Corporate governance of professional

football clubs: for profit or for glory?

This Case describes the corporate governance issues that have arisen in European
football clubs. The ethical issues associated with the shifting ownership and
investment landscape of modern football are discussed and alternative forms of
ownership of football clubs are identified. The Case provides an opportunity to
understand the tensions between ownership, shareholding, and stakeholding in a
unique industry context.

When Manchester City were crowned champions of the English Premier League for the
third time, in 2018, their Spanish manager, Pep Guardiola, remarked, ‘the league is
everything … the players deserve all my respect’. But City’s talented and respected group
of players had only been made possible by the huge influx of cash from owner, Sheikh
Mansour bin Zayed al Nahyan, and his Abu Dhabi Investment Group, which had invested
more than €1 billion in the club since taking over in 2008. City’s new-found riches
transformed the club from mid-table obscurity to champions, turning the tables on their
long-time overachieving neighbours, Manchester United. Unsurprisingly, United’s fans

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voiced their disapproval; but disquiet with City’s turnaround went far beyond their
Manchester rivals. As  Forbes  magazine remarked, ‘Manchester City will not be popular
champions with many, because ultimately they bought the title.’ In fact, only days after
claiming the title, City were landed with a record €60 million fine from UEFA (the European
football governing body) for breaching financial fair play regulations, having racked up
hundreds of millions of pounds in losses over the past few years in their search for glory.
With wealthy backers seemingly intent on spending their way to victory, whatever the costs,
Manchester City’s story crystallized the transformation in European football from a
community sport to a multi-billion-dollar international industry with serious corporate
governance problems.

The changing face of the football 'industry'

The commercialization of football has been a significant trend since the 1980s—and one
that has transformed almost beyond recognition the way the sport is organized, controlled,
marketed, and  financed. Long gone are the days when football players in Europe’s top
leagues would earn wages not much different from the supporters in the stands. Today, the
elite clubs pay their stars millions of dollars a year in salary, which is then further increased
with image rights and endorsements. In 2017, football’s top earner, Cristiano Ronaldo,
raked in some $93 million in total earnings, placing him at number five in Forbes’ annual list
of the world’s most powerful celebrities.

One of the key changes, of course, has come from the growth of commercial television in
the game. This has led not only to vast increases in income for the clubs themselves, but
also to a larger, global audience for the teams and their players. It is now commonplace to
find fans of Europe’s top clubs, such as Manchester United, Real Madrid, or AC Milan, in
Africa, Asia, and Latin America. Parallel to these huge TV revenues, opportunities for
generating revenue from merchandising club paraphernalia and advertising contracts have
increasingly helped to fill the clubs’ coffers. In 2017, Ronaldo’s former club Manchester
United was named as the world’s richest club with a revenue of $765 million, followed by
Barcelona ($688 million), Real Madrid ($688 million), and Bayern Munich ($657 million).

Another major change has been the trend towards new ownership and investment models
for football clubs, particularly among the English Premiership elite. Starting in the 1990s,
many UK clubs began listing their stock in order to source new investment, such that by the
mid-1990s, 27 clubs had listed on the stock exchange. However, football clubs quickly fell
out of favour with shareholders because of their meagre return on investment, especially
with escalating player salaries eating into profitability. In fact, since 2006/7, wage costs
have consumed 83% of Premier League clubs’ revenue growth. In 2016, therefore, only
three British teams remained publicly listed.

In the place of public ownership models, many clubs have been taken back into private
ownership, typically by wealthy individuals and private investment companies. For instance,
Manchester United is majority owned by the Glazer family via the Red Football parent
company, having delisted the club from the stock exchange in 2005. Similarly, Chelsea is
owned by parent company Fordstam Limited, which is controlled by Roman Abramovich,

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the Russian oligarch. Private ownership has often been accompanied by huge
accumulation of debt to finance the initial purchase of clubs and sustain growth. In 2016,
Manchester United owed some £261 million and Chelsea recorded a whopping £1.14 billion
in debt. The total net debt held by English Premier League clubs was reported as being
£2.2 billion. While still a huge sum, this was an improvement on recent years, given a
reduction in ‘soft loans’ (borrowing money on interest-free terms from club owners).

