From PSG to ESG – Why is governance so important in football?

From PSG to ESG – Why is governance so important in football?
27th May 2022 Matt Thorogood
In Insights

The increasing popularity of ESG as a lens through which to view sustainability risks and opportunities has increased familiarity with many of the environmental, social and governance factors that affect an organisation. However, the ‘G’ is often overshadowed by considerations of climate risk and societal implications of an organisation’s operations. This may be less true in the world of professional football, where good governance is at the very core of ensuring a club’s operations are successful and sustainable.

So, what does good governance mean, and why is it so important? This insight considers case studies where governance has failed or been criticised, and comments on the findings from the fan-led review into football governance which sets out 47 recommendations to safeguard the future of English football following the attempted breakaway of six Premier League clubs to a new European Super League.

What is governance and what does it cover?

S&P Global states that governance relates to the “factors of decision making, from sovereigns’ policymaking to the distribution of rights and responsibilities among different participants in corporations, including the board of directors, managers, shareholders and stakeholders.” Furthermore, it can include corporate governance factors such as the board and senior management composition, the ownership structure, risk and crisis management, and how business conduct and grievances are managed. For football clubs, the key aspects of governance relate to ownership and corporate leadership.

Case Studies

There are many examples of failures of governance across football:

  • Financial problems – One of the most common crises in football governance is when a club is subject to financial mismanagement and struggles to pay their debts. Ultimately, football clubs are unique in that they are private businesses that do not attempt to maximise profits. Instead, they maximise sporting performance, often at the cost of short-term financial performance. Notable recent examples are Bury FC, who were expelled from the Football League and have since been in administration; and Derby County FC who are desperately seeking investment in order to exit administration. Research conducted by Stefan Szymanski in 2012 suggested that club insolvency is usually the result of negative shocks, such as relegation, and the failure to financially manage these shocks. Club finances are not transparent, which enables owners of football clubs who struggle following a shock to hide their situation, hoping they will escape it by improving performances, until it is too late.

Financial mismanagement is the result of decisions made by those in control of a club, and the conditions within which a club operates. It is therefore crucial both to ensure that owners of a football club have the financial backing and skillset to avoid problems, and to ensure that the conditions for clubs facing negative shocks cushion the blow as much as possible. Regulations by the governing bodies should focus not only on restricting overspending but also on the protections given to those clubs who do face negative shocks, particularly those outside the Premier League, where finances may be more precarious.

  • European Super League – In April 2021, 12 leading clubs released a joint statement proposing a European Super League, a tournament of 20 teams that would fit around the domestic season and replace their participation in European competition. Notably, the twelve teams that proposed it would automatically qualify for the tournament, giving them financial security regardless of performances on the pitch and at the expense of other clubs across Europe.

The proposed tournament was a PR disaster, and was heavily opposed by fans, players, managers, pundits, politicians, football bodies, and other clubs, particularly in England. Whilst many could see the appeal of a change in the football structure for the Spanish clubs who were feeling the impacts of spending well beyond their means, the inclusion and keenness of some historic English clubs raised eyebrows. Many saw it as a move motivated by greed and against the spirit of football. The cracks showed very quickly, opening a clear gulf between those clubs who were driving the idea of the European Super League and others who had joined as they didn’t want to be ‘left behind’. Ultimately, the fan and media pressure became too much, and Manchester City and Chelsea formally withdrew following legal advice.

The Super League saga is an example of poor governance as the wishes of owners, perhaps eyeing up future financial gain, took precedence over the best interests of the fans and the game itself. Further, the lack of transparency and way the Super League was announced was deemed to be dishonest. Many believe that supporter input, and oversight, as demonstrated in German football (whose teams rejected the opportunity to participate in the Super League), is key to ensuring similar issues don’t arise in the future.

  • Owners and directors – In 2004, the British football bodies introduced a test which assesses the suitability of any person or entity that takes over a club, runs one, or owns over 30% of a club’s shares – and disqualifies them if they do not meet the criteria. This is largely based around financial security and minimising conflicts of interest but has the aim of preventing corrupt or untrustworthy individuals from having controlling interests in football clubs.

However, recent events have put the spotlight increasingly on the ‘fit-and-proper’ status of those with controlling interests in football clubs. Firstly, the takeover of Newcastle came under scrutiny, as an 80% stake of the club would be owned by the Saudi Arabian Public Investment Fund. As the Saudi state is widely argued to be responsible for human rights violations, the acquisition of Newcastle is viewed by many as an example of ‘sportswashing’, where a nation or organisation uses sport to improve their reputation. The Premier League were, nevertheless, satisfied that the club would not be controlled by the Saudi state and therefore accepted the takeover.

Secondly, the role of Russian oligarch money in football has become a flashpoint in the wake of the invasion of Ukraine. British government sanctions on the oligarch Roman Abramovic have had repercussions on Chelsea, forced quickly to find new ownership; and Everton did well to quickly suspend commercial ties with Alisher Usmanov’s USM Holdings.

The fit-and-proper test has in fact only been failed four times in its 18-year history. Furthermore, the narrowness of its application, focussing primarily on finances, leaves a lot to be desired when considering the geopolitical climate and the importance of environmental and social concerns.

New legislation and recommendations

These case studies demonstrate the importance of governance in ensuring the protection of football clubs from mismanagement. The fan-led review into governance was commissioned in July 2021 in response to ‘three points of crisis’ (the collapse of Bury FC; the impacts of Covid; and the attempted European Super League), and delivered its findings in November 2021. Recommendations focused on: implementing a new regulator which has oversight of finances; tighter restrictions for owners based around directors having integrity and financial stability; an improvement in fan consultation around key decisions; improvements in equality, diversity and inclusion; parity of women’s football; and the protection of players exiting the game, particularly young players.

While these recommendations are certainly a step in the right direction, football governance could further benefit from:

  1. A more holistic approach to the fit-and-proper-persons test. Although finances are clearly key, modern corporates more than ever consider other factors in the leadership of their businesses. Football clubs should be no different, and the access of individuals that are clearly in breach of the environmental and ethical standards that football’s governing bodies support should be restricted.
  2. Improving supporter engagement by consulting with fans on how football clubs should protect the environment. 90% of football fans agreed on the importance of protecting the environment in a recent survey.
  3. Regular reviews of both the state of governance in football overall, and the individual governance of football clubs. Learning from upcoming developments as governance evolves is key to ensuring the ongoing prosperity of football as a sport.

FIFA’s own governance failing, which culminated (but was not ended) in the 2015 corruption case which led to the indictment of 30 current and former FIFA officials and associates, set a very poor precedent for others. As the ultimate international governing body of football, the implications of poor governance were extremely serious. Furthermore, for an institution that is in many ways the gatekeeper of the beautiful game and enjoys the passionate support of billions of people, the opportunities to share the benefits of football and lead towards a more sustainable future are simply too great to ignore.

Sancroft is a leader in ESG incorporation and improvement. If you would like to find out about how we can help you to explore how your sports organisation can be more sustainable, please get in touch with me at matt.thorogood@sancroft.com.