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Football
Business
The debt debateObserver Sport asks experts from the worlds of football and finance what can and should be done
The Observer, Sunday 31 January 2010 Article history
GREG DYKE
Chairman, Brentford
Former BBC director-general, former Man United director and Glazers critic
I chaired a conference recently to discuss the relationship between business and football, and I think it's straightforward: business is where you make money, and football is where you lose it. Football is the only "business" where you can be a crook, everyone knows you're a crook, and you can carry on working.
The vast majority of clubs lose money, because player budgets are ludicrously high next to income. Change will only come when you can limit a club's expenditure on wages. It's the only way to stop clubs going broke – but while the smaller clubs are happy to do it, those higher up insist on spending their money "the way we see fit", as one of their chairmen said recently. That means they will continue to spend all their income on wages, and they'll be broke.
Lord Mawhinney [executive chairman of the Football League who steps down in March] has met the chairmen of all 72 Football League clubs and tried to persuade them to set a maximum percentage of income on wages. There might be a bit of fiddling but generally it works. In League Two the clubs voted for it and have a 60% limit. League One might go for it, but while some Championship clubs wanted to do it, there wasn't a majority.
I don't think anyone foresaw, when the Premier League was formed in 1992, that it would become a world league – owned by foreigners, managed by foreigners, played by foreigners. The butcher from Burnley might not have enough money nowadays, and the money comes from abroad, but the story of a club hasn't really changed, just the level of wealth of the owners. It's still a case of: "Rich bloke puts money in for a while, gets a lot of abuse, and then doesn't do it any more. Then someone else comes along."
NEIL PATEY
Football finance expert
Industry expert, Ernst & Young
Corporate governance and financial controls within British clubs have not kept pace with the media cash explosion. There's a pressing need for improvement in transparency and governance.
Among the issues that should be looked at is that we need a review of the fit-and-proper-person test. Clubs need to appoint independent nonexecutive directors to their boards with suitable qualifications and experience. And they should adhere to a code of conduct on public reporting of their finances and corporate governance procedures.
Measures should also be considered to create a more level financial playing field, like the implementation of the German and French models whereby broadcasting revenue is split between the top two leagues to reduce the gulf between them. It also reduces the impact of lower clubs gambling on squad investment to gain promotion.
Other policies which would help include the "6+5" rule where teams have to field at least six domestic players in their starting line-up, so reducing the money clubs spend on overseas players and promoting home-grown talent; a requirement for clubs to balance their books, so expenditure cannot exceed revenue; and levels of maximum permissible debt the club can take on compared with shareholders' equity.
ALAN SMITH
Former manager
Managed Palace, ran Fulham's academy and worked at Middlesbrough
The big change in football crept in in the first year of the Premiership (1992-93) and I first started noticing it in 1994. Everyone was trying to get into the Premiership, to keep up with the Joneses, and they started running themselves financially as if they were Manchester United, overspending like crazy.
They're still doing it now, and there's not a club in the Championship that's not in serious financial problems. People just have to be more accountable – we cannot carry on with this back-of-a-fag-packet approach to finance.
Football really, really needs a reality check – the clubs have to live within their means. And there should be one set of rules for all clubs. The Premier League are a law unto themselves, but all clubs, Premier and Football League, should be governed by the same rules.
JAMES PIKE
Solicitor
Senior solicitor at Davies Arnold Cooper
There has been an unfortunate trend in football to use Her Majesty's Revenue & Customs as a de facto overdraft facility, racking up huge debts in unpaid taxes. While this may have historically been acceptable to the Revenue, or at least subject to less frequent challenge, there has been a recent change of approach which is evident in the case of Crystal Palace and a number of other clubs.
This change in attitude is likely to be as a consequence of the Revenue no longer ranking as a preferential creditor when a company enters into any insolvency situation, as well as the fact that in order for clubs to not suffer further sanctions from their respective leagues they will need to satisfy their football debts first.
Clubs need to ensure that there's a change of attitude to the Revenue. This is particularly significant as, in April, there's a new 50% tax rate for employees on incomes in excess of £150,000 per annum.
DAVID GOLD
Chairman
New co-owner of West Ham – former co-owner of Birmingham City
We need to bring in rules that are acceptable to everyone and, although they might not solve the problem at the outset, once they're in place we can improve on them. There needs to be a financial police force monitoring clubs because some are cheating: spending above their means to beat a competitor. That's a bit like a sportsman using drugs.
I'm totally opposed to any form of salary capping because people will find ways around it. It introduces all forms of corruption. I remember when the maximum wage was £20 and there was corruption then. So let's forget that.