A similar pattern, albeit with some variations, has taken hold across many of Europe’s
biggest clubs.  Table 6.3  describes the ownership structure of some of Europe’s top clubs
by revenue, most of which exhibit very narrowly held ownership. The big difference comes
in Spain, where the country’s two footballing giants, FC Barcelona and Real Madrid, are
both owned by supporters’ associations.

Governance challenges

With these developments towards commercialization and private capital investment,

significant challenges confront the football ‘industry’. With roots in what was a simple local
institution for fans and communities, many football clubs have struggled to enter the world
of professional business, not only in the UK, but all over Europe.

Spectacular bankruptcies, such as the one at Rangers in Scotland in 2012, which saw the
club liquidated and eventually admitted into the fourth tier of the Scottish league as a new
company, are one obvious manifestation of these problems. By 2012, there had in fact been
92 instances of insolvency at clubs competing in the top five divisions in England since the
formation of the Premier League in 1992. In Italy, 103 professional clubs from the four top
divisions collapsed between 2002 and 2012, with even the likes of AC Milan struggling
under years of accumulated debt under the ownership of Italy’s former Prime Minister, Silvio
Berlusconi. More than 20 Spanish clubs went into bankruptcy protection in the 2010s
alone.

Across Europe more generally, many football clubs have struggled to generate profitability
despite increasing revenues. The German Bundesliga and the English Premier League have
been the only ‘big five’ leagues in Europe (the others being Italy, Spain, and France) to even
generate an operating profit, before financing and player trading is taken into account; once
they are included, the picture has looked even bleaker. For instance, the net losses of the
20 Premier League clubs run to several hundred million annually (approximately £111
million in 2017). The Bundesliga, however, has succeeded in remaining the most profitable
in Europe, mainly because of regulations from the German football authorities that exercise
greater control over the ownership and financial models of clubs. First, clubs are limited in
terms of how much they can spend on wages relative to revenues; and second, external
ownership of German clubs is restricted, which prevents wealthy foreign owners from
pushing up costs and debt loading by owning more than 49% of voting rights in any
particular club.

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Ownership structure of top European football clubs

Forbe Club 2017 2017 Country Ownership

s Revenue Value (owner)
2017 (million (million
Ranki $) $)
ng
1 Manchest 765 3,689 US (Glazer Public Corporation listed on
er United family);
 the New York Stock
UK (Red Exchange, majority
Football ownership by Glazer family
company) via Red Football parent
company.

2 FC 688 3,635 Spain Registered Association

Barcelona owned by supporters who
elect the club’s president.
The club president cannot
invest money and can only
spend what the club earns.
It is not possible to
purchase shares in the
club, only membership.

3 Real 688 3.58 Spain Registered Association as

Madrid per FC Barcelona.

4 Bayern 657 2,713 Germany Joint stock company run by

Munich FC Bayern München AG
(spin-off company). Stock
is privately owned; 75% by
the club and the remaining
25% by Adidas, Audi, and
Allianz.

5 Manchest 583 2,083 United Arab Fully owned by Sheikh

er City Emirates Mansour (Mansour bin
(Sheikh Zayed Al Nahyan), deputy
Mansour) prime minister of the United
Arab Emirates, minister of
presidential affairs, and
member of the ruling family
of Abu Dhabi, since 2008.

Beyond Germany, UEFA (the European governing body) has also sought to bolster the
financial management of European football clubs. UEFA’s Financial Fair Play regulations,
which were first applied in the 2011/12 season, aim to encourage clubs to build for long-
term success using sound financial management. They were brought in to stop what UEFA
general secretary Gianni Infantino referred to as ‘greed, reckless spending, and financial
insanity’ within European football. The main  requirements of the regulations are that any
club qualifying for a UEFA competition must prove that they do not have overdue payables
towards other clubs, players, and tax authorities; and break even (starting in the 2013/14
season).

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Clubs not meeting these requirements face a range of sanctions including fines, points
deductions, and even disqualification. Manchester City’s punishment in 2014, for example,
not only landed them a hefty fine, but also restricted the number of players they could
register for the following season’s Champions League—thereby inflicting a significant blow
to their hopes for success in the competition.

