Let's Talk about Real Fan Power - Term Paper Example

Corporate Governance of Football Clubs Public interest is deeply integrated in all aspects of the operations of football clubs. Newcastle United and Sheffield United both had encountered serious corporate governance issues in 1997. Due to these problems, Sheffield lost a manager, chairman and chief executive. Newcastle directors, Freddie Shepherd and Douglas Hall, have been forced to resign after they denigrated their own team's supporters. The Newcastle resignations have been hailed as a victory for fan power. However, these two directors remain as owners of the club. The crisis has been mitigated by the return of Sir John Hall to the club board. These clubs have become plcs, and its stocks are floated on the stock exchange. The plc was seen as the modern way to run a football club although it has created conflicts between shareholders and fans. . (The New Statesman, March 27, 1997, p.2). Sheffield United's manager resigned in protest at the chief executive's strategy of trying to achieve Premiership status by selling his best players. Noisy demonstrations forced the chairman and chief executive to resign. The outrage of Newcastle fans at the behaviour of the two directors was due to Kevin Keegan's resignation as manager. Fan power was limited to invading the pitch, singing nasty songs and boycotting matches. However, the problems persist. Fans believe big clubs aim to please the shareholders rather than the supporters. This blatant behavior on the part of club managers is a form of To football fans, for whom transfer of loyalty is not an option, this trend is a form of betrayal for dedicated football club supporters. (The New Statesman, March 27, 1997, p.2). There are two strategies to solve these problems. The first is a new corporate governance policy which tightens the accountability of directors to shareholders while deepening the involvement of fans, councils and schools. Clubs are allowed to appoint fans as non-executive directors and conduct "supporter audits". The second strategy understands that supporters have a a distinct relationship with their team. Though there are many teams in the league, once one has made one's choice of club, one usually sticks to it. Fans also have to survive on trust. They purchase season tickets without knowing which players and managers will be at the club. Football clubs can be legally required to further the long-term interests of the club and its supporters as a whole rather than the narrow interests of shareholders. Football clubs were previously controlled by wealthy local businessmen. They invested their money in the club operations and most often than not, they had lost their investments. However, this situation was unimportant. Owning a club gave them status and prestige in their local community. There are many options to ensure corporate governance for football clubs. One alternative is to widen the share ownership of clubs. If it was the aim of the club to ensure that as many fans as possible owned shares, this could improve accountability and investor commitment. Another option would be for fans to invest in a trust which would hold a collective stake in the club on their behalf and this in turn, will provide a guarantee for fans that they will have a say in major decisions. A third alternative is having mutual forms of ownership in which fans became the club's members and legal owners. A fan-appointed board would select the manager. Shareholder meetings would replace pitch invasions as the vehicle for expressing discontent. A mutual football club would be focused in pursuing things fans really want (winning matches and establishing its own club stadium). However, no ownership structure is perfect. Fans usually have a strong consensus about ends (buying good players) and not (which particular players). CORPORATE GOVERNANCE AND FOOTBALL Shleifer and Vishny (1997) define the term as follows: 'Corporate governance tackles the agency problem: the separation of and finance' (p. 773). The term is used to refer to how the firm is governed by its management. Football clubs have Directors rather than the manager. Ethical principles stem from consideration of principles at two levels; high-level issues (such as equitability) and second-level principles. There are also procedural principles for ensuring that the stated ends are achieved. The first-level substantive principles are dignity, equitability, prudence, honesty, openness, goodwill, and the prevention and alleviation of suffering. First-level principles are those that express the highest level of generality of standards, and act as the first reference point. They represent the aspirational level of ethical behaviour. Uprightness is a term which means consistency of behavior. Among the most important principles of ethics is that of treating each individual as an end rather than as a means to an end. However, employment does use people as a means to an end. Courtesy is an essential part of dignity. Prudence requires business people to exercise a degree of judgement that improves the circumstances. There must come a point where the harm outweighs the good that might be done. Prudence tells us to return to the status quo if there is any doubt. (Dine, 2000). Corporations are a product and a part of society. For the top clubs it seems easy, with West