Ownership Structure, Governance, and Regulation in Sports PDF

OWNERSHIP STRUCTURE, GOVERNANCE Prof. Tomislav Globan AND REGULATION IN SPORTS Sports Economics OWNERSHIP STRUCTURE Since mid-1980s there has been a shift towards teams becoming structured by a “concentrated ownership system”. → stronger monitoring power from individual investors and l...

OWNERSHIP STRUCTURE, GOVERNANCE Prof. Tomislav Globan AND REGULATION IN SPORTS Sports Economics OWNERSHIP STRUCTURE Since mid-1980s there has been a shift towards teams becoming structured by a “concentrated ownership system”. → stronger monitoring power from individual investors and large-block shareholders (holding at least 5% of equity ownership within the firm) over managerial decisions. In football (and other sports) – cut-throat decision-making, with high stakes but also potentially high rewards. In football there have been 4 distinct models of ownership during the last 30 years:  Stock market model  Private investor (individual)  Foreign ownership  Supporter trust/Membership model STOCK MARKET MODEL Tottenham Hotspur the first football club to float on the stock market in 1983 (raised £3.3m). Millwall raised £4.8m through floatation in 1989, and Manchester United £6.7m in 1991. Boom period in mid-1990s following the formation of the EPL in 1992. Increase in value of shares in Tottenham Hotspur and Manchester United between 1994 and 1996 (300% and 400% respectively) → favorable circumstances for 15 further flotations between September 1995 and October 1997. STOCK MARKET MODEL EPL clubs raised approximately £175m in total through stock market flotations. Judging by revenues in 2024, this is now considered to be a relatively small change! → the listing of football clubs seems to be increasingly less attractive in modern times. Since 2000 in the UK, 14 football clubs have de-listed, many experiencing a significant drop in share price due to poor returns on investment because of inherent difficulties for clubs to generate profits. Financial institutions simply do not see football clubs as viable investment opportunities. PRIVATE INVESTOR MODEL Almost an exact replica of the foreign ownership model (discussed below), albeit the investment in this case is provided by a home-based investor who often has an emotional attachment to a particular club.  Examples in English football: Jack Walker at Blackburn Rovers, Dave Whelan at Wigan Athletic, Eddie Davies at Bolton Wanderers, and Ben Kenright at Everton  Examples in Croatia: Damir Mišković at Rijeka. Only 30% of EPL clubs are under this model of ownership → most UK owners/investors do not have the financial capacity to compete with their foreign counterparts. Foreign investors now dominate the ownership of professional football clubs throughout Europe. FOREIGN OWNERSHIP MODEL Commercialisation football → rise in player wages → costs required to operate a club increased substantially. Many owners have been unable to provide the required levels of investment to compete and have sold their majority stake in the club to wealthy foreign investors. Global appeal of the EPL + high value of the recent broadcasting rights (£5.14bn for UK rights between 2022 and 2025) + opportunities for global expansion to maximise brand potential = owning an EPL club increasingly attractive proposition to foreign investors. Roman Abramovich purchase of Chelsea in 2003 → first big foreign takeover in English football → back-to-back EPL titles following significant investment in the squad. FOREIGN OWNERSHIP MODEL Opened the door for many more acquisitions of EPL clubs by foreign owners:  Glazers at Manchester United (USA)  George Gillett and Tom Hicks at Liverpool (USA)  Randy Lerner at Aston Villa (USA)  Sheikh Mansour at Manchester City (Abu Dhabi)  Venkys Group at Blackburn Rovers (India)  influx of Chinese investment across Europe: West Bromwich Albion, Wolverhampton Wanderers, Atletico Madrid, Inter Milan… Recent regulations such as Financial Fair Play (FFP)/Financial Sustainability curbed the spending of club owners somewhat, as they can no longer just fund transfers themselves in a benefactor style. SUPPORTER TRUSTS/MEMBERSHIP MODEL Involve a large group of supporters/members who own and/or operate the club by having a democratic say in who manages the club through executive bodies (one member, one vote). Rare in England where football clubs are classified as limited companies, but more frequent in rest of Europe. Germany: clubs operate under a 50+1 rule.  associations (Verein in German) hold 50% plus one voting right of any football club company, which then limits the power of clubs’ financiers  German clubs have been averse to financial takeovers  clubs are unlikely to accumulate debts over a long period (especially since its indebtedness capacity is low)  it can hurt the onfield performance of clubs as they cannot catch-up to the bigger clubs without external funding. SUPPORTER TRUSTS/MEMBERSHIP MODEL RB Leipzig has circumvented some of this regulation:  founded in 2009 when Red Bull (the energy drinks company that owns the club) acquired the license of a 5th tier club.  They have just 17 members with voting powers, mostly employees of Red Bull. Membership expensive (€1000 per year) and can be rejected by existing members.  Leipzig secured 4 promotions in 7 years to join Germany’s top tier Bundesliga in 2016/2017  Since then finished 2nd and qualified for the UEFA Champions League (semi-final in 2020).  