough from around the world for there still to be a steady stream of new owners. And, usually, the majority of fans at newly-purchased club are complicit in adding to the inevitable financial difficulties that these owners face.
Most clubs have developed a healthy debt which needs to be serviced somehow, and there are frequently calls for a new owner to â€œinvestâ€ â€“ a word which must be the most misused in football. â€œInvestmentâ€ generally involves spending money to make a profit, but thatâ€™s not applicable in football, where large sums need to by thrown at clubs in order to just stand still. The fear of relegation and the chase for promotion often means that an owner feels compelled to throw more and more money at the problem, but if that doesnâ€™t succeed against all the other clubs chasing the same outcome then financial problems inevitably ensue. If the money has been given to the club then fair enough, as long as the benefactor is prepared to continue giving it then fair enough â€“ but if the money has been lent as appears on the books as debt (the usual situation) then things are potentially calamitous. Thereâ€™s also a large number of clubs whose source of extra finance to keeps their club afloat was via neglecting tax payments due to HMRC â€“invariably with a disastrous outcome!
But still people come along and purchase clubs, for reasons I canâ€™t just canâ€™t fathom. No sensible businessman would take a look at a football club and see it as a good use of money, so the only potential reason I can see â€“ apart from the nefarious ones mentioned above – is prestige. But that only works for the super-rich who want a high-profile hobby and have unlimited funds to finance it â€“ the likes of Abramovich and Sheikh Mansour at Manchester City. But, of course, the moneys spent by the like of these super-rich sugar-daddies only serves to push up player wages and increase the problems for everyone else.
Problems are compounded when foreign owners come into clubs not quite sure what theyâ€™ve purchased â€“ for all the money theyâ€™ve spent and continue to spend they typically expect complete control. But a football club isnâ€™t like any other business in the world â€“ just how many people have their ashes scattered in their favourite branch of Sainsburyâ€™s? Despite what owners may think they have purchased and control, the history, traditions and values, a sort of â€œemotional propertyâ€ of a club isnâ€™t up for sale because it belongs to the community, not the company which owns the club – Vincent Tan at Cardiff and Assem Allam at Hull City please take note!
At this point, lest anyone think this is a diatribe against foreign owners, Iâ€™ll make the point that itâ€™s a diatribe against bad owners. Whilst itâ€™s true that foreign owners are less likely to understand a clubâ€™s â€œemotional property,â€ owners, good and bad, can come from anywhere. Hamilton, Archer and Craig were British, whilst Randy Lerner at Aston Villa was from the USA. I consider Lerner a good owner, but heâ€™s also a case study in what is a typical ownership cycle. A new owner comes in full of hope, optimism and promises, but once the going gets a bit tough and with supporters loudly demanding success at any cost, they come to the realisation of just how much they have to â€œinvestâ€ â€“ sorry, hand over, with no hope of return â€“ and so they look for a way out. Lerner did this in a responsible way, with a final investment of Â£20Â million and waiving a potential Â£100 million in interest, but many others just cut their losses and run.
And as a result there are a whole host of clubs who have suffered a succession of owners who have damaged them in one way or another, and who are now in a downward, ever-increasing spiral of damage. The more damage done to a club and the bigger its debt, the less attractive a proposition it become to potential buyers, and so it becomes a hot-potato club whose owner is desperate to off-load to any sucker prepared to take it off their hands â€“ debt and all. This means that the next owner is so much more likely to be ill-equipped or ill-advised to take it on, and so under their stewardship the damage gets worse and the club even less saleable. Portsmouth was the ultimate example of this, where a succession of actual and potential owners, not all of whom actually existed except on paper, took the club on the spiral of damage, until it was eventually purchased by its supporters. But its name and reputation was thoroughly dragged through the mud by these owners, so that for many Portsmouth is still a byword for financial mismanagement.
Although the number of clubs owned by their supporters is increasing, they are predominantly at a lower-league level because of the size of sums involved, and unless there are significant changes in footballâ€™s financial model they will continue to run at a major disadvantage. Firstly, many supporter-owned clubs start with the financial deck stacked against them, since supporters often only get the chance to take over their club at the end of its spiral of damage, when it has crippling debts. More importantly, though, supporter-owned clubs are by definition run sustainably and responsibly, and are competing in leagues with clubs that arenâ€™t. Most other clubs will have more money to spend and so have a competitive advantage on the pitch, whether this comes from a sugar-daddy donating large sums to them or by someone less responsible and happy to run up large levels of debt. Financial Fair Play schemes aim to do something to help level this and other imbalances, but their effect is likely to only do so partially, and their adoption is likely to be painful and contentious.
But today more than at any time in the past, ownership and the lack of governance that has allowed the ownership free-for-all of the past 20 years is a big problem – and one thatâ€™s getting bigger every day as costs soar and debt builds up. Club ownership eventually controls everything at a football club and up via the leagues to the whole of the game, and thereâ€™s such discord and such a disconnect between supporters and their club because of its ownership.
Letâ€™s imagine that clubs were universally owned by responsible, fan-sympathetic owners who do so for the club and for its long-term welfare, rather than for their own short-term financial gain. At a stroke, the objectives of supporters and owners would be aligned and not in opposition, and so many good things would follow â€“ ticket prices would come down, supporters would be listened to, their needs would be taken into account in match scheduling, and demand for safe standing would be met, amongst so many other issues â€“ virtual Nirvana! Never mind that itâ€™ll never happen, I can dream canâ€™t I?
The one country where they have got this right is in Germany, where clubs are by regulation 50% + 1 owned by their supporters, with the exception of the two company-owned clubs. This does meet the requirement that objectives of both supporters and owners are aligned, and as a result there are so many good things about German football.
Iâ€™m not suggesting that itâ€™s a magic bullet to solve English footballâ€™s problems, though, and there would be problems getting there from where we are now, because the essential problem came when that Rule 34 was circumvented, because the underlying problem is the legal structure of football clubs.
Those wise Victorians appreciated that football clubs just arenâ€™t the same as any other type of company. Theyâ€™re quite, quite, different, a community asset like a library or an art gallery, and as such a crucial part of their community. The problems weâ€™re experiencing now come when football clubs are treated as just any other type of company and are allowed to be bought and sold and subject to open market forces. That business model just doesnâ€™t fit â€“ itâ€™s inappropriate because it fails to take into account the â€œemotional propertyâ€ that is a huge part of a clubâ€™s identity. That just canâ€™t be bought or sold, but that shared history, those emotions and memories of the club and its traditions are what make the club what it is, and give value to what would otherwise be a name, a stadium and a bunch of players.
Itâ€™s obvious to me that something has to change and it has to change quickly â€“we just canâ€™t go on as we are at the moment, with football clubs being even more â€œmonetisedâ€ and the connection with their supporters and their â€œemotional propertyâ€ becoming more and more tenuous. Some kind of licensing system is, I think, the only solution, so that football clubs are recognised and valued as being more than just a commercial entity, but as something special, something much more than that, with a value to so many in the community that you just canâ€™t put a price on.
Why not value a football club as we do a work of art – a sculpture or painting? That has a price to purchase it, but any buyer is subject to proper legal scrutiny and terms and conditions, such as export licensing conditions, control what they can and canâ€™t do with it, in order to safeguard that asset for the nation. A football club that has been nurtured and supported by its community for generations has a much greater emotional value to its community, and to the nation, than any sculpture or painting ever will – so why is it allowed to be traded freely without any proper controls or scrutiny? A licensing system recognising and protecting the inherent value brought by the â€œemotional propertyâ€ just as much as a painting has artistic value would solve so many of the problems that the game not only has today but is also storing up for the future.