A Literature Review of Ownership Issues Finance Essay

In this chapter the author has decided to discuss on ownership issues regarding firms and football clubs by presenting the information obtained by previous researches. The author has also presented information on the difference between foreign ownership and domestic ownership that have brought controversies to companies. 2.1 Definition of ownership, foreign ownership and its importance According to the business dictionary ownership means having the ultimate right of a property [1]. Foreign ownership is investment made by non-resident corporations to control another country’s companies for the purpose of profitability [2]. While there is a chance for the recipient to get economic benefit from various field such by technology sharing and management knowledge, the home country has exposed itself to foreign practice and policy. The importance of foreign investment could not be denied as it has proven to be a globalisation tool especially for companies that are lagging behind.

While Foreign Direct Investment (FDI) could also be a driver to transform a society altogether, one should consider examining all the effects of FDI before deciding to fully benefit from it. 2.2 Different types of ownership structure with its advantage and disadvantages There are many form of ownership structure such as the sole proprietorship, the partnership, the corporation and the co-operative. Owners or shareholders could have maximized their profitability if they have been running the right type of ownership structure. Table 1 shows different ownership structure with its advantage and disadvantages. Figure 1: Different business structure with their advantage and disadvantages Ownership structure Advantage Disadvantage The Sole Proprietorship Easiest form to set up Unlimited liability Owner solely controls the business Can be hard to raise capital The Partnership Shared risk Risk of conflict between partners Shared management Shared decision making The Corporation Limited liability Most expensive form of business to set up Easier to raise capital Involves a lot of ongoing paperwork The Co-operative Owned and controlled by its members Decision making can be slow Limited liability Risk of conflict between members Sources: BusinessLink: Starting a Business -Forms of Business Structure

[3] The easiest to run and most common type of ownership structure is the sole proprietorship in which its business entity is owned and managed by a single person as being shown in the table above. The owner had to ensure the smooth operation of the business and would also be responsible for any profit or loss gained. Unlimited liability means owner have to overcome the debt at his own expense and there would also be difficulties to raise funds.

The sole proprietorship can be organized very informally, is not subject to much federal or state regulation, and is relatively simple to manage and control. Partnership in business means two or more people sharing the risks, costs and responsibilities.

The profits made are shared between the partners who are self-employed. Decision-making is also shared between partners and it is their responsibilities for any debts produced by the business. At least two members must be ‘designated members’ – the law places extra responsibilities on them. Being known to be complex, LLP could cost problems between members when disagreements happened. If the number of partners is reduced, and there are fewer than two designated members, then every member is deemed to be a designated member. Being owned by shareholders, the corporation share profits and losses generated through the firm’s operations, and have three distinct characteristics.

There is a legal existence in which a firm could be sued or even sued others. This type of business could go on for years, as ownership could be handed over through buy out or through the purchase of shares. For LLC, the risk is restricted to the amount of investment made. However, that this type of company also brings a range of extra legal duties, including the maintenance of the company’s public records such as for the purpose of the filing of accounts. A business owned by an organization and run democratically by its members is known as co- operative. The most obvious example is such as the Co-operative Store which is owned by the Co-operative Group which has policy in rewarding it members the share of profits every 6 months[4]. Limited Liability Partnership or LLP means none of the partner takes responsibility for any misconduct caused by other partners[5]. 2.3 Ownership structures of football clubs The three most operated ownership models being used in football clubs which runs as companies are as shown below [L. Nikolychuk, B. Sturgess]: Limited liability companies consisting shareholders and a board of directors. Public limited corporations (plc) with freely tradable equity Football clubs or firms consisting members who jointly own the assets and elect officials on the one member one vote principle. At the top level of professional football such as in the UK, clubs have long been running as limited liability companies. In Spain, most of the football clubs are In Germany, However, there has been transformation towards the plc model that has produced mixed results.

Among the top peer football leagues made of the English Premier League, Spain’s La Liga, French League 1, German’s Bundesliga and Italian Seria A, the Premier League has the best revenue stream but the highest debt. The Guardian (23rd Feb 2010) reported that from the 2007-08 annual accounts produced by the European Club Footballing Landscape, premier league clubs have a total of £3.5bn debt which is around four times the figure for the next most indebted top division, Spain’s La Liga who is domestically owned[]. 2.4 Ownership issues and its controversies Football is now big business and is becoming bigger. Combined revenue for the world’s five largest football nations (England, France, Germany, Spain, and Italy) rose from e1.94 billion in the season 1994-1995 to e6.27 billion by the season 2004-2005. The UK has been leading this global phenomenon (Deloitte, 2006). In the UK, football’s three main revenue streams (match day attendances, broadcasting rights, and other commercial income) have grown much faster than real GDP. Combined turnover of the 20 Premier League clubs rose from £170 million in the season 1991-1992 to £1.33 billion in the season 2003-2004 (Deloitte, 2005). An important and ongoing consequence of these changes is how this relatively new commercial impetus is competing with the sport’s traditional socio-cultural foundation (Morrow, 2003). Over the last few years, football clubs in the UK has reported serious financial problems, resulting in increased concerns about corporate governance. Adam Micheal Rapp (2004) stated that have pointed to the wave of bankruptcies in English football over the past five years as the result of widespread mismanagement or misplaced incentive schemes[]. In order to clean their debt, football clubs have decided to enter administration or to go bankrupt.