Latest figures available show that Leipzig owe Red Bull €83m, and there have been suggestions as to whether or not the club is acting within the spirit and ethos of the league in regard to ownership structure.  German clubs have decided to retain the 50+1 rule after there were discussions about relaxing the regulations to spur outside investment  The issue of Bayern Munich dominating the league for a decade and whether or not that is good for the wider competition and the attractiveness of the league. OWNERSHIP MODELS ACROSS EUROPE Spain: most professional clubs constituted as Sociedades Anonimas Deportiva (SAD) = joint- stock sporting company with limited liability, introduced in 1990 following a financial crisis of clubs and lack of regulation.  Barcelona, Real Madrid, Athletic Bilbao, and Osasuna were allowed to retain the membership model of ownership as they had recorded a positive balance in their accounts during the 1985–1986 crisis. Italy: clubs historically under the control of wealthy individual owners, especially more successful clubs such as Juventus (Agnelli family), Inter Milan (Moratti family), and AC Milan (Silvio Berlusconi).  mirrors the environment of the Italian corporate business industry  fits with the notion of “win” maximisation and the prestige of owning a big football club with little regard for financial performance.  ITA clubs often face financial crisis, and in a world of FFP there may be a shift change in Italian club ownership (e.g. investment into Inter Milan by Chinese company Suning; American ownership group led by RedBird Capital investments own AC Milan). OWNERSHIP MODELS ACROSS EUROPE France: foreign investment in clubs was prohibited until the 1980s when a law was passed to permit football clubs to operate as limited companies (much as they do in England).  French clubs were also allowed to float on the stock market in 2006, but only Lyon and Olympique Marseille have ever floated on the stock market  most French clubs remain under the ownership of a single individual with shares not commonly being available. OWNERSHIP MOTIVES/OBJECTIVES The takeover of Chelsea by Roman Abramovich → ownership being a “trophy asset”  return on investment was not the point, Abramovich personally bankrolled to Chelsea to success on the pitch from mid- 2000s until his abrupt selling of the club in 2022 owing to his ties to Russia and their invasion of Ukraine. Glazer family purchase of Manchester United in 2005 → synonymous with the American sport strategy of profit maximisation.  return on investment purely in mind  borrowed the money to buy the club, have been paying themselves very high dividends from the club during their 18-year reign to date The takeover of Manchester City by Sheikh Mansour and the Abu Dhabi Royal Group in 2008  began with motives similar to Abramovich at Chelsea → „spend big, win big”  evolved beyond the trophy asset into something bigger, multi-club ownership  Manchester City Football Club are now the flagship operation of the City Football Group (CFG) which also owns clubs in America, Australia, Uruguay, France, Spain, Netherlands, and Japan.  Other powerful clubs have begun to do similar things but also in other sports. The Fenway Sports Group (FSG) who own Liverpool are a good example here as they also own the Boston Red Sox (MLB) and the Pittsburgh Penguins (NHL). OWNERSHIP MOTIVES/OBJECTIVES The motives of the owners often transcend football and the sport sometimes becomes a side show:  Fosun investment at Wolverhampton Wanderers FC connected to a company with links to the High- Speed Rail project in England that is due to run through a central hub in the midlands very close to where the club is situated.  previous Chinese investment at Southampton FC has been cited as being more about Southampton being a port city and the potential to expand sea transport links.  Newcastle United takeover by the Saudi Arabian Public Investment Fund (PIF) in late 2021 → sovereign wealth funds use sport teams and events to leverage political and geographical influence.  Similar story with Abu Dhabi Group at Manchester City and the Qatar state group at Paris Saint- Germain.  Net worth of the PIF is £320bn → >10x more than the worth of Sheikh Mansour at Manchester City (£23bn) who is 2nd on the list in terms of English club owners.  Rumors of a multi-club model of ownership that includes Italian and French giants Inter Milan and Marseille. OWNERSHIP MOTIVES/OBJECTIVES These emergent models are not without their risk, but they do present growth opportunities for both clubs and investors. The economic principles of profit vs. utility maximisation will remain a strategic challenge for club owners  global sport industry reached an estimated value of between $600bn and $700bn in pre-pandemic 2019 and predictions are for a robust growth rate of 6–7% per year. Sport teams remain an attractive market that offer:  revenue generation  opportunity to drive structural change  opportunity to maximise return on investment if that is the motive. One area we have already seen movement in this space is private equity firms becoming involved in sport leagues and teams.  