Corporate governance in professional sport – the board of directorsRichard Barham, Daniel Stock
“At a football club, there’s a holy trinity – the players, the manager and the supporters. Directors don’t come into it. They are only there to sign the cheques”. Bill Shankly on boardroom meetings.
Although many supporters may agree with Bill Shankly’s statement, today the board of directors has a broader role than merely signing cheques. The board is an important decision-making body with statutory duties to promote the club’s success. In this blog, we discuss the statutory duties of the directors and principles of good corporate governance set out in the UK Corporate Governance Code (the “Code”).
The directors’ powers are set out in the club’s constitution. Usually, the directors have the power to manage the club, whilst shareholders have the power to instruct directors to take, or refrain from taking, specified action. Along with wide powers to manage the club, the directors have responsibilities in the form of statutory duties.
Directors’ statutory duties apply to every decision made by a director. The core duty of a director under the Companies Act 2006 is ”to promote the success of the company for the benefit of its members as a whole”. In doing so, directors must have regard to certain factors including the long term consequences of their decisions.
Unhelpfully, the term “success” is not defined in legislation. In February 2006, Lord Goldsmith (at the Lords Grand Committee) stated that success will usually mean, for commercial companies, a “long term increase in value”. For professional sports clubs, the pursuit of sporting success is often at the expense of an increase in shareholder value creating a tension for directors who wish to make decisions in line with their statutory duties. Lord Goldsmith explained that it is up to “the members of the company to define the objectives they wish to achieve. Success means what the members collectively want to achieve." The directors therefore require guidance from the company’s shareholders on the club’s objectives. In other words, is success measured by sporting achievements or financial results?
In an attempt to achieve sporting success, the directors of Portsmouth Football Club were encouraged by successive owners to borrow heavily between 2002 and 2007, primarily to spend on recruiting and paying players. On 17 May 2008, the club achieved its goal by winning the FA Cup, granting entry into one of European Football’s premier tournaments, the UEFA Europa League. Success had been attained but at a cost.
In February 2010, the club announced that it had entered into administration (becoming the first and only Premier League club to date to do so) with debts of £135 million. Since then, Portsmouth have been relegated twice and entered into administration for a second time in February 2012. Last week, the Football League announced that, unless Portsmouth find new owners by the end of this season, Portsmouth will be expelled from the Football League.
Directors should properly obtain guidance from various sources in order to ensure they fulfil their duties as directors. The Code provides recommendations for companies with a premium listing of equity shares on the Main Market of the London Stock Exchange and consists of principles of good governance. Although there are no professional sports clubs in the United Kingdom with a premium listing, the Code is still helpful in providing guidance.
The Code states, amongst other things, that the role of chairman and chief executive officer should not be held by the same person to prevent any one individual having “unfettered powers of decision”. Additionally, the Code recommends that at least half of the board should be non-executive directors, being persons who act as independent advisers to the company with a mandate to scrutinise the activities of the executive and senior management.
Some sports organisations embrace the role of non-executive directors. Arsenal FC, a club widely considered to be one of the most well-managed in the Premier League, consists of two executive and four non-executive directors with separate independent committees for audit, nominations and remuneration, each of which comprises non-executive directors. Similarly, the Rugby Football League has a completely independent board of directors with three non-executive directors. However, this level of governance tends to be the exception rather than the norm for professional sports clubs.
In 2004, following corporate governance concerns relating to the management and ownership of football clubs, the English football authorities introduced a “fit and proper person test” for potential and current directors and shareholders. The test is objective and aims to prevent individuals with an unspent criminal conviction or a history of football club insolvencies from managing or owning football clubs.
Individuals must demonstrate that they are not subject to one of several disqualifying conditions including disqualification as a company director, convictions for offences of dishonesty and bans imposed by other sports governing bodies. Since 2004, there have only been three individuals who have been known to have failed the test: Dennis Coleman, Stephen Vaughan and Craig Whyte. The test has been criticised for its limited scope and reactionary nature as it fails to consider the future intentions of potential directors and the financial resources of potential shareholders, considerations which, if investigated, may have prevented the plight of both Portsmouth and Rangers FC. Of course, any such widening of scope would give rise to more subjective judgments and be more likely to face challenge.
Directors of professional sports clubs face a difficult task of satisfying the club’s owners whilst running the club day-to-day. Directors need to ensure they have adequate guidance whilst taking into account best practice in terms of the board and its leadership. Professional clubs with distant shareholders, opaque aims and a board dominated by one individual are likely to be subject to an increased level of financial risk in an industry where the definition of success is never clear.
In our next blog we will discuss shareholder activism and the role of the supporters trust.
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- Tags: Directors | Football | Governance | Match-Fixing | Portsmouth FC | Premier League | Rangers FC | The Code
- Corporate governance in professional sport: legal structures
- Corporate governance in professional sport
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.
Daniel is a corporate lawyer at Dentons and is a member of the firm's Sports group. Daniel has acted on the acquisition of major football clubs in the United Kingdom and advises on all aspects of corporate finance transactions, including cross-border mergers and acquisitions (share and business sales), company/business ownership matters, joint ventures and investment funds.