But you can introduce controls in relation to debt v turnover. Turnover is a common denominator that all clubs have. So I'd start by saying that you cannot have debt that exceeds a year's turnover and if you do, you will be deducted points.
When it is accepted you could later say that debt cannot exceed 75% of turnover and so on. This is about getting 92 clubs to accept a principle and provided it's not too painful they will. To get everybody to agree you would have to start by asking what the worst case scenario is. And that is Manchester United. They have debt of £700m and they would have to address it. West Ham have £100m of debt at the moment and let's say turnover is £100m, we know that is barely sustainable. They were on the brink of going bust.
GERALD KRASNER
Insolvency expert
Chairman of Leeds in 2004 and administrator at Bournemouth in 2008
There are a range of issues that need addressing. We need a widened, tightened fit-and-proper-person test to really uncover past non-football related insolvencies. And we need measures to force debt reduction.
I would automatically doom any club that goes into administration to relegation at the end of that season, allowing new owners to start again with a clean slate (and stopping clubs overcoming a 10-point deduction by managing to avoid finishing in their division's bottom three).
I would also address the tax system. A lot of football debt involves PAYE and VAT. So I would like to see the Football League get together with the Revenue. If clubs owe the Revenue, the League would automatically pay a percentage of the money they would normally be distributing to that club direct to the Revenue. That would concentrate minds. As things stand now it would have to go to a chairmen's vote and that would be like turkeys voting for Christmas – so it would need government intervention to enforce. That is possible.
I'd also like to see a salary cap whereby wages are linked to club income, thereby preventing clubs spending their entire incomes on wages – but you'd run into huge legal problems trying to enforce this.
We also need to restore trust, and build transparency. Clubs should have two fans forums a year at which supporters can question all club directors. There should be more accurate media reporting, and a wider public debate involving all parties involved in football – Greg Dyke would be the perfect man to chair it.
MARK FRY Administrator
Works for Begbies Traynor, was Southampton's administrator last year
The principal problem in the way football is structured now is the revenue-to-wages ratio. In a difficult climate, we've got falling attendances, very high costs for a family to go and watch football, and corporate cutbacks. One of the big debates for me is whether we look at the American system of wage caps. It needs to be properly debated as I'm sure there are pros and cons, but at the moment a large number of clubs seem to fall into this trap of signing players on very, very expensive wages and then getting themselves in a position where they can't actually move those players in a transfer window.
Reintroducing all-year-round transfers would be a good idea because that would give flexibility to clubs, and be much more fluid. If you've got a financially struggling club, which has star players and an aggressive creditor, it can be crippling if they have to wait for a transfer window to free up main assets.
Prof TOM CANNON
Sports finance expert
Professor of Strategic Development at the University of Liverpool Management School.
Portsmouth have really exposed the failures of the system, and almost regardless of what happens to them now it just shows that the Premier League's fit-and-proper-person test does not work. Even if Portsmouth survive until the end of the season, if they are in anything like the current financial state, it will be very hard for the Football League to accept them or a team facing those kinds of problems.
The football authorities – whether it's the FA or the Premier League – have either got to demonstrate palpably that the FAPPT can work (and it palpably hasn't) or they have to set up a genuinely effective test of ownership, almost certainly in collaboration with the Football League.
That should then be implemented rigorously, by a third party – an objective, external panel, probably involving a lawyer, somebody who knows the game, and another party. As it is, the FAPPT is discredited and the Premier League is becoming a source of ridicule.
JON SMITH Agent
Smith is chief executive of First Artist, whose clients include Harry Redknapp and Andrey Arshavin
The one thing I have found intriguing about being in football – and an immense burden – is that we perform our day jobs in the national spotlight. A private company with the same overdraft as a football club will just have their bank manager and his credit committee to contend with, but we have national emotion too. And let's not overlook emotion because football trades on it – but people must be realistic.
I think legislation that hampers proper bank borrowing would be a knee-jerk overreaction. I don't believe that Platini or anyone else can look at England and say "we want to change your rules". That's not correct. There are clubs around Europe and other markets in the Fifa family of football that conduct their businesses in a far more scattergun approach than our clubs.
There is no doubt looking at the January window that the banks are applying the same pressure to football clubs as they are to every other corner of commerce. Clubs have left planet football and returned to planet earth and they're just not used to it. But I don't agree with some of the more lurid headlines of controls and regulation.