Ham turning people away while charging people 29 a head for tickets, while the fans of Schalke 04 in Germany pay top prices of around 4 a ticket. The history of business failure is full of people who took for granted the continuing demand for their products. The football clubs can profit from pay-per-view set-up. However, football clubs should take care of their fans. If interest rates doubled just as football clubs were busy expanding their stadiums, and they were left half-finished and half-empty for two season, then they will need their fans for support. If there is a new wave of cybersport, which makes football staid to a new generation, they will also need fan support. The business of sports, particularly football changes. When the change comes, the lesson from business is that the survivors will be those that were: sensitive to the changing climate around them; quick to learn and adapt; insistent on preserving their unique character and values; prudent with their cash; good at growing their own talent; well regarded by their local authorities; and earning the loyalty of the next generation of their fans. Relationships with customers, suppliers, communities and employees are to a business what eyes and touch are to a person. They enable one to sense danger and seize opportunity. Businesses which focus on pleasing today's shareholders suspend their ability to attain wealth in the future. Relationships depend on human qualities like loyalty and trust: when you are in trouble you want to have a strong deposit account of goodwill to call upon. One cannot trust people who have no values. Prudence with cash gives you freedom of action: if you have gambled away all your reserves and one is at the mercy of a rich freak who wants to buy out the club. For example, it was home-grown talent that rescued Manchester United after Munich. What the club sows, the club reaps. Football fans are not the usual customers. They are the local community. They are suppliers of goodwill, energy and atmosphere. Without the atmosphere of the Premier League, many foreign players say they would not be so keen to come to the UK. If fans withdraw their goodwill and support, few boards can hope to survive. The money that comes from television rights and merchandising is an extra, but it only grows out of the goodwill that fans provide and over generations may withdraw. An ideal football club would include the appointment by the board of a director responsible for supporter relations. This would lead to all kinds of innovation. This would include consultation over the fairest way to allocate tickets; how to have a public-address system that actually addressed the public; co-operation with the local community over parking; internet dialogues with the manager; quarterly face-to-face public meetings where the board explains to the fans what it is doing on youth development; a joint approach to difficult issues like fans standing up in seated areas; improvements to the quality of music, entertainment and food at the stadium. The goal of a football club is to win the championship, entertain the fans, and build a better club for the future. Football players are certainly acquired to help generate future economic benefits for the football clubs on a continuing basis. The benefits that they are contracted to generate are intangible. They sign contracts which legally bind them to a particular club. Players who have a contract with a club cannot leave that club or play for anyone else without the permission of the club. Corporate governance issues There are two corporate governance issues relevant to football: one, the stewardship role of Directors, and two, the representation of small shareholders on company boards. Both of these aspects take on a particular significance when the company is faced with a serious take-over bid. A salient point that has been well made in the academic literature and recognised widely in policy discussion is the idea that the onus should be on the acquiring firm to demonstrate that any proposed take-over would be in the public interest, rather than having the onus be on the public authorities to establish that it would act against the public interest. The British company law on business take-overs is lax, short-term, and oriented to free market processes rather than the long-term good of the company. This means that even if they wanted to, company Directors are not supposed to consider what is in the interests of the company's customers - they have to accept, and recommend to other shareholders, any take-over bid that offers enough money. In essence, the Company Directors are obliged to give importance to the long-term interests of the club and the local community to which it belongs to, when faced with a bid to take over the company of which they are a Director. There is a case for stewardship requirement on all company directors, as discussed for example by Kay and Silberston (1995). Football clubs play an important role in the sporting, cultural and social life of local communities, well as nationally, and this should be given proper consideration when any club is faced with a take-over bid. Several British football clubs have a wide share ownership. For example, 23% of shares in Manchester United are held by small shareholders, fans who bought shares, primarily, for this reason. The November 1998 Manchester