Since UEFA’s regulations only apply to clubs entering European competitions, they have
also prompted similar moves to regulate domestically. The Football League, for example,
which represents the lower tiers in England, announced the agreement of a Financial Fair
Play framework including a break-even rule and a protocol limiting total spending on player
wages to a proportion of club turnover.

The role of fans

Another major governance challenge facing European football concerns the role of fans in
the running of football clubs. After all, at the end of the day, clubs depend on their fans for
their livelihood, as either spectators, TV audiences, or consumers of merchandise. Also,
football fans are unlike typical consumers in that they rarely if ever switch allegiance and so
are ‘brand loyal’ often for their entire lives, regardless of the varying fortunes of their team.
This means that they might be seen as one of the most important stakeholders in the club
and could be expected to have a significant say in the running of its affairs.

In recent years, several initiatives have been taken to address fans’ interests more directly,
as two examples from the UK illustrate. A government-funded initiative, Supporters Direct,
was initiated in 2000 to encourage the creation of supporters’ trusts, which organize
collective shareholding for fans in their clubs. The aim of these trusts is ‘to bring about
responsible, democratic representation at spectator sports clubs, and so help promote the
highest standards of governance, accountability and embed those clubs deeper into their
communities’. The trusts have grown in popularity among supporters, with many clubs now
having one, but in only a handful of small teams have the trusts directly assumed ownership
of the clubs.

Another initiative by the clubs themselves has been the Football in the Community scheme.
This involves clubs participating in various social projects, generally targeted at embedding
the club in the local community and addressing social exclusion, unemployment, or
antisocial behaviour in the immediate vicinity. Corporate social responsibility programmes
have become more widespread in the world of football, especially among large clubs,
where teams such as Arsenal and Chelsea now have initiatives, reports, and websites
dedicated to CSR. Even smaller UK clubs, such as Charlton and Brentford, have initiated a
host of award-winning community schemes, often in partnership with fans, the police, and
local councils.

While these philanthropic initiatives appear laudable, the tension around the core purpose
of a football club remains: is it just another business that can ‘give back’ to the community
some of its commercial success, or is the actual primary purpose of clubs to provide value
to fans? Perhaps the most striking alternative is illustrated by clubs such as Real Madrid

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and FC Barcelona, which are member-owned, democratic, not-for-profit organizations.
Here, the club leadership is accountable to the people who watch and pay, and the primary
rationale for the club is to play football. Members at Barcelona, for example, can vote on
the election of the club’s president and the governing board, and have a right to participate
in key decisions.

Barcelona and Real Madrid are both hugely successful teams that have dominated the
Spanish league for decades, as well as recording a string of European successes. It is
hardly surprising, therefore, that they have attracted an avid membership, as well as
recording some of Europe’s highest annual revenues, demonstrating that it is not necessary
to have either a wealthy oil sheikh or stock market financing to be financially viable at the
top of the game. Nonetheless, the domination of Real and Barcelona in Spain has often
come at the expense of Spain’s other teams, who have rarely been able to exercise the kind
of economic muscle necessary to challenge for the Spanish title and compete with the
European elite.

Back in the UK, governance issues have remained high on the agenda in the wake of
financial problems among various clubs, a failure to nurture domestic talent (leading to poor
showings of the national team in international tournaments), and an ongoing unease about
the source of funds flowing into the game. A Parliamentary Football Group proposed a
number of recommendations to enhance governance in the ‘industry’, including an
enhanced ‘Fit-and Proper-Persons test’, which was adopted by the Premier League in 2009
in order to exclude unscrupulous club owners and directors. While the test offers some
useful protection to UK clubs, it is not without its critics. In 2017 there were calls for reform
by the UK campaigning organization Supporters Direct following rent strikes, controversial
stadium moves, and the subsequent demise of Coventry City under the ownership of hedge
fund, SISU Capital, among other issues. Additionally, in the case of Manchester City, Sheikh
Mansour passed the test, but not without criticism from NGOs such as Human Rights
Watch, which denounced Abu Dhabi (the country that he, as deputy prime minister, and his
family run) as a repressive ‘black hole’ for human rights.