Compiled by Stuart James, Jamie Jackson, Louise Taylor, Owen Gibson
Football
Business
The debt debateObserver Sport asks experts from the worlds of football and finance what can and should be done
The Observer, Sunday 31 January 2010 Article history
GREG DYKE
Chairman, Brentford
Former BBC director-general, former Man United director and Glazers critic
I chaired a conference recently to discuss the relationship between business and football, and I think it's straightforward: business is where you make money, and football is where you lose it. Football is the only "business" where you can be a crook, everyone knows you're a crook, and you can carry on working.
The vast majority of clubs lose money, because player budgets are ludicrously high next to income. Change will only come when you can limit a club's expenditure on wages. It's the only way to stop clubs going broke – but while the smaller clubs are happy to do it, those higher up insist on spending their money "the way we see fit", as one of their chairmen said recently. That means they will continue to spend all their income on wages, and they'll be broke.
Lord Mawhinney [executive chairman of the Football League who steps down in March] has met the chairmen of all 72 Football League clubs and tried to persuade them to set a maximum percentage of income on wages. There might be a bit of fiddling but generally it works. In League Two the clubs voted for it and have a 60% limit. League One might go for it, but while some Championship clubs wanted to do it, there wasn't a majority.
I don't think anyone foresaw, when the Premier League was formed in 1992, that it would become a world league – owned by foreigners, managed by foreigners, played by foreigners. The butcher from Burnley might not have enough money nowadays, and the money comes from abroad, but the story of a club hasn't really changed, just the level of wealth of the owners. It's still a case of: "Rich bloke puts money in for a while, gets a lot of abuse, and then doesn't do it any more. Then someone else comes along."
NEIL PATEY
Football finance expert
Industry expert, Ernst & Young
Corporate governance and financial controls within British clubs have not kept pace with the media cash explosion. There's a pressing need for improvement in transparency and governance.
Among the issues that should be looked at is that we need a review of the fit-and-proper-person test. Clubs need to appoint independent nonexecutive directors to their boards with suitable qualifications and experience. And they should adhere to a code of conduct on public reporting of their finances and corporate governance procedures.
Measures should also be considered to create a more level financial playing field, like the implementation of the German and French models whereby broadcasting revenue is split between the top two leagues to reduce the gulf between them. It also reduces the impact of lower clubs gambling on squad investment to gain promotion.
Other policies which would help include the "6+5" rule where teams have to field at least six domestic players in their starting line-up, so reducing the money clubs spend on overseas players and promoting home-grown talent; a requirement for clubs to balance their books, so expenditure cannot exceed revenue; and levels of maximum permissible debt the club can take on compared with shareholders' equity.
ALAN SMITH
Former manager
Managed Palace, ran Fulham's academy and worked at Middlesbrough
The big change in football crept in in the first year of the Premiership (1992-93) and I first started noticing it in 1994. Everyone was trying to get into the Premiership, to keep up with the Joneses, and they started running themselves financially as if they were Manchester United, overspending like crazy.
They're still doing it now, and there's not a club in the Championship that's not in serious financial problems. People just have to be more accountable – we cannot carry on with this back-of-a-fag-packet approach to finance.
Football really, really needs a reality check – the clubs have to live within their means. And there should be one set of rules for all clubs. The Premier League are a law unto themselves, but all clubs, Premier and Football League, should be governed by the same rules.
JAMES PIKE
Solicitor
Senior solicitor at Davies Arnold Cooper
There has been an unfortunate trend in football to use Her Majesty's Revenue & Customs as a de facto overdraft facility, racking up huge debts in unpaid taxes. While this may have historically been acceptable to the Revenue, or at least subject to less frequent challenge, there has been a recent change of approach which is evident in the case of Crystal Palace and a number of other clubs.
This change in attitude is likely to be as a consequence of the Revenue no longer ranking as a preferential creditor when a company enters into any insolvency situation, as well as the fact that in order for clubs to not suffer further sanctions from their respective leagues they will need to satisfy their football debts first.
Clubs need to ensure that there's a change of attitude to the Revenue. This is particularly significant as, in April, there's a new 50% tax rate for employees on incomes in excess of £150,000 per annum.
DAVID GOLD
Chairman
New co-owner of West Ham – former co-owner of Birmingham City
We need to bring in rules that are acceptable to everyone and, although they might not solve the problem at the outset, once they're in place we can improve on them. There needs to be a financial police force monitoring clubs because some are cheating: spending above their means to beat a competitor. That's a bit like a sportsman using drugs.
I'm totally opposed to any form of salary capping because people will find ways around it. It introduces all forms of corruption. I remember when the maximum wage was £20 and there was corruption then. So let's forget that.
