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Financial performance in English professional football: âan inconvenient truthâ1
Sean Hamil and Geoff Walters
Department of Management, Birkbeck, University of London, London, UK
This article presents an analysis of the financial performance of English football since the creation of the Premier League in 1992. It demonstrates that despite large increases in revenue, in particular from broadcasting, football clubs in the Premier League and Football League have year-on-year collectively failed to post a pre-tax profit; there have been many examples of clubs in the Football League having to enter into administration; and debt levels have risen. The article argues that, in their denial that the financial crisis in the wider economy will seriously impact the economic health of English Football, many of the industryâs leading figures share many of the same hugely optimistic assumptions of those who seek to play down the significance of climate change. In doing so they overlook the âinconvenient truthâ coined by former US Vice-President Al Gore in the context of the climate change debate, that English football is not immune from the impact of wider financial instability. The article questions whether, given the current economic climate, a failure to implement pro-active regulatory action to address the problem of chronic unprofitability and unsustainable debt will lead to a major financial crisis in English football.
Introduction
Since the foundation of the Premier League (Premiership) in 1992, English football has embarked on an extraordinary financial expansion. Between the 1992/1993 season and the 2006/2007 season the combined financial turnover of the clubs in the Premier League increased by 900% from ÂŁ170m to ÂŁ1530m.2 This is a significant achievement by any standards. This financial success is not confined only to the Premier League. All levels of the English professional game have increased financial turnover, if not as spectacularly as the Premiership. By way of example, between the 1997/1998 and 2006/2007 seasons, the combined financial turnover of clubs in the second tier of English professional football, the Championship, increased 179% from ÂŁ186m to ÂŁ329m.3
However, it is an astonishing fact that there has not been a single year since its foundation when the combined Premier League clubs have made a collective pre-tax profit. This is also the case for the Championship and Divisions 1 and 2 of the Football League. The clubs have been able to survive only through the receipt of new investment from owners or investors, or through shedding debt via the financial administration process, as nearly 50 clubs went bankrupt between 1992 and 2009.
This raises a fundamental question. Is it possible for any industry to sustain losses on the consistent annual basis that has characterized the English football industry and not eventually be faced with a catastrophic industry transforming crisis?
The stock answer to the lack of profitability by English football insiders is that owners of English clubs have always recognized that few clubs make money; they are in fact motivated primarily by nonfinancial considerations, for example, by the desire to pursue sporting success on the field of play at the expense of profit because they themselves are fans, for the public relations benefits to their wider business interests, or for the celebrity and vanity assuaging benefits that club ownership brings. By this logic, there will always be a sufficient pool of willing investors prepared to sacrifice some investment in order to, to echo the well-worn phrase, âlive the dreamâ, if only for a short period. Certainly, the fact that the Premier League has managed to sustain 17 years of uninterrupted pre-tax losses since its foundation while simultaneously being lauded as the most successful soccer league business in the world would seem to support this folklore. However, that was before the âcredit crunchâ.
In September 2008, the world entered a economic slowdown of a severity not experienced since the great depression of the 1930s. A number of major British banks had to be rescued either by the British state taking a significant shareholding via a cash injection, as in the case of Royal Bank of Scotland, or by straight nationalization, as in the case of Northern Rock. Fundamental to their difficulties was the issue of overindebtedness. It does not seem an extraordinary leap in logic to suggest that, with some of the countryâs major financial institutions brought to their knees by the âcredit crunchâ, it was at best rather optimistic to suggest that English football would be immune from its effects. That was certainly the view of Lord David Triesman, chairman of English footballâs main governing body the Football Association (FA). In a controversial speech4 to the Leaders in Football conference in October 2008 at Chelseaâs Stamford Bridge Premiership stadium he observed regarding indebtedness of English clubs:
The best estimate I could get in the City yesterday was that debts in English football as a whole have probably edged to the ÂŁ3bn mark.
Critically, Lord Triesman observed that such âtoxic debtâ could cause massive damage to the game and called for a review of the Fit and Proper Persons test in order to make football club ownership more transparent. The test, first introduced by the Football League in 2003, with the Premier League following shortly after, effectively bars from ownership of a football club anyone with a criminal record. However, Lord Triesman expressed concern about the current format of the test:
Transparency lies in an unmarked grave. Nobody has real confidence in what they cannot see. The Fit and Proper Persons Test does not do the job sufficiently robustly. A review is now inevitable because football clubs are not mere commodities. They are the abiding passion of their supporters. We forget that at our peril.