may be the next big play in professional sport and could see the ownership dynamic shift again in the future. FINANCIAL REGULATION “Virtually every regulative financial intervention distorts sporting competition to some extent and creates beneficiaries and losers” (Budzinski, 2018). There is often a genuine reason for financial regulation and most regulation begins with good intentions (e.g. limiting financial imbalances, preventing distortive insolvencies of teams). However, financial regulation may also cause unintended consequences such as:  Protecting hitherto successful teams from new challengers  Cementing the competitive order  Creating foreclosure and entry barriers  Serving the vested interests of powerful parties FINANCIAL REGULATION There is a valid argument that regulation may be anticompetitive. Figure 10.1 outlines the most common approaches to financial regulation in professional team sports. The first two, budget/salary caps and common revenue allocation, are found in most American team sports and some European sports. FFP is a regulation found exclusively in European football. BUDGET/SALARY CAPS Types of budget/salary caps:  global budget cap covers all types of expenditures of a team  partial budget cap only limits spending of a specific class of expenditures (e.g., salary caps for players, transfer payment caps, or an engine development freeze like in motor racing where the expenditures on improving the engine are capped).  absolute or symmetric cap limits all budgets to the same nominal amount  relative or asymmetric cap prescribes different maximum budget volumes to different teams.  static budget cap defines the maximum spending  dynamic cap limits the growth rate of the budget Budget caps can also regulate income instead of expenditures:  universal cap limits a total income or revenue measure of a team  discriminatory cap only limits income or revenue from defined sources COMMON REVENUE ALLOCATION Types of common revenue allocation:  equal allocation is where each team receives the same share of the common revenues  performance-based allocation is where teams that perform better (higher win or points score, better position in the championship ranking, etc.) receive a higher share of the common revenues than those with worse performances.  reverse-performance-based allocation is where teams performing better receive a smaller share of the common revenue than those who perform worse  brand-value-based allocation is where teams with a larger fanbase (however this is measured) and/or a higher marketing potential (past success, traditions, etc.) receive higher shares of the common revenues. EXAMPLES OF SALARY CAPS – MAJOR LEAGUE BASEBALL (MLB) No classic salary cap, but there is a Luxury Tax element – also referred to as a Competitive Balance Tax (CBT). Each year, clubs that exceed a pre-determined payroll threshold are taxed on each dollar they exceed that threshold. A club exceeding the threshold for the first time must pay a 20% tax on all overages. The tax rate increases (dramatically) based on the number of consecutive years that a club has exceeded the payroll threshold. There is also a 12% surtax for clubs that exceed the threshold by $20 to $40 million, which increases to 42.5% over $40 million and 45% if the club is over by more than $40 million for two or more consecutive seasons. Clubs can also have their draft position moved back for being over the threshold by more than $40 million (up to 10 places). PROBLEMS WITH SALARY CAPS IN EUROPE In American sports, there is no substitute league for players to move to. In European sports players can move to other leagues more freely. This presents challenges for sports looking to implement a salary cap as they risk losing their best players to other leagues in other countries that do not have a cap.  in rugby union, a lot of players that played for English teams have looked to move to France where there is no salary cap.  this in turn puts further pressure on English clubs who then need to keep up with and compete with French clubs because they play each other in pan-European competitions.  there is an inherent danger that the salary cap becomes a target not a limit, and clubs overstretch themselves financially to try to max out on the cap.  rugby union and rugby league → a few players soaking up much of the cap as there is no regulation on direct individual pay → tensions within the squad which may then impact sporting performance FINANCIAL FAIR-PLAY IN EUROPEAN FOOTBALL Financial crises throughout European football in the mid-2000s saw many clubs become financially unstable with significant levels of debt. There were claims of “financial doping” by some clubs, and this led to wider calls for more regulations. As a result, UEFA launched its FFP regulations in 2011, which principally focused on a break- even principle of not spending more than you earn. There were good intentions with FFP, but it did receive early criticism in academic circles which centred on:  legality of the FFP  impact of FFP on the quality of all teams  impact that FFP on player wages  FFP preventing the industry (and clubs) from benefitting from substantial injections of external financing. FINANCIAL FAIR-PLAY IN EUROPEAN FOOTBALL Constraining clubs to spend within their means is fine in principle (from a business perspective)  but this will be dependent on the clubs’ own market potential → a club with a bigger market potential will outperform a club with smaller market potential, thus making it difficult for smaller clubs to compete  further cementing the existing hierarchy of European club football, strengthening the power of the wealthiest clubs by constraining the smaller clubs FINANCIAL FAIR-PLAY IN EUROPEAN FOOTBALL On the positive side, it is improving financial sustainability in European football.  