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The Evolution of Irish PLC Co-operatives - Lessons for English Football Clubs

Ann Bourke, Department of Business Administration, University College Dublin
Paper for Conference on the Corporate Governance of Professional Football
Birkbeck College, London, 3rd February 1999


Contents
Introduction
Setting the scene...
Football - a Business or Sport?
Co-operatives - what are they?
Shift to PLC status
Parallels for Football Clubs
Concluding Comments
References

Introduction

The contemporary sport industry is complex, with unique legal, business and management practices and imperatives. Structures in sport (leagues, club system, and tournaments) have evolved in response to broad social changes and to address specific issues within a segment of the sports industry. This paper considers briefly the factors which have contributed to recent changes in football in England. While many developments are positive (better player and spectator facilities), there are indications that business interests in the game are now determining the sporting aspects. The more overt signs of corporates running clubs is reflected by the ownership structure adopted by many clubs. Individuals associated with some of the leading football clubs identified some years ago the potential to reap financial gains and engaged the services of business consultants to support their efforts. For them there has been much financial success - but is the game in better shape?

Reports on the financial state of the game constantly refer to the divide between the rich and poorer clubs, the scarcity and high cost of local talent, and poor financial results achieved by the majority of clubs. Trevor Watkins in an effort to save Bournemouth from financial ruin in 1996, has put a supporters' and community trust in place, which put the club in the hands of people whose loyalty will last much longer than that of any potential white knight new chairman, coming in on an agenda of his own to put money into the club (Conn, 1997). There are several possible ownership arrangements for football clubs (as noted by previous contributors), but the option proposed in this paper is the Plc cooperative.

Dairy cooperatives are common in Ireland, but in the late 1980s four of the leading cooperatives adopted PLC status, yet the essence of cooperative ownership has been maintained. The new organisational structure which evolved is not replicated in any other country, and is unique in that it caters for the farmers interest in the longer term. Parallels between developments in the Irish dairy sector and English football exist, especially in relation to financial needs during the mid 1980s. It is acknowledged that while there is a variation in relation to operational issues in both industry sectors, nevertheless, from the ownership perspective the Irish development incorporates the interests of a broad sector of the population and more particularly the core supporters - the farmers. There is no reason why such an arrangement can not be organised to cater for the concern of fans in football clubs.

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Setting the scene...

Conn (1997) asserts that had the English Football Association (FA) been more in tune with the needs of soccer during the 1980s, many of the changes which have occurred since then may not have happened, or may have taken a different format. Drawing on the FA publication 'Blueprint for the future of Football' published in 1991, he suggests that this document with its graphs and charts and chasing the middle class consumer, had it the wrong way round. According to Conn the first requirement needed to bring the game into the modern era was unity in the administrative structure. The fact that the idea floundered on the steps at Lancaster Gate has possibly, more than any other factor contributed to recent developments in the game. In 1992, twenty-two clubs managed (and were supported by football's governing body, the FA) to breakaway from the English League and form their own league, illustrating a lack of interest or inherent weaknesses of the body which is supposed to be custodians of the game.

The necessity for clubs to upgrade their facilities had been ascertained in the 1980s, particularly in the wake of the Hillsborough disaster. The Taylor Report recommended investment in all seater stadia which has been undertaken by the clubs with some government aid, but in their view at considerable cost. Following such investments it was necessary for clubs to adopt a more professional approach to financial and management matters. Individuals associated with football clubs rarely adopt a long term focus so every single top football club to get over the short term cost of the Taylor Report and enter the altogether more lucrative world beyond, has had a takeover, a flotation, or financial reorganisation of some sort (Conn, 1997). These were not like the old deals, the shares hawked around pubs or money put in, in return for a seat in the directors' box and a name in the programme. The football clubs were now investment vehicles and this was corporate dealing. It could have been otherwise as the evolution of the Irish PLC co-operative described later in this paper illustrates.

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Football - a Business or Sport?

The question is frequently posed as to whether the football industry is different from that of other service sectors such as catering, banking or educational services. To answer this question it is necessary to focus on its constituent elements - inputs and outputs. In relation to the output of a sports club the following quotation from economist S. Rothenberg (cited by Dempsey and Reilly (1998)) is pertinent. He wrote the following about American Baseball over 40 years ago in a classic analysis of the sports business that still applies to day to football or any other team game:

Two teams opposed to each other in play are like two firms producing a single product. The product is the game, weighted by the revenues derived from its play. With game admission prices given, the product is the game weighted by the number of paying customers who attend. When 30,000 attend, the output is twice as large as when 15,000 attend. In one sense the teams compete; in another they combine in a single firm in which the success of each branch requires that it be not 'too much' more efficient than the other. If it is, output falls.

