Financial Regulation in Professional Sports

Ownership Structure, Governance, and Regulation in Sports

• A shift towards "concentrated ownership systems" has occurred since the mid-1980s. Individual and large-block shareholders (holding at least 5% equity) now have more power over managerial decisions in sports teams.

• Football (and other sports) demonstrate high-stakes decision-making alongside significant potential rewards.

• Four distinct ownership models have emerged in football over the last 30 years:

• Stock Market Model:

• Tottenham Hotspur was the first football club to float on the stock market in 1983.

• Millwall followed in 1989, and Manchester United in 1991, raising significant capital.

• The mid-1990s saw notable growth in share values for Tottenham Hotspur and Manchester United, with 15 further flotations occurring between 1995 and 1997.

• However, since 2000, 14 clubs have de-listed, often due to poor returns on investment and difficulties in generating profits, resulting in less investor appeal. Currently, listed club stock market values are considered a relatively small investment change compared to overall revenues.

• Private Investor Model:

• This model is similar to foreign ownership; however, the investor is typically a domestic individual with an emotional attachment to the club.

• It accounts for roughly 30% of EPL clubs

• Notable examples include Jack Walker at Blackburn Rovers and Dave Whelan at Wigan Athletic in English football.

• Foreign Ownership Model:

• Growing commercialization and increased player wages have led many owners to sell majority stakes to wealthy foreign investors, leveraging the global appeal and high value of the recent broadcasting rights.

• Roman Abramovich's purchase of Chelsea in 2003 marked a significant foreign takeover in English football, leading to back-to-back EPL titles after large investments in the squad.

• Subsequent foreign acquisitions of EPL clubs have significantly altered the landscape. Examples include the Glazers, Gillett & Hicks, and the current ownership of Manchester City (Abu Dhabi), and many other clubs with significant foreign investment.

• Recent regulations like Financial Fair Play (FFP)/Financial Sustainability have curbed club spending.

• Supporter Trusts/Membership Model:

• This model involves a large group of supporters/members who participate in the democratically managing the club through executive bodies (one member, one vote).

• Less common in England (where clubs are mainly limited companies) but more frequent in other European countries.

• Germany, e.g., operates under the "50+1 rule," where associations (Verein, in German) hold 50% plus one voting right of any football club company, limiting financiers' power and making clubs less prone to financial takeovers.

• RB Leipzig is a unique case; although owned by Red Bull, it has been able to circumvent regulations to maintain this model.

Ownership Models Across Europe

• Spain: SAD (joint-stock sporting company with limited liability) structure is common.
• Italy: Often seen under individual ownership by wealthy families (e.g., Juventus, Inter, Milan).
• France: Foreign investment was restricted until the 1980s.

Ownership Motives/Objectives

• Owners' motivations often extend beyond football, encompassing broader business interests, global strategies, political implications, and so on.
• Examples such as Fosun at Wolverhampton Wanderers or the Saudi Arabian Public Investment Fund's takeover of Newcastle United indicate varying investment motivations.

Financial Regulations

• Financial regulation in sports is often intended to maintain competitive balance and prevent financial instability, although unintended consequences like protecting dominant teams and preventing smaller clubs from challenging the status quo, can arise.

• Budget/Salary Caps: These limit spending on player wages or specific categories of expenditures to maintain a financially sustainable environment, which helps create a balance across competing teams.

• Cap types can be global (covering all expenditures) or partial (for a specific category) or absolute or relative (different limits for different teams). Regulations can also affect income generation.

• Common Revenue Allocation: This can include methods like equal allocation (each team receives the same share), performance-based allocation (teams with better performance receive larger shares), reverse performance based allocation (better teams receive smaller shares), and value-based allocation (based on market value).

• Financial Fair Play (FFP): This European football regulation aims to create a break-even principle for clubs, and often generates significant discussion on its fairness. FFP regulates spending to limit losses and maintain financial stability.

Impact of FFP on Competitive Balance

• FFP, intended to create competitive balance, has also led to concern about possible deterioration of sporting balance and potential financial disadvantages for smaller clubs to compete against larger, better-funded ones. This is particularly evident in the German Bundesliga and Italian Serie A.

UEFA’s Financial Sustainability

• UEFA superseded FFP with Financial Sustainability, which implemented a 70% wage, turnover limit for clubs. The name change was intended to align with fairer competition; however, the regulation has faced critique.

Possible Solutions to the Problem

• Re-evaluating broadcasting deals, transfer rules, and ticket pricing can help promote a more balanced competitive environment.
• Introducing a handicap or removing parachute payments could redistribute spending to help provide a fairer playing field.

Managers in Professional Team Sports

• Manager costs are substantially high and place enormous and often disproportionate pressure on managers in highly competitive leagues.
• Short manager tenures in leagues are often tied to the intense pressure from a competitive environment and need to achieve consistently high performance, which can translate into management instability.
• The three-tiered theory of Scapegoating, Vicious-circle and Tenure & life-cycle can explain manager's decisions on an organizational level.

Agents in Professional Team Sports

• Agents play a key role in player negotiations and representing their interests, often taking a huge commission from club earnings.
• Agent compensation is often criticised for being disproportionate, and there are ongoing discussions and debates for increased transparency, particularly around costs and restrictions relating to their fees.
• Recent regulations are intended to moderate the increase in agent fees, which often greatly affect club spending and the competitive balance of teams.