In 2017, for the first time, the 700 top-division clubs in Europe together generated a “bottom-line” profit figure  These bottom-line profits of €615million – profits after transfer, non-operating, financing, tax, and divestment – reflect six consecutive years of improvement since the introduction of FFP.  There is also a clear distinction between pre-FFP and post-FFP in the financial figures. In this respect, FFP has been a positive introduction at governance level.  However, question marks still remain over the distribution of broadcasting money, acceptable losses, “soft” loans from owners, and sporting integrity (e.g. competitive balance). In 2019, the president of UEFA, Aleksander Čeferin, stated that “the biggest challenge [to develop football in Europe] over the next few years will be competitive balance”. IMPACT OF FFP ON COMPETITIVE BALANCE FFP an aggravating factor in the overall decline in competitive balance across leagues.  especially the case in the German Bundesliga and Italian Serie A  part of this decline in competitive balance due to the sizeable financial gap that has developed between clubs during the last 30 years – caused in part by prize money from TV deals and UEFA Champions League and Europa League prize money which under an FFP framework keeps the top clubs at the top.  FFP tends to polarise/fix the sporting rankings by favouring (deliberately or unintendedly) “established” clubs.  FFP regulations might be exacerbating the financial imbalance between clubs and leagues themselves. UEFA’S „FINANCIAL SUSTAINABILITY” In 2022 UEFA replaced FFP with Financial Sustainability – a wages/turnover limit of 70%. Changed the name because „fair play” implies an ‘even playing ground’ for all teams – not the case! There is a valid argument that FS will not change too much, certainly in the short- term, as clubs that earn more would still be able to spend more. UEFA’S „FINANCIAL SUSTAINABILITY” POSSIBLE SOLUTIONS TO THE PROBLEM  Revisit respective broadcasting deals and make them more equal (all leagues).  Alter regulations on transfer fees, player wages, and/or the number and value of commercial deals that an individual club can sign (all leagues).  Cap ticket prices at a certain level or introduce a flat fee across the board (may still benefit bigger clubs with bigger stadiums) (all leagues).  Re-distribution of parachute payments to bridge financial gap between leagues and clubs within them (EPL and EFL).  Introduction of a handicap system whereby relegated clubs select either to have parachute payments and begin on minus five points or to not have the parachute payments and begin on zero points like all other clubs in the league (EPL and EFL).  Abolition of parachute payment system entirely (EPL and EFL). POSSIBLE SOLUTIONS TO THE PROBLEM Financial regulation in any sport needs to be looked at more holistically rather than just focusing on one metric in isolation. In football, radical overhauls of the current regulations (or lack of) could fuel further debate around a breakaway European Super League. Perhaps lower competitive balance is not a practical problem → leagues and much of their member clubs are posting their highest revenue figures of all time, driven primarily by the increases in broadcasting deals in recent years.  While this remains the case, it can be proposed that is no real reason to change or challenge the status quo. MANAGERS IN PROFESSIONAL TEAM SPORTS Costs of managers and agents are very significant in football, more than in any other sport because of the money involved.  When Manchester United sacked Jose Mourinho in 2018, it cost them £19.6m in compensation to do so.  Mourinho was also paid £18m in compensation when he was sacked by Chelsea a few years earlier.  Roman Abramovich payed millions on sacking managers, accumulating around £90m in compensation paid over a 15-year period. Average tenure of a football manager in English football is ~1 year long (477 days).  the role of the manager is one of chronic insecurity → due to the intense pressure placed on modern day football managers to achieve consistently high club performance MANAGERS IN PROFESSIONAL TEAM SPORTS Most organisations change leadership at some point, but in sport changes are often made at unconventional times and within-season.  This places a unique pressure on sport team managers that are perhaps not found in other industries. 