The author could not believe that football clubs should be allowed an easy way out by going into administration and then starting from starch again. The response of some commentators has been to assert the dual economic and social role of a football club, maintaining the importance of an inclusive approach to stakeholder relations. This inclusive approach is consistent with the concept of corporate citizenship, which can be understood as the specific activities undertaken by an organisation that are intended to meet social demands in a responsible manner[8]. While corporate citizenship can help to strengthen the social bond between a firm and its community, the successful implementation of corporate citizenship initiatives can simultaneously deliver firm benefits including employee commitment, customer loyalty, and corporate reputation. In turn, these can contribute towards delivering competitive advantage and improving financial performance (Maignan et al., 1999; Fombrun et al., 2000). Birmingham City FC manager, Alex McLeish has expressed his fear regarding the future of British managers after the increase of foreign investors in the Premier League. He pointed that foreign owners are likely to bring in managers from abroad which could even affect young English talent coming through the ranks if home-grown coaches are gradually eroded. Foreign managers work differently to the British managers who choose their own players and scout through their own networks while the foreign managers tend to use an in between director of football who recruits players. If the foreign owners did that in the UK then it would make it hard for English managers to pursue their managerial style. Despite stability in the socio-cultural nature of football, significant economic changes have occurred.

The largest shift that has changed corporate control arrangements relate to the commercialisation and globalisation of the sport. Previous research done in China showed that managerial ownership has a positive effect on firm performance []. Although return on assets (ROA) and return on sales (ROS) decline post-privatization, firms with high managerial ownership and, specially, high CEO ownership, exhibit a smaller performance decline.

The difference is highly significant, with or without controlling for residual state ownership and changes in the firm’s operating environment. In contrast, performance continues to increase with managerial ownership. This finding suggests that, beyond a certain point, the distribution of shares would be more effective if extended to the whole management team instead of being limited to the chief executive. The member owned ownership structure could be implemented in foreign-owned or domestic-owned football clubs. The idea is to be successful in every aspects of football making decisions on what’s best for the clubs rather than what’s best for the owners.

When it comes to foreign owners they may lack the knowledge and the passion to bring the clubs forward as most foreign owners see football clubs as business rather than sports. Among the performance measures being used by firm are such as return on assets, return on sales, and normalized real profits. As foreign investment and globalization continues to increase, developing countries desperately seeking to attract foreign investment can have undesirable outcomes. In this scenario FDI can have numerous negative effects, such as job loss, human rights abuses, political unrest, financial volatility, environmental degradation, and increased cultural tensions. Spar (1999), takes a neutral stance when discussing the complexity of the relationship between foreign direct investment and human rights and the ways in which FDI impacts society both negatively and positively. Portsmouth Football Club had been making headlines for the wrong reason after being the first premier league club to get under administration. Having a changed of ownership 3 times in a year with its latest owner being Balram Chainrai, a Hong Konger. Mr Chainrai has seized the 90% shareholding in the Premier League side that was held by Ali Al Faraj after the club defaulted on loan repayments. Mr Chainrai ordered his lawyers to act on Wednesday when Portsmouth again failed to make due payments by missing the extended deadline given. Mr Chainrai is now the fourth person to own Portsmouth this season after Sacha Gaydamak, Sulaiman al Fahim and Mr Faraj, who has never visited the club. He had expected to receive a sizeable chunk of cash when the Premier League paid all of its 20 clubs £7m from television revenue early last month.

Portsmouth’s share, though, was withheld by the governing body and used to pay a proportion of transfer fees owed to English and European clubs. He hopes to appoint two new members to the Portsmouth board in the next 24 hours and says he is intent on stabilising the finances before looking to attract investors. Portsmouth, who lost 1-0 at Fulham on Wednesday night and are bottom of the league, have been plagued by financial problems despite making tens of millions from the sale of players. This season they have been late paying their team four times – once under Mr Fahim’s ownership and on three occasions after Mr Faraj took control. They are also fighting a winding-up petition served on the club by HM Revenue and Customs before Christmas, which will be heard in the high court on 10 February.

They are also fighting a winding-up petition served on the club by HM Revenue and Customs before Christmas, which will be heard in the high court on 10 February. The club is believed to owe around least £60m – almost half to Mr Gaydamak. He has described himself as a soft creditor and is not currently demanding repayment. The increase in ticket price for some foreign-owned clubs have also been a caused for concern[]. Foreign-owned football clubs such as Manchester City, Manchester United and Chelsea had introduced new ticket price for the 2010/11 season with a 5-10% increase to the dismay of their supporters. Since the UK is in financial crisis, clubs should reduce the burden of their supporters and freeze the ticket price for the time being.

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