United AGM was attended by around 1000 shareholders, mostly small shareholders. However, there is no representation of this block of shareholders on the Board, and there is no consideration by the Board of how this might be best facilitated. While the individual shareholding of each of these small shareholders taken separately is minute, this block represents the biggest percentage vis-a vis other shareholders. Martiner Edwards owns 14% of the shares, and BSkyB owns 11% of the shares. The largest institutional shareholdings amount to only around 2-3% each, and the largest of the other Directors' shareholdings is around only 2%. One of the stated aims of the flotation of Manchester United in 1991 was to widen share ownership among the fans. It is therefore strange that the club management has made no attempt to secure some sort of representation on the Board at Manchester United. In contrast, the Northampton Town Football Club depends on the local council support as they get their funding for their ground development from this council. For this scheme to become the norm in the industry, this would require action at the national level, whether from Government, a regulator, or the Football League and Premiership. Regarding the situation when a take-over bid is made, the British take-over law states that once the acquirer has 90% of the companies shares, the remaining shares can be bought compulsorily. This provision does not consider the mass of small shareholders who are fans of the club and who have a great emotional attachment to their ownership of the club. In the case of, for example, BSkyB's bid for Manchester United, this would involve literally thousands of shareholders being forced to part with their shares against their will. There are many English football clubs that are now PLCs and are vulnerable to asset-stripping takeovers. The changes to the Companies Act is important as the short-term attitudes and behaviour by companies, poses especial dangers to the football industry. The digital and pay-per-view TV threatens to unleash these dangers in Britain as media companies divide up the football broadcast content providers. The clubs should consider some points seriously when they are dealing with take-over bids. Firstly, when faced with a take-over bid, the club Directors should have regard to the long-term interests of the company itself and its customers, not just the bid price. Secondly, those making a take-over bid should be required to demonstrate that it is in the public interest. And thirdly, shareholders should not be forced to sell, against their will, as happens when 90% of the shares in a company are acquired. CONCLUSION British football clubs have to seriously address corporate governance issues. The problems of the clubs are due to honest incompetence, rather than fraud. The growing commercialism of these clubs has led to profiteering from the sport by club management and the possible social exclusion of fans who are small shareholders. Individuals and companies and wanted to pay dividends, hence, the profit motive was highlighted. Rule 34 restricted payment of the dividends to 5% of the face value of shares and prevented the payment of Directors. The dividend limit increased to 15% in 1981. The stock market flotation of the football clubs resulted in a situation in which profits could be transferred to the holding company and distributed without limit. This new set-up raised problems related with unfettered profit maximisation and share ownership of the football clubs. Football has sports, charitable and commercial objectives. The clubs have local monopoly power over ticket prices. They have supporter (or brand loyalty). The supporters feel exploited and excluded when they raised funds for clubs but received no shares in return for their investment. The interests of supporter shareholders and financial investors diverge. However, the supporters bail clubs out of financial crisis. The objective then is for Supporters' Trusts to own the club, in order to prioritize supporters as stakeholders. There is a need to restore the priority of sports over commercial objectives. Clubs can be run in a professional/commercial way, but the revenue generated should be reinvested in the club and community. The Supporters' Trusts aim to improve governance and make clubs prioritise their sports, social and charitable objectives. They can bring new support from excluded groups such as the youth, women and minorities. Finally, the Trusts aim to generate funds for the club and build links with local government. WORKS CITED Gamble, Andrew and Gavin Kelly. "Let's Talk about Real Fan Power; the Newcastle Utd Scandal Should Make Us Think Again about Football Plcs." New Statesman. Volume: 127. Issue: 4378. Publication Date: March 27, 1998. Page Number: 28. Francis, Ronald. Ethics and Corporate Governance: An Australian Handbook. Sydney, N.S.W: New South Wales University Press, 2000. Dine, Jane. The Governance of Corporate Groups. Cambridge: Cambridge University Press, 2002. 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(1997), 'A Survey of Corporate Governance', The Journal of Finance, Volume LII, Number 2 (June), pp. 737-783. Online sources Tomorrow's football club: an inclusive approach to governance Mark Goyder Available at http://www.football-research.org/fitda/FITDA-chapter10.htm Read More