FOOTBALL INQUIRY

10 July 2008

Members present:

Alan Keen MP (Chair)

Clive Betts MP

Lord Faulkner of Worcester

Angela C. Smith MP

Witness:

Professor Christine Oughton

Alan Keen MP (Chair): Christine, we cannot thank you enough for coming.  I know that the panel agrees with and is familiar with your views, but we wanted to get them on record because I believe that they will play a serious part in the inquiry and help us to anchor the views of more controversial figures when we see them later.  You care about football, as we do.  You can make a short opening statement if you wish, and then we will go into questions as quickly as possible.

Christine Oughton: I was just thinking before I came about the key issues of governance.  There are four interrelated areas, the first of which is the pyramid structure, or what is sometimes referred to as the European sports model, and what is different about this model when compared with other sports models, such as the United States model.  Secondly, not unrelated to that, is the effect of globalisation.  Why is that happening and what are the likely effects on football?  Will they be good or bad?  Thirdly, there is a peculiar relationship between club and fan or, if we look at it purely from a management or economic perspective, between the company and its customers.  Football is unusual in that respect, which leads to all kinds of difficulties.  Fourthly and finally, what is an appropriate business model or corporate structure for football clubs?  Should we try to change the governance structures and put in new ones?  Those are the four areas that I think are important, on which I want to answer questions.

Chair: In the autumn, hopefully we shall have two or three people from Europe to give evidence, not so they can tell us in the United Kingdom how to run football, but to get the views of FIFA and UEFA on how English football governance should fit into the European work model.  What are the main differences?  You have been in Italy for a while, and you are familiar with the football on the continent.  What are the main differences between football governance in Europe and England?

Christine Oughton: Although I live in Italy, I have not done a huge amount of research on it, so I cannot talk with any great authority about Italy.

Chair: You know a lot more than we do.  You do not have to be too academic about it.

Christine Oughton: In some ways, the Italian situation is not dissimilar to the UK, because the clubs, by and large, are companies, which is different from the situation in Germany and France, where the clubs were associations, or formed as 50% association and 50% companies.  They are hybrids, and there is a 50% plus one voting structure within those clubs.  We have companies.  Italy has companies, but in France and Germany, there are hybrid structures.  Typically, half is a not-for-profit, club-type structure, to which a company is attached.  There is a 50% + 1 voting model and in Germany the casting vote lies with the members association or club, in France, I believe it is the other way round.

The clubs are mainly companies in the UK, but there is a trust movement.  When the trust owns a share of the company, the structure is hybrid, but normally the trust owns a small share only, if it has any ownership stake at all.  Those ownership models are important. 

Italy made a big mistake, because its competition authority, back in the 1999, outlawed collective selling.  The Italians now have the least competitive balance of any of the big five European leagues.  They realised that it was a mistake and reversed the decision, and they have tried to put in place all kinds of mechanisms to redistribute income.  Our competition authority, when the case went to restrictive practises court, allowed collective selling to continue, although the European Commission continues to analyse the collective TV deals.

Chair: What are the main problems of governance in English football?  What are the main dangers?  The situation is changing, and has been changing for a few years. 

Christine Oughton: The big changes came, first of all, when the clubs became companies back at the end of the 19th century.  The 1980s was a period of commercialisation and, more recently, there has been a second wave of commercialisation based on money from television.  Rather than asking what is the main problem, we should ask what are the good things about our structure. 

We have a pyramid structure, on top of which is international football.  You can go down to whatever level you want to find the bottom of the pyramid, to the conference or to leagues below that, and down to school level, because the FA does a lot of work with schools.  The integrated pyramid system features open leagues between which there is promotion and relegation.  International club competitions and national competitions are near the top.  They all fit together logically, in some sense. 

