Failing football governance in England

This is a contribted article by Duncan McHardy:

This is a contribted article by Duncan McHardy:

Sports Minister, Hugh Robertson, has vehemently condemned the manner in which football clubs are governed in the UK.  The blame for regulatory failings was firmly pinned upon the Football Association by Mr Robertson earlier this week in a Parliamentary Committee meeting on Football Governance.  For the FA to gain the trust and confidence of the Government, a series of changes are required to the structure of the organisation and the manner in which the FA regulates professional clubs.  Mr Robertson has warned that failure to cooperate and adhere to such changes may result in legislative intervention that would completely overhaul the 148 year old organisation.     

The FA has never previously been forced to reform the ownership models of English football clubs…until now perhaps.  In general, clubs operate as limited companies, owned by wealthy individuals and their holding companies. With very little governing body regulation or company law to contend with, there are opportunities for financial risk taking (remember Liverpool’s leveraged buyout in 2007) which has the potential to cause long term financial damage (think of Portsmouth in 2010 and Leeds United in 2002). 

Over the last two decades, many football organisations on the continent have undergone reforms in an attempt to improve the financial sustainability of their member clubs.  It may come as a surprise, but Spanish and German clubs were in a much worse-off financial position compared to their English counterparts in the eighties and nineties. 

Both the Liga de Fútbol Profesional (LFP) and Deutscher Fussball-Bund (DFB) were forced to modify their governing capacity with regulations in 1990 and 1998 respectively.  Prior to this, their clubs were forced to adopt non-profit company models. 

The inability of the LFP to properly regulate Spanish clubs resulted in Government intervention through legislation (Ley del deporte 10/1990).  Those clubs that were unable to submit positive accounts were compelled to adopt a new company form, the soceidad anonima deportiva (SAD).  A rigid framework of financial obligations and restrictions were placed on all SAD’s.  Only Athletic de Bilbao, FC Barcelona, Osasuna de Pamplona and Real Madrid CF were in the black, given their generally efficient member-owned (socio) company forms.  

The amendment of Spanish legislation in 1999 subsequently allowed foreign investors to buy shares in clubs to improve cash flows – taking risks where Spanish investors would not.  However, the credibility and position of the LFP has been under constant scrutiny, not only because it struggled to enforce its rules, but also because of its limited influence on the negotiation of television agreements. Whilst the elite in Spain, namely FC Barcelona and Real Madrid CF, have taken advantage of their individually negotiated television agreements, they have still managed to accumulate significant debts.   

In a similar vein, the DFB in 1998 recognised the inadequacy of the long-established non-profit (Verein) model by passing a governing body regulation that allowed clubs to assume elements of conventional company forms so as to improve financial sustainability.  Yet this autonomy was subject to an important limitation that required a majority shareholding (51%) to remain with the members (fans) of the club so as to avert a takeover.  Known as the ‘50+1 rule’, the DFB regulation granted an exception to Bayer 04 Leverkeusen as a wholly owned subsidiary of the Bayer AG pharmaceutical group, and then to Volkswagen as a 90% shareholder of Wolfsburg. 

On the surface, the DFB reforms appeared adequate to provide clubs with scope to restructure.  Clubs were still under an obligation to comply with statutory law governing the 51% non-profit component; however, there was limited control over the conventional 49% company component that was affixed to the clubs.  In the absence of DFB supervision of the latter component, Bundesliga clubs were free to take financial risks on this.  Consequently, the likes of Borussia Dortmund and Schalke 04 were on the verge of financial collapse in the period following reform. 

In the run up to the 2006 World Cup however – hosted by Germany – the DFB engaged in significant dialogue with its member clubs to ensure prudent budgeting.  Moreover the progressive tightening of regulations on club expenditure meant that only 39.3% of total revenues were allocated for player salaries (Bundesliga Report 2008).  This was in comparison to 64% for Spanish clubs, and 63% for English clubs.  Although the acquisition of world-renowned players by German clubs has been thwarted because of such controls, there has been a significant improvement in their financial sustainability

The DFB was forced to take action.  Their previously light handed approach and inadequate regulations illustrated that football clubs are socially sensitive companies that may be crippled under the peculiarities and strains of the marketplace, particularly when they are the subjected to financial restructuring.

Mr Robertson will need to seriously consider how the FA is to restructure in light of the challenges faced in regulating English clubs. The DFB system of regulation stems from its strict system of company law.  FA regulations that seek to tighten the controls on the ownership of English clubs may well contravene our liberal system of company law.