BEHIND THE PLAY #54

Corporations have their place but that doesn’t mean they need to be in every business. Professional sport has increasingly ceded their place as public assets to them and the MBA’s advising those corporations. It’s a poor fit long term.

I’m very aware that those who criticize corporations and any aspect of the free market system are viewed, increasingly, as marxists. I’m also aware that, as an instrument to help businesses, it completely makes sense. It allows for investment to be crowd-sourced through the sale of shares and shifts financial liability away from individuals to the actual business. Also, through endless lobbying of government officials and their regulatory bodies they have finessed increasingly better terms and concessions for themselves over the years in terms of de-regulation, access to capital and corporate welfare in the form of tax breaks and funding for new stadiums

But should a business category that is legally beholden to prioritize shareholder value ahead of all else really be the ownership model for sports teams? Are sports just like any other business? Are the consumers of sports teams just like patrons of an automobile company?

Regardless it has become the default for society to view corporations, the vehicle through which businesses are seen to grow and create wealth, to be a universally necessary and beneficial creation when it comes to almost any substantial commercial transaction.

Personally, I bear no resentment for people who have made a lot of money. Almost all of the ones I know who would be classified as wealthy combine traits of hard work, determination, community service, humility and generosity.

That’s a quote from the author of The Corporation, a book that was later turned into a well-known documentary. You can watch it free here on YouTube. Keep it in mind as you read the rest of this.

Corporations, with their legislated compulsion to lower costs and return profits not to people at the company who created it but to those who own shares, have almost certainly contributed mightily to the steadily growing wealth gap. This is seen most prominently in the United States where the wealthiest 1% of the population own 50% of the stocks traded in the USA while the poorest 50% own just 1%. Many may still believe its the land of opportunity but empirically that is proving to be a myth.

But how does this relate to the game?

When the English Premier League was birthed business consultants were the doctors and midwives. The FA, while initially a driving force in its creation, essentially washed its hands of it and passed on responsibility to the big five clubs (of the day) pushing for the new league. These being United, Arsenal, Spurs, Liverpool and… Everton. The FA had brought in Saatchi & Saatchi, a large marketing and communications company to get a sense for how to position the new league. They also brought in a management consultant from Ernst & Young. Then they, the FA, grew tired of it and told the Big 5 to make the league what they wanted it to be. The role of the MBA types grew as a result.

What it ended up as is now well known. The EPL is by far the most financially successful football league in the world. Club revenues are the highest in the world. Chart below courtesy of Statista.

The EPL’s dominance in annual turnover is even more remarkable given the Bundesliga actually has higher game attendance by an average of 2500 fans per game.

But within that very fact lays a very important bit of information because the underlying purpose of a football club is not, except to those few in C-Suite positions within it, to maximize shareholder value. It is first and foremost to be successful on the field and secondly to be a pillar of the community that ensures support will be ongoing through generations.

Back to the very imporant bit of information…

Bundesliga clubs are required to have an ownership structure that sees just over 50% of the club owned by supporters. La Liga clubs are not bound by this rule but Barcelona, Real Madrid, Athletic Bilbao and recently relegated Osasuna are all supporter-owned while Real Sociedad do not allow any one person or group to own more than 2% of the club.

What a non-corporate model of ownership facilitates is a supporter-forward approach to running the club. When “shareholder value” is not driving every decision you are more likely to see decisions that reflect the needs, values and desires of those that provide a large part of the revenues rather than what is generally a much smaller number of people who have invested larger sums and expect the club’s values to be centred on “reducing inefficiencies”, “corporate synergies”, “maximizing revenues” and “reducing costs wherever possible (ie. people who have to be paid)".

Yes, even supporter-owned clubs need to be run like a business but the top clubs in the world (Barcelona, Real Madrid, Bayern Munich; winners of 11 of the last 16 Champions League titles) have shown you can be incredibly successful on the field without needing the business amenities provided by incorporation. You can even do it in a league that generates substantially less revenue than the EPL.

Moving beyond financials to consider the other benefits of non-corporate models of club ownership, another metric would be engagement. Engagement is the foundation of longevity for businesses. Definitely a subjective area but after thinking about it two things stood out as reasonable measures of engagement. Kit purchases and social media followers. I think season ticket wait lists are also a highly relevant way to assess engagment but the info I could find on this was either disputed, out of date or incomplete so I’m leaving it out.

You can probably guess which clubs sell the most jerseys but, again, the ranking, of those clubs is quite telling.

ESPN published a top ten list of the clubs that sold the most. The ones in red are majority supporter-owned. From tenth to first:

• Spurs (10th)

• Juventus

• Chelsea

• Arsenal

• PSG

• Manchester United

• Liverpool

• Bayern

• Real Madrid

• Barcelona (1st)

So the top three in terms of kit sales are all supporter-owned clubs. The other seven are not. How about social media? From footballobservatory.com come these numbers from June 2024:

While Bayern were down in 9th place, Real Madrid and Barcelona maintained the top two spots as they did for jersey sales.

This does not prove that supporter-owned teams are more successful than corporate owned teams. It does show though that it is not a fundamental requirement to have the financial advantages of a corporation to be successful and in particular, when it comes to engagement, there seems to be a stronger relationship between supporters and their club when it is seen as ‘theirs’ and thus has a more central place in their community and their lives rather than being viewed in transactional terms as most other interactions with businesses tend to be. Three of the biggest clubs in the world that have been successful for over 50 years have proven this with exceptonal on-field performance and off-field business success.

Keep in mind as well, there are far, far fewer supporter-owned clubs in the top five leagues in Europe (and the rest of the world) than their are incorporated clubs. For example, there are no supporter owned clubs in Serie A or Ligue 1.

Ajax, along with a few other Eredivisie teams, has an unusual and somewhat complicated ownership model that sees what looks to be a trust called the AFC Ajax Association that has 700 voting members that control 73% ownership of the club through AFC Ajax Limited shares. There is little else of significance in terms of club ownership forms that I can see.

What does this lead to down the road? We have seen increasing interest in club ownership among three types of investors.

• Gulf State countries using sovereign investment funds to buy clubs in what is seen as a strategic move to start diversifying their economies away from oil.

• Private investment funds; primarily American.

• Billionaires looking for a pet project.

These are of course all run through LLC companies to protect themselves but the concern is that this foreign ownership doesn’t have the cultural connection with the game that supporters do, particularly in England where most of this investment is occurring, and see this is little more than an asset that they expect to perform well on the balance sheet. Chelsea’s new owner, Todd Boehly, wasted no time in pitching the idea of a North v South All-Star game and a four team ‘relegation’ tournament at the end of the season to determine who goes down to the Championship.

Remember when I mentioned the FA left the details of the new Premier League to the clubs themselves? One of the things they agreed on was that major decisions had to be approved by at least two thirds (14 of the 20) clubs. That was back when all the clubs were owned domestically. Today, only five clubs have majority English ownership. Ten are either owned entirely or substantially by American interests. Others are owned by Saudi Arabia, China, Thailand, Greece and UAE. Now think back to the nature of corporations and their legal obligation to increase shareholder value. A big part of that is protecting the asset from risks that could devalue it. What’s the biggest risk an EPL club faces?

Relegation.

There are now enough votes among ownership to change or entirely eliminate relegation. And anyone who thinks there won’t be some attempt to do so in the next decade is naive. Most of the American owners in the EPL have a background in various American professional leagues where there is no promotion or relegation. They are closed leagues that provide consummate asset protection and the current ownership group won’t take much convincing that it’s in all their interests to consider abandoning true meritocracy and protecting shareholders.