The structure generates enormous value.  America has nothing like the global reach of European football.  That is one reason why people who are interested in sport and the business of sport in America are buying European football clubs.  The model is tremendously successful, but that success depends on integration.  The danger is that the pyramid will fragment.  At the very top, there is a debate between club and country, and we have seen clubs act against national associations by reluctance to release players, actions to seek compensation etc.  There is conflict within the professional game over the distribution of revenue between leagues, and now there is very little inter-league distribution.

We hear arguments from time to time—I am not convinced that the people making them entirely believe everything they are saying—that we could take the top of the professional game out of the structure and have it as a free-standing element, like an American sports league.  Clearly in the short term you could do that, but the value that comes from the integrated structure would be lost in the long run.

The Football Association runs national competitions that generate the income.  About 50% of the money gets reinvested in the grass roots, and the rest goes to the professional game.  That investment in school football activity creates demand.  Why is there such enthusiasm in schools for football compared with other sports in the UK?  It is because football is socially embedded.  That is due partly to the FA’s work the money that comes in from the very top—international competitions and the elite end of the game—to clubs, regional associations, schools and so on.  That generates demand for, and a love of, the game.  The English premier league is so successful because people pay to watch matches at the ground and to subscribe to television football channels.

The flows from the bottom to watch football at the ground and on television, to buy football products and so on, are ‘invisible’ or indirect, whereas the flows that go down from the FA to the grass roots are visible monetary payments.  It looks like the top of the game is subsidising the bottom: sometimes that is true, but there is also a flow of resources from the bottom to the top.  The broader the base of the pyramid, the stronger the top.  Taking out a slice of the pyramid would mean that clubs could keep all their money in the short run, but in the long run, they would lose the structure, which is partly responsible for the success of European football.

Angela C. Smith MP: I take entirely what you said about delivering a fan base by investing downwards into the grass roots of the game through schools and so on, but is not there a risk that, when it comes to developing the talent of players of the future, there are disincentives in the system, because the top level of the pyramid takes players from abroad, the rest of Europe, South America and so on?  Increasingly, we are getting a logjam, if you like, in the movement upwards through the pyramid, when it comes to players.  Is that not a great problem?

Christine Oughton: Yes.  I understand that and it is an important point.  From my perspective, as an economist, it is a training problem.  There is always a free rider problem with training.  We import nurses from developing countries to work in our health system.  They are attracted by higher wages, but we are taking the most skilled people from poorer countries to work here.  There is a cost to those countries, but a benefit for the individuals.  The same kind of thing happens with football.  We pay the highest wages—we have the richest league in terms of revenue—so we can attract players from around the globe.  It has become easier and quicker to do that rather than to train players.  The French are good at that and have invested more in training, which is reflected in their performance in international competitions.  We take a lot of players from French leagues.  That is partly down to the preference of managers of some of the top clubs, but the French generate a lot more home-grown players. 

There is underinvestment here.  Firms will always be tempted not to invest in training themselves because it is costly, but to poach trained workers from other companies.  That is what is happening.  There is a tremendous mobility of labour in football.  For all the criticisms that the EU makes regarding the restriction of movement for players, there is more mobility in the labour market for football than in probably any other labour market.  The problem is investment in training.

Angela C. Smith MP: Is that right the way through the professional league, from Division 1 right the way through to the premiership, or are there lanes specifically to the premier league?

Christine Oughton: I do not have enough information on that, but there is a general problem with underinvestment in training.  I do not believe that we do not have enough raw talent in the UK to generate players.  We are the same size, pretty much, as the other big five European leagues, but clubs find it quicker, easier or cheaper to import players from abroad rather than to invest in training schemes themselves.  That is short-termism on the part of the clubs. 

Lord Faulkner of Worcester: What are the consequences of that for the national teams, by which I mean the England first team and the other representative sides that are turned out?  Do you feel that if places in premier league and, increasingly, championship sides, are taken by foreign players, it will be more difficult for English players to get through to represent their country?

Christine Oughton: I agree.  If you do not train enough young talent coming through, places will be taken by the talent from elsewhere, to the detriment of the national team. 