While the above quote encapsulates the essence of the core output of football clubs, it begs the question as to what are the corresponding inputs. Firstly, a clubs' infrastructure will comprise of a football stadium and training grounds. Other important aspects of football club management include finance, organisational structure, marketing strategies and technology available. Football clubs are service organisations, consequently personnel is a key resource - the CEO, the manager, coach, players, medical staff etc. [It is worth noting that recruitment strategies employed by clubs in relation to key personnel (players and managers) deviates in many respects from those employed by banks or hotels - but this is beyond the remit of this article].

The Rothenberg quote above stresses the fact that football like business in general is characterised by uncertainty of outcome, but this case is unique by virtue of the fact that two teams (opponents) are producing a single product (the game). Many firms produce similar products (Siemens and Nokia produce mobile telephones), have differing levels of efficiency, and are expected to outmaneuver their rivals to gain competitive advantage. Managers and chairmen of football clubs aim to win championships etc. but the perspective adopted is not, and will not be a long term one. This may be due to the lack of focus or managerial skills on the part of individuals associated with clubs, the stage of development of the football industry, or the volatility of the sector. Gordon Taylor (cited in Dempsey and Reilly, 1998), acknowledges that there are some major structural differences between football and music, film or television, but as far as the logic behind the cost of the best talent is concerned they are very similar.

There is no definitive answer to the above question, and many clubs are now adopting a 'business' approach to their activities. But the core activity still poses a dilemma. Soccer for many people is a religion, gives rise to passion and can be a source of unity or disunity. Fans are an endangered species with the new forms of ownership - in order to accommodate important sociological dimensions, a cooperative style of ownership is appropriate. In the following paragraphs the essence of the cooperative arrangement is detailed and background information provided in relation to the conversion to PLC status by four Irish dairy co-operatives during the late 1980s.

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Co-operatives - what are they?

Co-operatives developed as a means of organising large scale operations (Smith, 1983). Most co-operatives date from the Industrial Revolution, though some such as those making Gruyere or Emmenthal cheese in France and Switzerland were formed before the thirteenth century. There are no clear-cut commonly accepted understanding as to what a cooperative is (Hind, 1997). Hind contends that many authors (Bateman, Edwards, and LeVay) have attempted to provide a workable definition and conceded defeat. According to the Registrar of Friendly Societies the distinguishing features of cooperatives from non-cooperatives are as follows

     

  1. Conduct of the business must be for the mutual benefit of the members, with the benefits they receive deriving mainly from their participation in the business

     

     

  2. Control of the cooperative must be vested in the members equally e.g. the principle of one member, one vote is fundamental

     

     

  3. Interest on capital will not exceed a rate necessary to obtain and retain sufficient capital to carry out the cooperative's objectives

     

     

  4. Profits, if distributable, will be distributed in relation to the extent members have either traded with the cooperative or taken part in the coop's business and

     

     

  5. Membership must not be artificially restricted with the aim of increasing the value of any proprietary rights and interests.

     

The aim is to ensure a genuine community interest among the cooperative's members based on something other than the amount of capital they have placed in the organisation.

The purpose of a cooperative dictates its way of working, but is often ill defined. The objectives may be categorised as economic and non-economic. According to Smith (1983) the cooperative follows its own interest, seeking for the members the best possible return on milk supply, labour, or grocery purchases as the case may be. Cooperatives have become composites: it is a cooperative as far as members' own trade is concerned but capitalist in relation to outsiders. A cooperative is an association of people rather than capital; capital subscription does not form the basis of voting power. In most cooperatives each member has one vote irrespective of the amount of equity he contributed.

The Irish dairy industry has traditionally been dominated by cooperative organisations which are owned by suppliers of the cooperatives. Cooperative rules1 ordain that the shareholdings in these cooperatives can only be traded at par value while the level of return in terms of share interest is also limited by cooperative rules. Some amalgamations had occurred in the 1970s which reduced the number of cooperatives and increased the membership of individual cooperatives, but the core ethos of cooperatives remained. In the US, two forms of reorganisation of cooperatives emerged (a) conversion and (b) refinement of traditional cooperative principles and practices. In the Irish dairy sector the new form of organisational structure which evolved was a combination of corporate and cooperative, which importantly for the farmers retained the cooperative dimension.