Essentially, Triesman was arguing that the test should be extended to ensure that only those who could demonstrate a clear ability to finance a football club as an ongoing concern should be able to take ownership of an English football club. And that English football needed a much stronger financial regulatory framework if it was to avoid major problems in the near future.
Premier League chief executive Richard Scudamore responded robustly, arguing that the Premier League clubsâ debts were not out of line with their revenues (although he made no mention of profitability),5 and that the established framework of light touch self-regulation had served the industry well and did not require significant amendment. However, a week later, the government minister with responsibility for sport, Andy Burnham,6 Secretary of State for Culture, Media & Sport, entered the debate. Speaking at the annual conference of the supportersâ organization Supporters Direct, he opined that English football risked losing touch with its core supporters but that it also needed to âre-assess its relationship with moneyâ. He then asked the FA, as well as the Premier and Football Leagues to consider whether:7
the rules governing finances could be made consistent between the leagues;
there could be greater transparency and scrutiny of clubsâ ownership, including the amount of debt used to finance a takeover and an assessment be made as to whether that debt is âsustainable and in the wider interests of the gameâ;
the rules which penalize clubs falling into insolvency needed to be reviewed;
the rule which requires insolvent clubs to pay football debts in full (the Football Creditorsâ Rule), unlike other debts, should be reviewed;
the Fit and Proper Person test for club directors and 30% shareholders needed to be strengthened;
âcompetitive balanceâ [unpredictability of league outcome] should be promoted, âpreventing the game becoming too predictableâ;
everything possible was being done to bolster the national side, and whether there is âa case for introducing a specified number of homegrown playersâ into club sides.
As with Lord Triesmanâs comments, at the heart of Minister Burnhamâs comments was a concern that football clubsâ perceived reckless approach to financial management was creating a risk of spiralling financial instability, leading to the possible demise of some clubs and the collapse of the traditional relationship between English football and its supporters.
Although the Premier Leagueâs response was more restrained than it had been for Lord Triesmanâs comments â a spokesman simply noted the comments and said they would await formal communication â clearly there was not much appetite in this quarter for the implied significant overhaul of the regulatory regime in football. So, while in the rest of the economy major companies collapsed with startling regularity, the view from the commanding heights of the major professional football league in the Europe was that, in all likelihood, English football would ride out the economic trauma of global recession relatively unscathed, and certainly without the need for the kind of dramatic regulatory intervention seen elsewhere in the economy. To repeat a comment made earlier, this seems an extraordinarily optimistic assumption in light of the wider economic circumstances that pertained toward the end of the 2008/09 season.
An effective analogy that might be drawn with the âoptimistâ position on English football finance in 2009 can be found in the policy arena around the climate-change phenomenon and its threat to the world ecosystem. In his best-selling book, An Inconvenient Truth: The Planetary Emergency of Global Warming and What We Can Do About It, former US vice president Al Gore8 argues that the climate crisis is an âinconvenientâ one because it will be expensive to address over the long-term and there is a natural tendency to put off until tomorrow what requires financial commitment today. Nevertheless, even though its effects are happening slowly, if left unchecked, the consequences of climate change will be catastrophic; so it will require an expensive transformation in the way we live our lives, and in the way the global economy is organized, to avoid these consequences. But in order to begin the process of addressing the crisis, there must first be recognition among global leaders that there is indeed a global climate change crisis. Gore then poses the question â why is it that some leaders seem not to hear the clarion warnings?
In its first season in 1992/1993, the Premiership commenced with four key supporting trends:
(1) | English clubs had just been re-admitted to European football competitions in 1990, with the consequent boost to revenue, after a five-year ban following the Heysel disaster (Brussels 1985), when 39 Juventus fans died at the European Cup Final between Juventus and Liverpool following crowd disorder. |
(2) | The rebuilding of all English football stadia had commenced, following the recommendations of the Taylor Report into the Hillsborough disaster which saw 96 Liverpool fans die at an FA Cup semi-final with Nottingham Forest due to flawed stadium management and ... |