Lord Faulkner of Worcester: Do you think that the risk of that—there is evidence that it has already occurred—is enough to justify a limitation on the numbers of foreign players coming in, or do you think that the value of the entertainment product, which is provided especially by the premiership, which contains most of the best players in the world, outweighs the contribution that the league structure makes to English football?

Christine Oughton: The important thing to take out of this discussion is nationality.  It is nothing to do with nationality.  It is simply to do with talent and the most talented players.  That is why the UEFA view in the six-five debate is preferable to the FIFA perspective.  FIFA wants it to be about nationality, and UEFA wants selection based on where a player is trained, irrespective of his nationality.  It is a training problem. 

There is a sufficient population in the UK to have very talented English and other home-grown players playing for our clubs in greater numbers than they do at the moment, and playing in the national teams.  If you want that to happen in five or 10 years’ time, you have to invest in more training.  You have to widen the pool of players that you train, and have the right channels for them to go up from amateur to professional status, but the clubs or the FA have to invest more.  The clubs are beneficiaries of the training, so they should pay part of the training costs of home-grown talent.  That would inevitably mean more English players, but it could also mean players from other countries.  It is important to take nationality out of it—it is a bit of a red herring.

Lord Faulkner of Worcester: I am not saying I agree with you, but we are listening to your views today, not mine. 

Clive Betts MP: I should like to pick up on a couple of issues that you raised.  First, you talked about the importance of the pyramid and how it is holding everything together.  Do you think that the creation of the premier league is a threat to the solidity of the pyramid?  Could it be detached from the top fairly easily?

Christine Oughton: I do not think that it is a threat per se; it depends on how it is embedded in the structure.  One of the difficulties is that the pyramid must be governed.  There is an international layer, a national layer, a European layer, and the premier league and football league exist as organisations that run their own competitions, plus the conference.  There is a problem with integrating the layers and having a structure that does not allow any one layer to dominate.  I do not think that the problem is the premier league per se, but it is a problem when it argues that it should keep all the money and not redistribute it.  All successful sports leagues redistribute income.  US leagues do it far more than Europe, by and large.  The premier league thinks that it is creating entertainment, which it is, if you look at the surface, but one reason why it is so successful is that it is part of the pyramid structure.  If it was hived off, the structure would not create the value that it does. 

Clive Betts MP: That seems to lead on to arguing for having a strong FA as the thing that holds everything together.  Do you think the reforms of the FA have gone far enough?

Christine Oughton: No.  It is still pretty much 50:50 on the board between the professional and national game, although there is an independent chair.  Perhaps I have missed the latest news, but I have not seen any independent voice on the board—there is no voice from supporters or players.  The council is the biggest problem.  There is nothing wrong with having a council that size, but it cannot be a strategy-making body.  The representation on council has been increased, but its powers have been reduced.

Professor Jonathan Michie and I wrote a paper on the governance system.  We argued that the upper tier, meaning the council, if it is to be an effective strategy-making body, cannot be bigger than 20 or 25 people. On the Main Board of the FA, I am not sure why three people represent the premier league when one could do it, and other voices could be brought to the main board.  The council could be a smaller, strategic body, and there could be annual meetings of the ‘parliament’, as it were, meaning the council as it currently exists.  I cannot see how the council can act as an effective constraint on the board given its present size.

Chair: Before I call Angela again, will you give us your views on the value of almost completely democratic clubs such as Real Madrid and Barcelona, compared with the corporations that run premiership clubs here? I think that Nottingham Forest was the last club to go back to being a limited company when it was owned by the supporters.  What are the advantages and disadvantages of the Real Madrid model?

Christine Oughton: That question relates to what I was going to say on the relationship between the club and the fan or, in businesses terms, company and customer.  There is a peculiar aspect of football—it is not unique—that works to the detriment of consumers, or fans, namely that they do not have an exit.  A huge amount of research has been done on this.  If you do not have exit from buying a product, you need voice.  Similar things have been found.  Railways, for example, are a similar kind of industry.  Railways have monopolies over certain routes, and you cannot exit if you want to get to work, so you try to find some voice mechanism.  The Barcelona model gives voice to customers/fans. 

