Corporate governance in professional sportRichard Barham
If I were to ask a sports fan for a classic example of mismanagement in professional sport (of which there are more than a few), they may well reply with the words “Leeds United….we lived the dream”. In 2001, Leeds United’s board of directors made the decision to borrow £60 million against future gate receipts based on the assumption of continuous qualification for the Champions League. The decision led to the club’s near financial collapse and relegation to the third tier of English football.
Eleven years later, more companies than ever recognise the importance of strong corporate governance but what do we mean by the term “corporate governance”? The Cadbury Committee’s definition is still the classic definition:
"Corporate governance is the system by which companies are directed and controlled. Boards of directors are responsible for the governance of their companies. The shareholders' role in governance is to appoint the directors and the auditors and to satisfy themselves that an appropriate governance structure is in place. The responsibilities of the board including setting the company's strategic aims, providing the leadership to put them into effect, supervising the management of the business and reporting to shareholders on their stewardship. The board's actions are subject to laws, regulations and the shareholders in a general meeting."
In short, corporate governance is the system by which companies are managed and controlled. Good companies normally have robust and efficient corporate governance systems in place. In a series of Corporate Governance blogs, we will focus on the key issues around corporate governance in professional sport including the relevant legal structures employed, the role and effectiveness of the key decision-makers, accountability and risk management. In this blog, we will discuss the reasons put forward for good corporate governance in business and what is unique about corporate governance in professional sport.
We are told that corporate governance is good for business. Reports suggest there is a positive correlation between a listed company's standard of corporate governance and its share price performance. Companies with the highest corporate governance standards are said materially to outperform those with the lowest standards. Evidently a clear understanding of a board's roles and responsibilities as well as collective responsibility for the sustainable success of the company is going to help the board of directors in preparing and delivering effective strategies. Besides, a company operating with the proper checks and balances ensures that critical decisions for a business are properly evaluated with transparency and probity before being carried out.
That is not to say that good corporate governance automatically means good decision-making. The Leeds United board in 2000 had a wealth of commercial experience. They employed two non-executive directors, Allan Leighton (former CEO of Asda) and Richard North (FD of Bass Brewers and later, CEO of Intercontinental Hotels). At each monthly board meeting, the directors possessed player contracts, wages, bonuses and a projection of the club's cash flow over an eighteen month period. In hindsight, the board's financial assumptions were too bullish and its strategies geared towards the club's short term success which were, at best, uncertain. Clearly there are limits to the effectiveness of corporate governance.
However, the Leeds United saga belies the importance of corporate governance in a professional sports context. Businesses are set up as commercial enterprises. There are various ways a business can be structured but its main objective is to promote the success of the company which is almost always measured financially. This is not necessarily the case with professional sports clubs.
Stakeholders of professional sports clubs measure success through a prism of matches won, tries scored and wickets taken. Directors face pressure from the club's shareholders, supporters, sponsors and the wider public to show "on the field" success and finish as high up the league as possible. Sometimes, sporting success and financial success can go hand in hand. If a team were to finish in a strong league position, it could raise a club's profile and may mean better gate receipts and a larger slice of television and sponsorship revenue.
However, a club's emphasis on immediate sporting success can encourage excessive risk taking. Where financial prudence is of secondary importance and without the proper checks and balances, directors may be quicker to use aggressive strategies to ensure sporting success in the short term. Corporate governance is arguably therefore even more important in professional sport than in other commercial sectors.
Despite the importance of corporate governance in sport, the current standard arguably remains below that of other sectors. The history of sports clubs is not rooted in the "for profit" sector. Many sports clubs began as charities or unincorporated associations which were managed and run by volunteers. With sport becoming a more commercial activity but with the emphasis continuing to be on sporting success, the previous governance structures have not always been adequate to ensure effective leadership and clubs have sometimes been slow to replace them.
In our next blog, we discuss the set up of professional sports club and the legal structures in which they operate to see how this fits in with the standards of corporate governance expected of commercial enterprises.
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About the Author
Richard heads both the London Corporate practice, and Sports practice, of Dentons.
Richard's focus is on M&A and corporate work. He is particularly interested in corporate governance issues, and regularly advises companies and other organisations on how they best operate to achieve good and effective governance standards.