But you can introduce controls in relation to debt v turnover. Turnover is a common denominator that all clubs have. So I'd start by saying that you cannot have debt that exceeds a year's turnover and if you do, you will be deducted points.
When it is accepted you could later say that debt cannot exceed 75% of turnover and so on. This is about getting 92 clubs to accept a principle and provided it's not too painful they will. To get everybody to agree you would have to start by asking what the worst case scenario is. And that is Manchester United. They have debt of £700m and they would have to address it. West Ham have £100m of debt at the moment and let's say turnover is £100m, we know that is barely sustainable. They were on the brink of going bust.
GERALD KRASNER
Insolvency expert
Chairman of Leeds in 2004 and administrator at Bournemouth in 2008
There are a range of issues that need addressing. We need a widened, tightened fit-and-proper-person test to really uncover past non-football related insolvencies. And we need measures to force debt reduction.
I would automatically doom any club that goes into administration to relegation at the end of that season, allowing new owners to start again with a clean slate (and stopping clubs overcoming a 10-point deduction by managing to avoid finishing in their division's bottom three).
I would also address the tax system. A lot of football debt involves PAYE and VAT. So I would like to see the Football League get together with the Revenue. If clubs owe the Revenue, the League would automatically pay a percentage of the money they would normally be distributing to that club direct to the Revenue. That would concentrate minds. As things stand now it would have to go to a chairmen's vote and that would be like turkeys voting for Christmas – so it would need government intervention to enforce. That is possible.
I'd also like to see a salary cap whereby wages are linked to club income, thereby preventing clubs spending their entire incomes on wages – but you'd run into huge legal problems trying to enforce this.
We also need to restore trust, and build transparency. Clubs should have two fans forums a year at which supporters can question all club directors. There should be more accurate media reporting, and a wider public debate involving all parties involved in football – Greg Dyke would be the perfect man to chair it.
MARK FRY Administrator
Works for Begbies Traynor, was Southampton's administrator last year
The principal problem in the way football is structured now is the revenue-to-wages ratio. In a difficult climate, we've got falling attendances, very high costs for a family to go and watch football, and corporate cutbacks. One of the big debates for me is whether we look at the American system of wage caps. It needs to be properly debated as I'm sure there are pros and cons, but at the moment a large number of clubs seem to fall into this trap of signing players on very, very expensive wages and then getting themselves in a position where they can't actually move those players in a transfer window.
Reintroducing all-year-round transfers would be a good idea because that would give flexibility to clubs, and be much more fluid. If you've got a financially struggling club, which has star players and an aggressive creditor, it can be crippling if they have to wait for a transfer window to free up main assets.
Prof TOM CANNON
Sports finance expert
Professor of Strategic Development at the University of Liverpool Management School.
Portsmouth have really exposed the failures of the system, and almost regardless of what happens to them now it just shows that the Premier League's fit-and-proper-person test does not work. Even if Portsmouth survive until the end of the season, if they are in anything like the current financial state, it will be very hard for the Football League to accept them or a team facing those kinds of problems.
The football authorities – whether it's the FA or the Premier League – have either got to demonstrate palpably that the FAPPT can work (and it palpably hasn't) or they have to set up a genuinely effective test of ownership, almost certainly in collaboration with the Football League.
That should then be implemented rigorously, by a third party – an objective, external panel, probably involving a lawyer, somebody who knows the game, and another party. As it is, the FAPPT is discredited and the Premier League is becoming a source of ridicule.
JON SMITH Agent
Smith is chief executive of First Artist, whose clients include Harry Redknapp and Andrey Arshavin
The one thing I have found intriguing about being in football – and an immense burden – is that we perform our day jobs in the national spotlight. A private company with the same overdraft as a football club will just have their bank manager and his credit committee to contend with, but we have national emotion too. And let's not overlook emotion because football trades on it – but people must be realistic.
I think legislation that hampers proper bank borrowing would be a knee-jerk overreaction. I don't believe that Platini or anyone else can look at England and say "we want to change your rules". That's not correct. There are clubs around Europe and other markets in the Fifa family of football that conduct their businesses in a far more scattergun approach than our clubs.
There is no doubt looking at the January window that the banks are applying the same pressure to football clubs as they are to every other corner of commerce. Clubs have left planet football and returned to planet earth and they're just not used to it. But I don't agree with some of the more lurid headlines of controls and regulation.
Compiled by Stuart James, Jamie Jackson, Louise Taylor, Owen Gibson