The price of tickets in the UK is astronomical, and clubs have local monopolies—fans have enormous loyalty to clubs and they will not switch if they do not like the product/price.  Also, they will try to go even if they find it extremely difficult to support the club.  If there is no exit, and if the market does not work in that way, fans must have voice.  The Barcelona model is probably one of the best.  The supporter trust model attempts to move toward a Barcelona-type model.  It is important that supporters have a voice; otherwise, they are open to exploitation by clubs.  That is a real problem practically and theoretically.  There has been a huge amount of research on ‘exit and voice’.  There are solutions, the Barcelona model being one, because it gives fans voice in the club. 

The lack of exit leads again to the problem of short-termism.  If we look at the average age of supporters, we will see that kids are not going to watch football anymore, so we must ask where the next generation of supporters will come from.  When we look at pictures of crowds, we can see that there is a missing generation.  That might be great now, but in 10 years’ time, it might not.  In Italy, stadiums are half-empty. 

Angela C. Smith MP: Thanks, Alan.  You have opened up a whole interesting area on which I am sure people want to ask questions.  However, going back to training, Christine seemed to be describing an opportunity to create more competitiveness by creating, training or developing more home-grown players, and not necessarily by restricting the intake from the rest of the globe.   It seems to me that the academy can work to stifle the development of talent, with clubs buying up youngsters at the age of eight or nine.  That begs questions whether the FA should more strictly regulate the quality and structure of training within the professional football league.  What is your view on that? 

Christine Oughton: I agree.  The more the FA can take a lead in training, the better.  It does a lot of work on training already, and works on the development of the football association, but it needs to be co-ordinated as opposed to left to individual clubs.  Training is a classic free rider problem.  There used to be a training levy.  The more it can be regulated to ensure that everyone invests in training and does their fair share, the more that problem would be addressed.

Angela C. Smith MP: What about the quality of the training and the care of the youngsters?

Christine Oughton: The FA, by and large, do a fairly good job, but I am not an expert on the sporting side of training.  I hear that we are less strong on technical skills than Italy and France, and perhaps, looking at their style of play, there is something in that, but economics rather than coaching is my field.

Clive Betts MP: If you said that to the football authorities in this country, they would say, “Fine, they do things differently on the continent, and even in different countries on the continent.”  If there is some attempt at cross-European regulation, things will be brought up to this country’s standards, because we are generally better.  Our stadiums, policing and stewarding, are better, and we have rules on who are fit and proper people to sit on football club boards.  We have rules on agents that other European countries are looking to take on board.  We have taken a lead in all those areas.  Why is there a view that things are better over there when we lead in most fields?

Christine Oughton: That is fair comment.  I would not say that it is all better in Italy, for example.  Training in France is stronger than training in the UK, which could be looked at.  We have taken the lead on some governance issues.  The FA has a code of corporate governance of football clubs and it has tidied up agent regulations, but it might have taken a lead because problems have surfaced here more than in other countries because there is more money in the English game. 

Putting that to one side, one of the complaints made to the Independent European Sport Review, on which I served, was that clubs in France and Germany have much tighter regulation of the financial side of club operations.  Clubs there are not allowed, for example, to go into such high levels of debt.  They therefore feel that they are at a disadvantage in European club competitions, because there is nothing stopping English clubs being financed by extraordinarily high levels of debt.  French and German clubs have to compete on the European platform in UEFA competitions constrained by the need to have sound and sensible financial models regarding levels of indebtedness.

I have some sympathy with that.  If you look at Chelsea’s finances, you will see that the money is being loaned.  The club is very indebted.  That could not happen in a German or French club.

Clive Betts MP: Could it happen in Spain?

