Wednesday, June 10, 2015

Brian Gaynor: Too much… the culture that toppled FIFA

The FIFA controversy, particularly the rise and fall of Sepp Blatter, is probably more about business, money and governance than sport. It clearly demonstrates that sporting bodies operating under a feudal system – with 19th century rules – may not have the appropriate governance structures to effectively manage large inflows of money.

It also shines the spotlight on Swiss secrecy and the criticism of the country’s banking sector for its lack of transparency.

With this in mind it is not surprising that FIFA, which wouldn’t win any awards for transparency, is based in Zurich.

Andrew Jennings revealed FIFA’s poor disclosure and corrupt practices in his 2006 book Foul! The Secret World of FIFA: Bribes, vote rigging and ticket scandals.

There has been so much interest in the FIFA story that a secondhand paperback edition of Jennings’ book has an offer price of US$1734 ($2429).

This money also has to be astutely and ethically managed.

The Federation Internationale de Football Association (FIFA) was founded in Paris in 1904. It has had only eight presidents since 1904, the first six from England, France and Belgium.

The sixth president was Sir Stanley Rous who reigned from 1961 to 1974. Sir Stanley was a former international referee with the old-fashioned English view that football was about the game rather than money.

FIFA changed dramatically in May 1974 when Joao Havelange of Brazil defeated Sir Stanley by 68 votes to 52 after aggressively lobbying FIFA delegates. Havelange’s election represented a major shift in FIFA’s power base from Europe to the new world and from amateurism to big money.

Keith Botsford wrote in the UK Sunday Times of “little brown envelopes being passed around” with the sentiment that “if that’s not enough please tell me”.

Botsford was deeply concerned about the outcome of the 1974 election because “Sir Stanley was a bulwark protecting football against the twin evils of Too Much Money and Too Much Politics”.

He wrote that “Havelange is a creature of the Too Much”.

Botsford’s predictions were astute – Havelange signed up adidas and Coca-Cola as principal sponsors and television money began to pour into FIFA’s head office in the 1980s. FIFA became an extremely wealthy organisation but there were constant allegations of corruption against the Brazilian president and other FIFA executives.

Sepp Blatter joined FIFA in 1975 and was appointed general secretary, the governing body’s second highest ranking position, in 1981. He replaced Havelange as president in 1998.

FIFA is an enormous organisation with total revenue of US$1910 million last year. FIFA is far bigger than the International Cricket Council and the World Rugby Council, the international governing bodies of two major New Zealand sports.

But all three have a huge spike in revenue in their world cup years.

FIFA’s revenue soared 57 per cent to US$1.9 billion last year, mainly because of the World Cup in Brazil. The largest contributors were television (US$743 million), ticket sales (US$477 million) and advertising (US$465 million).

At the end of last year, FIFA had US$1.1 billion in cash and US$1.3 billion of financial assets, a total of US$2.3 billion. This is an incredibly large figure for an organisation with no debt and in a sport that is extremely wealthy at many levels.

For example, Barcelona FC reported revenue of 530 million ($832 million) and net earnings of 42 million last year, and has reduced its net debt from 431 million to 44 million over the past four years.

 Sporting revenue – Boom times, particularly in World Cup years
World Governing Bodies
FIFAUS$ million1,910*1,2201,109988
International Cricket CouncilUS$ million196110132321*
World Rugby CouncilUK£ millionn/a78219*
New Zealand
NZ FootballNZ$ millionn/a1710n/a
NZ CricketNZ$ million46453945
NZ Rugby UnionNZ$ million121117107101
*World cup years

FIFA’s structure – eight presidents in 111 years, all 209 member countries having one vote each, huge financial resources and a low level of transparency – are foundations for privilege, patronage and corruption.

It would be easy to buy patronage because many of FIFA’s 209 member countries are extremely small and their votes could be cheaply bought.

Members with small populations, such as the Caribbean island of Montserrat with less than 10,000 people, get one FIFA vote as do Brazil, China and England.

Based on Jennings’ book and the recent controversy FIFA needs a complete reorganisation, not just a change at the top.

There is also a low level of transparency at national levels. For example, Football Federation Australia does not post its annual report on the web whereas Cricket Australia and the Australian Rugby Union do.

New Zealand Football, which has yet to post its 2014 annual report on the web, had revenue of just $17 million for 2013, a net surplus of $2.5 million and year-end cash of nearly $19 million.

New Zealand Football has established a separate entity, the New Zealand Football Foundation, to manage the $4 million it received for qualifying for the 2010 World Cup.

The International Cricket Council gets most of its revenue from the World Cup, the Twenty20 World Cup and the ICC Champions Trophy.

Cricket’s governing body reported a net surplus of US$128 million for last year, compared with US$65 million for the previous year.

At the end of the year, it had US$53 million in cash and financial assets of US$116 million, a total of US$169 million.

Several national bodies, particularly Cricket Australia (CA) and the England and Wales Cricket Board (ECB), are also in strong financial positions.

CA generated revenue of A$292 million ($315 million) for the year to last June, and had a surplus of A$102 million before distributing A$92 million to state associations.

It had cash resources of A$85 million at year end.

The ECB generated revenue of £175 million ($377 million) in its latest year, a net surplus of £28 million and had year-end cash of £67 million.

The Black Caps’ recent success has been remarkable – particularly when viewed in terms of financial resources – as New Zealand Cricket reported revenue of just $46 million for the year to last July, had a small loss and held only $6 million of cash at year end.

The World Rugby Council, formerly known as the International Rugby Board, is more like the FIFA of the Sir Stanley Rous era rather than the FIFA of today. This is a compliment rather than a criticism.

Rugby’s governing body generates most of its revenue in World Cup years – through television, tournament fees, sponsorship and merchandising – and spends the money over the following three years.

Nevertheless at the end of 2013 – its latest financial accounts – WRC had 132 million of cash, shares and bonds.

The New Zealand Rugby Union had revenue of $121 million last year, mainly from commercial income of $87 million and fixtures and tours revenue of $16 million.

NZR has performed extremely well, particularly given the small size of the domestic commercial market. It had cash and financial assets of $88 million at the end of December.

But NZR’s biggest challenge is to stop its younger players from moving to the Northern Hemisphere, particularly to wealthy French clubs.

These French clubs have lucrative television contracts, are often owned by wealthy individuals and have generous salary caps.

Forty years ago FIFA underwent a major change when Joao Havelange replaced Sir Stanley Rous and football’s governing body came under the influence of “Too Much Money”.

The biggest challenges facing New Zealand sporting organisations are the limited commercial opportunities at home and the “Too Much Money” syndrome in the Northern Hemisphere.

Brian Gaynor is an investment analyst and the Executive Director of Milford Asset Management. 

No comments: