Duncan Drasdo, the CEO of MUST – the Manchester United supporters’ trust shares their submission to the government on Football Governance, via the Corporate Governance reform consultation (which is separate to the Football reform consultation). Shared 17 February 2017.

Please see below

Introduction

  1. Please accept this document as a submission to the consultation on Corporate Governance reform launched on 29 November 2016.
  1. This submission is on behalf of the Manchester United Supporters Trust (M.U.S.T) and concerns corporate governance within football clubs. M.U.S.T is the largest fans trust in the world with 208,000 registered members. It is a Community Benefit Society and was originally founded as a supporter-shareholder organisation in 1999 to promote the ownership of Manchester United shares by its supporters. In 2005 the Glazer family took over Manchester United in a hostile, leveraged takeover. They subsequently delisted the company from the London Stock Exchange thus removing important transparency and corporate governance requirements. Following this, once they had sufficient acceptances from shareholders (approximately 90%) they then forced the remaining supporter shareholders to relinquish their shares through a compulsory purchase. Thus depriving supporters of an ownership stake in their club (some having passed shares down through generations in their family). Crucially this allowed the Glazers to transfer their acquisition debt onto the Football Club so that the club (and fans) became responsible for that debt.
  1. M.U.S.T still retains objectives regarding promoting supporter share ownership but we have broadened our approach to include achieving better ownership and governance through regulation and legislative change. This is particularly important given that the opportunity to own a significant share ownership stake has been put out of supporters’ reach indefinitely.
  1. To be clear, the issues within this submission do not purely relate to Manchester United; but to football clubs the length and breadth of the country. The ideas and thinking have been developed in partnership with supporters of a large number of clubs.
  1. The key principles which should guide the governance of football clubs are:
  • Owe a duty of care to supporters as well as a duty to cultivate and preserve supporter loyalty to their club
  • Prioritise the long term sustainability and best interests of the football club above all others especially where there may be a collision of interests with shareholders
  1. We would be pleased to clarify or explain any elements of this submission should that be useful, and would be available to meet at your convenience along with the corporate lawyers and other advisors who assisted in the compilation of this submission.

 

The issues

 

Why make a special case for football in corporate governance regulations?

  1. If the FA had maintained and modernised their rulebook that originally protected the “Member Club” nature of Football Clubs, from the point at which they were allowed to become limited companies, then perhaps we would not need to isolate football clubs as a unique sub-sector for the purposes of imposing additional requirements in terms of corporate governance.
  1. However, because the FA has failed to maintain these safeguards and ultimately abandoned them altogether in the 80s and 90s when challenged by Clubs (who started forming holding companies to bypass them), there is now no meaningful distinction in law or practice between a Football Club and any privately owned limited company.

Why is football not just a business that can be regulated through ‘normal’ company law and regulation?

  1. Football Clubs were member clubs that were allowed to become incorporated as limited companies to protect the directors and shareholders from excessive liabilities whilst also encouraging investment. This was clearly a good thing and brought benefits to the game in an era before TV revenue dominated and turned cash sinkholes into cash cows, essentially moving away from acting in the best interest of the members (supporters) but to focus on revenue and profit for the benefit of shareholders.

Supporters are not the same as customers

  1. The problem is that club members (or supporters) have a different relationship to their clubs than customers do to any other privately owned company operating in a normal market. That relationship generates a special form of unconditional loyalty between supporters (fans – fanatics) which creates the value on which all of the football club’s revenue is based either directly (match day, merchandise, TV subscriptions) or indirectly (the brand, sponsorship and advertising). The goodwill in a football club is vested in the fans; it is the reason why the club generates income and why other people want to support the club and to enter into commercial relationships with the limited company.  Without fans clubs would not exist, but fans lack the customer choice to move to another team as you would in a normal economic sector.
  1. The special culture of loyalty created by the traditional members’ club relationship inevitably leads to an inefficient market. Clearly football fans who are fiercely loyal to their club for life, will not switch supplier to find better value in the way a customer of Tesco might switch to Aldi if such organisations failed to deliver for their customers. Fans embrace the loyalty and the clubs derive huge value from the goodwill that underpins their brand and all of their revenue streams. However, if owners of football clubs choose to operate along normal commercial lines with a view to maximizing profit at all costs, such an approach will inevitably create direct and indirect conflicts of interest between the shareholders and both the supporters and indeed the “football club” itself.
  1. Shareholders of any company generally want to see maximum return on investment but in the case of a football club this may be at the expense of the relationship with supporters. The board of directors will be well aware that is one of the key objectives of their role on behalf of the football club as a large private company. For example, the huge ticket price rises seen at Manchester United for the first 5 years of ownership of the Glazers between 2005 and 2010 was in the interests one could say of the owners (to service increased debt) as opposed to taking decisions to protect the consumer, especially as those latter years coincided with the economic downturn arising from the sub-prime lending crisis.  Ironically, that crash was in a regulated sector which demonstrates that where profit becomes the primary pursuit, even with regulation, damage to consumers can occur.  In the domain of privately owned football clubs, the lack of regulation in governance and indeed corporate maturity creates risk and damage to customers (the supporters) and ultimately the goodwill of the business.
  1. Similarly, the reining in of investment in the team and the stadium allows increased ROI in the short term but creates damage to the club and supporter relations in the longer term.
  1. However, for any normal business this is not typically a consideration because the market rules and poorly run businesses that do not serve customers fail as a result of market forces. Therefore, in such circumstances shareholder and customer interests remain largely aligned.
  1. So it is in the long term interests of the football club to preserve good relations with supporters, but this may not be the priority for shareholders who wish to maximise revenues at the expense of supporters and their loyalty, knowing full well that history dictates that fans of football clubs are in many ways a constant.
  1. Therefore, directors of football clubs (or their controlling company board as the collective) should owe duties to supporters generally not simply to protect people made vulnerable by the inefficient market, which their loyalty creates, but also because this loyalty relationship is crucial to the long term interests of football clubs, and for reasons set out below, to the local community.

Football Clubs are cultural institutions with a value in their own right

  1. There is a compelling case to argue that football clubs should be subject to special provisions designed to protect them from aggressive, exploitative, incompetent (or worse dishonest) owners and directors.
  1. Football clubs do not only serve to generate revenue, they often have a large impact on local community initiatives, through youth sport and events. They are also of significant value in terms of tourism and they generate revenue for local amenities.
  1. The lack of appropriate regulation allied with the absence of effective measures to ensure good corporate governance practice has allowed individuals to take risks with clubs. Clubs like Leeds United and Portsmouth had owners and directors who took huge gambles to try to achieve success in European competition and the Premier League both of which generate immense increases in revenue. So in the event that they had been successful it would have been hugely lucrative for the shareholders but failure put the very existence of these century old cultural institutions under threat.
  1. Furthermore the high risk behaviour of reckless owners and directors also has consequences for other clubs (including well run and community owned clubs which are operating sustainably within their means) because they push up the cost (player acquisition and retention) of being competitive and success (on the pitch and financially) thus encouraging similar risk taking at other clubs. Good corporate governance should require football club directors to ensure their clubs are operated in a sustainable way
  1. Supporters Direct was formed in 2000 to help set-up and support Supporters Trusts. There are now almost 200 in the UK with approximately 500,000 individual members. During that time there have been almost 150 insolvency events at football clubs in the English pyramid with over 100 benefiting from the involvement of Supporters Trusts who have played a variety of roles to ensure the continuation of the club, these include reforming it, buying it, finding suitable owners, raising money to pay off creditors and running the club cost effectively for the administrator. Less than 18 months ago Newport County supporters raised £250,000 in 5 weeks with no single big investor, and Supporters Direct has worked at clubs where individuals have stepped forward to remortgage their house just to ensure the club continues to operate.
  1. Again this is not the behaviour that you would expect to see in customers at any normal business. Professional football, as a sector, needs special protections in place and this can best be achieved through legislation placing obligations on the directors in addition to those of directors of any ordinary company.

Struggling Football Clubs.

  1. Ordinarily if a business is failing it is allowed to go into an insolvency situation but with football clubs the loyal fans often fight tooth and nail to save them because they recognise they are special cultural institutions and community assets (albeit that community of supporters may be much more dispersed in the modern era). So football clubs are not just ordinary businesses.

Viable Football Clubs.

  1. The threat to football clubs may not come only to those that are struggling financially. If football clubs are considered no different to other large privately owned companies, then they may be acquired through leveraged takeover placing damaging debt on the club for the benefit of shareholders but to the detriment of supporters and the club alike. Whereas this may be common practice in ordinary privately owned businesses, for the reasons stated above, we do not believe it should be allowed for football clubs.
  1. History has shown that the FA is not an effective regulator; it is not fit to intervene and indeed does not have the necessary authority to do so and is unable to reform itself due to the inherent conflicts of interest within its structure. Indeed, a Parliamentary vote recently saw the House of Commons determine the inadequacy of the FA, and call for legislative intervention.
  1. Furthermore, take the scenario where a company is generating a disproportionately small return versus its net asset value. Normal practice would be to liquidate that company and then distribute proceeds to shareholders so they can obtain better value investing elsewhere and the directors could be compelled to do so, in the interests of shareholders, under existing company law. In fact, almost all football clubs operate in precisely this environment because the league structures and competition for players create a market where even if large revenues are generated, they are swallowed up by player acquisition, agents’ fees and salaries leaving little in the way of distributable profits. In this scenario arguably many football clubs would be more valuable to shareholders if they were liquidated but is that acceptable? Is there not a public interest case here to argue that football clubs are special and directors should have a duty to look after the long term sustainable interests of the club (and its local community) even when there is a conflict of interests owed to shareholders?
  1. Additionally, an ordinary business may decide to change sectors and utilise its assets for another purpose. Would it be reasonable for the board of a football club to sell off the brand and football league shareholding for relocation as a franchise club and knock down the stadium for redevelopment for some other use? We’ve seen precisely this happen – Wimbledon FC being a prime example.
  1. To take a further analogy we choose to protect our most highly valued historic buildings, because of the perceived cultural value and public interest, by applying listed building status (National Heritage List for England). This allows such a building to be a privately owned asset which may well generate substantial revenue for the owner but this cannot be at the expense of the long term sustainable preservation of the building. We believe football clubs are equally worthy of such protection and the way to do this may well be through special duties for football club directors which require them to:
  • Owe a duty of care to supporters as well as a duty to cultivate and preserve supporter loyalty to their club
  • Prioritise the long term sustainability and best interests of the football club above all others especially where there may be a collision of interests with shareholders

Finally, is such intervention necessary following the improved regulation including Financial Fair Play?

  1. We anticipate that the vast majority of clubs will not be significantly impacted by such changes although adherence to improved corporate governance practice is usually considered to be good for business performance and especially where such proposals are there specifically to promote the long term sustainable operation of the football club.
  1. So while we hope there would only be significant impact on the worst performing owners and directors, such reform would raise the standards across the board and benefit supporters and their football clubs alike.

Proposed remedies

  1. Our general feeling is that the November 2016 Green Paper on Corporate Governance Reform contains many sensible proposals.  However a football club operating as a limited company is a different animal and special rules should apply over and above any framework intended to regulate “mainstream” companies;
  1. “The football club as a special case” – a football club and, by way of example, an engineering company, have many things in common.  They own assets.  They enter into contracts.  They have employees.  They have shareholders and they have directors.  They also have customers but there is an important variable to take into account in the case of a football club.  If a customer of the engineering company is dissatisfied with the quality of the service provided, that person is free to take his custom elsewhere.  However a customer of a football club does not have that luxury.  That person is a fan of that football club and as such is tied in to that company by unbreakable bonds.  There are emotional, deep-rooted ties which mean that the customers of a football club i.e. its fans, have to enter into a contract to support that club come what may.  The fans and historical events comprise the club and its heritage;
  1. Duties imposed on directors of limited companies are enshrined in the Companies Act 2006 and in particular section 172 of that Act.  Currently the overriding duty of a director is to promote the success of the company for the benefit of its members as a whole.  When taking decisions directors are obliged to consider section 172 CA 2006 and other factors set out in sub-section (1).  Paragraph 2.6 in the Green Paper sets out the position quite neatly.  However this should again be developed in the case of football clubs and particular rules introduced.  Our suggestion is that a football club operating as a limited company should be required to amend its constitution by adopting new Articles of Association which contain specific objects intended to protect the heritage of the club, its future and its fans;
  1. Similarly the scope of a director’s duties should specifically be extended to fans as stakeholders and, when taking decisions, a director should be required to take additional factors into account on the basis described above i.e. the heritage of the club and its future success.  These additional duties should be codified but should not be so onerous as to dissuade people from taking on the role.  Directors will still be answerable to shareholders and the Courts but fans and other stakeholders must have a greater say in the direction of their club;
  1. We recognise that clubs must still be able to operate on a proper commercial basis with a view to generating profit. We also acknowledge that any new regime must not put any significant hurdles or bundles of red tape in the way of commercial success.  That said fans must have a greater voice and be able to exert some influence on the way their club operates.  The composition of Boards should be examined in greater detail.  It would be our suggestion that fan representatives or observers should have the opportunity to at least attend some Board Meetings. The exact role of such representatives would have to be explored;

Summary

  1. We understand that the issues raised in this submission may be rather different from those in the other consultation responses you receive. But we believe there is widespread support in the football community for some of these principles, and cross-party support in Parliament including from the DCMS Select Committee. As such, it may be helpful for us and our advisors to meet with Ministers and officials at BIES and DCMS to discuss this submission in detail and explain our thinking in further detail.

Submitted on behalf of M.U.S.T – the Manchester United Supporters’ Trust

www.joinmust.org

by: Duncan Drasdo, Chief Executive of M.U.S.T

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