Christine Oughton: Yes, in the sense that it is possible for Real Madrid to incur debts or to receive loans or subsidies.  But, ‘no’ in the sense that, it is not possible for Real Madrid to be taken over by a rich ‘benefactor’ because it is an association or club and not a company. Given that we have European club competitions, which are extremely successful at bringing money in, it is important to have co-ordination of governance throughout Europe.  Whether that means rolling out the FA, Barcelona, French or German model—the latter two are quite similar—or some combination of those is not clear.  UEFA has a licensing system, but that sets a bar, the idea being that all countries can make it.  The idea after that is to raise the bar over time, but the bar must be set at a compromise level, so that all 46 nations can make it.

Clive Betts MP: Is it a problem that UEFA does not have the strength to do very much?  As I understand it, there was going to be a second phase of the UEFA licensing system, but it has gone cold and nothing has happened.  UEFA admit privately that because the eastern European countries do not have the resources, the licensing rules are not enforced.  Backs on seats, for example, is one of the criteria for the staging of a UEFA competition game, but no one bothers with it, and most or many of the other licensing regulations are simply ignored.  Is it a problem that UEFA is not strong enough to pull things together? 

Christine Oughton: That is a good question.  The new UEFA licensing system is meant to come in now, and it raises the bar.  In the Independent European Football Review, we talked about this problem at length.  The problem is that countries that are at very different stages of development and that have very different governance systems have to compete in European-wide competitions, and there must be a standard that is achievable by all-countries.  Our clubs would therefore not find it difficult to meet the standards that are set.

There are problems in the English game, but stadium problems and the like were sorted out long ago.  Setting the standard is a compromise, but the idea is that, over time, the standard is raised.  It is a continuous process of improvement to try to bring everyone up to the standard over time, and it will not happen immediately.  It is difficult to find a panacea to cure all the problems.  You can set standards, but we need to achieve long-term cultural change.  It is the same with companies.  Codes of corporate governance are all very well, and we can get companies to tick boxes, but can we change the culture so that companies have transparency and openness? 

Lord Faulkner of Worcester: To how great an extent do you think supporters should be involved in running the clubs?

Christine Oughton: There is certainly no harm in having a supporter representative on the board of every club and in them having a voice.  Obviously, the Barcelona model involves a group, who are elected from the members, who can veto the plan of the club.

Lord Faulkner of Worcester: Can you see a time when the supporters trust model will replace limited companies, certainly at levels below the highest leagues, or do you think that it will simply be that one or two supporters are invited to join boards?

Christine Oughton: It is difficult to say—it depends how you change from the company model in large clubs, because the shares are expensive.

Lord Faulkner of Worcester: Such things tend to happen when clubs are on the point of going out of existence and supporters rescue it.  Would it not be better if there was a planned change over, rather than a reaction to an emergency?

Christine Oughton: It is difficult to see supporters getting control through the market mechanism, which is what must happen with the supporter trust movement—they have to buy the shares—but there is nothing to stop the FA saying that every football club should have a supporter representative on the board. 

Lord Faulkner of Worcester: The Minister said that.

Chair: I know that some people have to get away or have long journeys to make.  You mentioned attracting nurses from developing nations.  I heard a Radio 4 satirical programme on which a comedian said that so many people come to the United Kingdom simply to see their GPs. 

I cannot really thank you enough for coming and for giving us some of your time.  This inquiry will go on into the autumn—we will be lucky to get it finished before Christmas—so there is a lot of time.  We would welcome you keeping an eye on the website to see the evidence of other witnesses.  We would be happy to receive any written submission from you up to November.  We are going to have others from Europe to give their views, but you have no axe to grind, which we value very much.  We will put any written submission before the committee before we draw up our final recommendations, which will be based on evidence rather than our opinions.  We are hoping to draw out enough views and evidence from people who will agree with us, but we will be as independent as possible.

Christine Oughton: You are welcome.  You asked interesting questions—I am sorry if I did not answer them all.

Chair: If you come over again, please get in touch.  You can have a cup of tea with us and give us your views informally.