3 contrasting theories that attempt to explain the association between manager change and organisational performance:  Scapegoating theory  managers are replaced as a ritual to signal that the board has taken action to address poor performance;  Vicious-circle theory  manager change continually damages performance because replacement events disrupt already established processes and bring with it instabilities and tensions that can further deteriorate performance;  Tenure and life-cycle theory  new manager develops new processes, a new team, and a fresh strategy that will improve long-term performance through continual learning and identifying where adaptations are necessary. MANAGERS IN PROFESSIONAL TEAM SPORTS Empirical evidence in European football tend to align more with scapegoating and vicious- circle theory  change is needed now and done quickly, which, in turn, creates more pressure. In American team sports, the model is much more like the life-cycle theory → managers are given more time.  there is still a pressure in American team sports, but it is not as acute as in other sports around the world owing to their closed leagues and financial protection, etc.  in other sports: fear of relegation or missing out on qualification for pan-European competitions brings with it a financial risk → persuades clubs to offer huge compensation pay-outs to managers to try and spark a short-term boost in performance. If you believe paying £18 or 20m compensation to change the coach will bring you qualification to the Champions League (£50m - £100m) then this makes sense.  While there is that kind of financial reward on offer, the role of the football manager will remain one of chronic insecurity. AGENTS IN PROFESSIONAL TEAM SPORTS An agent is a representative and intermediary who handles the interests of a player or multiple players. An agent’s core responsibilities include:  Negotiating contracts to achieve the best possible outcome for their client  Securing lucrative endorsement and sponsorship deals  Organising TV, radio, and digital media appearances  Providing journalists with access to players for interviews or newspaper columns  Managing a player’s public relations  Curating their social media accounts  Some agents become close friends with players and provide help and guidance during crisis periods AGENTS IN PROFESSIONAL TEAM SPORTS Agents are often part of larger agencies which manage hundreds of clients. The financial reward can be significant, especially if you represent successful players.  more successful the player is, the more valuable he becomes as a client to the agent. Agents earn their wages primarily through commissions.  They are entitled to a commission of any kind of earnings, endorsements, or contract negations  Depending on an agent’s ability to select a talented and capable player they can represent, their business can become extremely profitable.  This is most likely the reason why they are envied and criticised by many in the sporting world → they have the capacity to earn millions of pounds after one day’s work, depending on what happens to their player on the field of play. AGENTS IN PROFESSIONAL TEAM SPORTS According to Sports Management Worldwide, an agent can earn anywhere between £1,200 and £550,000 per Premier League (football) client annually. For agents of Major League Soccer players that figure ranges from $1,300 to $260,000. Some agents make millions each year, but that is an exclusive club. These agents are often referred to as “super agents”.  extensive client profile, usually includes the biggest stars – and thus earners – in the game.  Their roster and reputation marks them out as powerful – and sometimes difficult – individuals for clubs to deal with.  Jorge Mendes (whose clients include Cristiano Ronaldo and Jose Mourinho)  Mino Raiola (who has represented Zlatan Ibrahimovic and Paul Pogba)  Jonathan Barnett (Gareth Bale and Jesse Lingard). AGENTS IN PROFESSIONAL TEAM SPORTS World’s leading sports agents closed contracts totalling more than $41.2 billion in 2020 (Forbes), netting $1.9 billion in commissions  several deals that are within $500m for a single athlete. Restrictions against what agents can earn → agent fees are typically capped and regulated by the players associations  until recently top commissions allowed by FIFA in football (10%), Major League Baseball (5%), which gives a ranking advantage to football and baseball agents.  NHL and NBA both allow fees to hit 4%, and the NFL caps them at 3%. THE PROBLEM WITH AGENT FEES FIFA wanted greater transparency to transfers and cut down on agent fee costs  sometimes agents are paid more for negotiating a deal than players were due in wages. FIFA has revealed that $500.8m was spent on agent fees in international transfers alone in 2021  95.8% of that money was paid by European clubs Agent market in football has been largely de-regulated for several years → paved the way for agents to earn large fees.  until recently there has been no such thing as a FIFA-licensed agent, with the world governing body trusting individual associations to handle the granting of licences to and monitoring of intermediaries.  no course to complete or exams to undertake to become a football agent → it has been left to individual football associations to decide on who becomes an agent.  To become an official agent or intermediary, an individual must be registered to operate by the association of the country where their clients are working.  In England agents must comply with a test of “Good Character and Reputation”, as well as a criminal record check. There is also a fee of £500, with a further annual registration fee of £250. FIFA’S NEW REGULATION FOR FOOTBALL AGENTS Change in 2023 for football agents:  Due to increasing agent fees, FIFA capped them at 3% commission for any annual player salary above $200,000 and 5% for salaries under $200,000  maximum 10% fee for transfers  agents must also make all transactions public, allowing fans to see how much they are paid for deals  mandatory licensing system, passing FIFA’s exam