Stephen Morrow
Executive Summary
Football at club level has changed markedly in the last decade or so. Indisputably, major football clubs are now complex businesses, intrinsically concerned with financial matters. One of the most important contributory factors in the new business era of football has been television, in particular satellite television, both in terms of the amount paid for broadcasting rights and also in radical alterations to the distribution of that income among clubs. The increasing business orientation of clubs is also evident in other areas: for example, the status of players, where alterations to the transfer system have given players greater freedom of movement and contractual bargaining power, and changes in the ownership structure and governance of clubs.
How football, or more accurately, football constituencies or stakeholders, should respond to this economic transformation remains a contested area. As a business it could be argued that footballs strategic direction and its decision making should now be a function of market economics, with an unfettered market approach being adopted to issues such as league structure and the distribution of revenues, with the emphasis on business objectives like profit, shareholder value and market share. Alternatively, a more politically informed approach can be adopted which results in football being conceptualised as economic in basis, but social in nature. This approach encourages recognition of the social aspects that delineate football from purely economic activity; that is to identify how its economic base affects its stakeholders.
This debate has been thrown into sharp focus in recent years by the fact that despite clubs earning record levels of income, many of these clubs have found themselves in serious financial difficulties with few reporting profits and several heavily indebted. One response from supporters of these clubs has been to demand improved, and more public, forms of accountability from club directors. Supporters often have high levels of engagement with their clubs. The setting up of mutually structured supporter trusts at most professional clubs in England and Scotland, and the very high levels of attendance at the AGMs of those clubs that have become Stock Exchange listed companies are just two manifestations of their engagement and of their demands for accountability.
In this context the annual report is an important document; a mass communication device capable of providing information to a wide range of groups and of discharging accountability. In particular, narrative reporting in annual reports provides a convenient route for clubs to convey information to interested stakeholders who may not always have expertise in interpreting financial statements.
Study and findings
The study was based on a sample of thirty football clubs over a five-year period, beginning with the 1997/98 annual reports. The clubs selected were the twenty clubs in the English FA Premier League and the ten clubs in the Scottish Premier League in season 1997/98. The study was concerned with the following issues:
- whether football club annual reports are becoming longer documents, with an increasing emphasis on unregulated narrative content;
- whether the amount of narrative reporting is dependent on the organisational form and location of the football club;
- whether narrative communication about the financial position and performance of football clubs has become a site of image management; with the narrative being used to mask the financial position and performance of football clubs, including those listed on the Stock Exchange.
- The incidence of narrative reporting was determined by carrying out a systematic analysis of the unaudited narrative content in football club annual reports. Nine key variables were selected: financial performance in year under review; debt levels, financing; wages and salaries; historical logic; youth development; future performance, revenues; capital investment development projects; player investment; and capital investment - stadium, other capital projects. In total 3,317 individual text units were identified and classified.
Length and content
Over the five year period football club annual reports have followed the trend in the wider corporate environment, becoming longer documents, with increasing emphasis on free-form business narrative. Furthermore, clubs listed on the Stock Exchange have longer annual reports, with more free-form business narrative than those which are not Stock Exchange listed, while English clubs tend to have longer annual reports than Scottish clubs. As the period of study for this research has been an expansionist one in terms of income generation in the industry generally, these findings are unsurprising: clubs have become substantially bigger businesses over this period, and the turnover of major English clubs is considerably greater than the majority of Scottish clubs, primarily due to the more lucrative television deal enjoyed by the FA Premier League in England.
Image management
Despite the poor financial performance reported by many clubs over the five-year time period, the study indicates that narrative reporting was highly skewed towards neutral and positive commentary. Of the 3,317 text units identified, only 14% were coded as negative statements, with the balance being evenly split between neutral and positive statements. The evidence suggests that the narrative is focused on information which can be reported as good news, such as improved television deals, with little or no emphasis on equally important but less palatable information such as, for example, disproportionate increases in wages and salary costs. Furthermore, a detailed study of disclosure on clubs wages and salaries suggests an inconsistency between the underlying financial performance and position and the accompanying narratives. While a significant correlation was reported between lower ratios for wages as a percentage of turnover and positive, confirmatory narrative, the absence of such a correlation for higher ratios and negative comments at the very least suggests lack of balance in the clubs narrative reporting.
Issues for consideration
Football is a peculiar business. Structural factors like the scale of reward on offer to clubs for retaining top division status and the skewed mechanisms for distribution of these revenue sources, taken together with the high degree of engagement between many supporters and their clubs, place particular demands and pressure on football club directors. But the peculiarities of football businesses also provide benefits for directors: for example, few other businesses enjoy such loyal and committed customers as football clubs.
In this context narrative reporting is important from both accountability and disclosure perspectives. Directors can communicate about a range of factors that have affected or may affect their performance to a wider range of interested stakeholders, including shareholders, supporters, community groups, the press and politicians, all of whom have been shown to take an interest in football businesses. This disclosure may help meet the demands for improved and more public accountability from football stakeholders, particularly the supporter grouping. Moreover narrative reporting provides a means to reduce conflict between directors and supporters, providing directors with an opportunity to better inform stakeholders about the financial realities of clubs, which in turn may act to lessen any unrealistic supporter expectations. But for this to be achieved, it is essential directors ensure that the narrative presented in the annual reports is more balanced and less partial than the evidence from this study suggests is presently the case, and that the annual report sends out a more coherent message. Of course this applies to other types of business which are also susceptible to selectivity in disclosure and image management. The proposal that auditors should express an opinion on the process that has been followed by listed companies in producing their Operating and Financial Reviews may provide some assurance to stakeholders of those companies. But narrative reporting is about communication, accountability and education. Given the public space within which football clubs operate, improved narrative disclosure needs to be seen as being in the best interests of all football club stakeholders, whether motivated by financial objectives, football objectives or a combination of both.
ISBN 1 904574 12 2