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Shift to PLC status

There is little doubt about the success of the cooperative movement in Ireland, especially in the dairy sector where co-operatives or co-operative controlled firms, account for virtually all the milk purchases from farmers (Harte, 1997). In 1992, the dairy cooperative sector in the Republic of Ireland employed 19,462 people and generated a turnover of 4954m (ICOS). The conversion by some Irish dairy coops to PLCs has been referred to as an entrepreneurial event (Mahon, 1998). According to Harte, the two primary reasons for the change to Coop Plcs was (a) the need to gain additional capital for growth and (b) the need to provide shareholders with a current market value for their shares. A third reason was the need to provide a mechanism to reward and promote executive staff.

The general method by which traditional cooperatives were converted to Coop PLCs was as follows:

A new public company was formed with two types of share capital, 'A' and 'B' shares, having equal ranking. The 'B' shares were issued to the original cooperative in exchange for its assets and subsidiary companies. Some of the 'A' shares were then offered to farmers and employees at a discount on the expected market price of the shares. Further 'A' shares were then placed in public flotation. As currently constituted, the shareholding of the cooperative in the public company must be maintained above 50% giving the cooperative majority control. This control structure is copper fastened by requiring agreement by 75% of farmer members in two consecutive extraordinary general meetings to permit the cooperative shareholding to fall below 50%.

In the following paragraphs, the mechanics of the change over are detailed in relation to the four Irish dairy cooperatives which opted for the conversion at that time - (a) Kerry, (b) Avonmore (c) Waterford and (d) Golden Vale. However, it must be noted that there are slight variations in the approach adopted by the organisations and some changes have occurred more recently.

     

  1. Kerry Cooperative Creamery was the first cooperative to turn all of its assets into shares in a Public Limited Liability Company - Kerry Group Plc. It swapped all of its assets into ninety million 'B' shares in the newly founded Plc. The coop had authority to increase this number to a statutory maximum of 102 million B shares. Kerry Group Plc could also place 98 million 'A' shares on the stock exchange. The ninety million B shares owned by Kerry Cooperative Creameries Ltd. were non-marketable and were indirectly owned by the 6000 shareholders in the cooperative. This would ensure that effective control of the organisation remained in the hands of the cooperative members. Subsequently, Kerry has converted all of the B shares into A shares, thus they are tradable on the stock exchange, allowing the cooperative to reduce its shareholding in the plc if the cooperative members wished. As at the year-end 1997, Kerry Cooperative Creameries Ltd. owns 38% in the Kerry Group Plc. (see Annual Report, 1997)2.

     

     

  2. Avonmore and Waterford had structures similar to Kerry Group plc whereby the cooperative retained majority control of the Plc by owning the non-marketable B shares, which accounted for more than 50% of the total shares issued. Avonmore cooperative in 1988 placed all its assets in Avonmore Foods Plc3 in exchange for 100 million 'B' Shares in the plc. They subsequently issued 39.1 million marketable 'A' shares. The issue of shares by Avonmore Foods Plc was bound by a statutory maximum of 196 million.

     

     

  3. Waterford Cooperative Society in 1988 was turned into a holding company, owning the majority of shares in the new Waterford Foods Plc. Statutory authorised share levels were determined to be 115 million 'A' shares and 120 million 'B' shares.

     

     

  4. In the case of Golden Vale the arrangement is slightly different, as the cooperative does not control the Plc by owning the majority stake. Instead the plc owns 2 million of the 2,004,243 shares in the cooperative Golden Vale Food Products Limited. The less than 1% ownership of cooperative ownership not held by the Plc is accounted for the 4,243 cooperative shares held by the milk suppliers. The cooperative Golden Vale Food Products Limited is a pure cooperative, as each member has only one vote in the running of the cooperative regardless of the number of shares held. Thus the Plc has only one vote, the same as any other supplier. So the cooperative does not control the Plc , it does control the milk pool and is also responsible for primary processing.

     

Effects of the Ownership Change

Farmers have had a long tradition of involvement in the cooperative movement, and many were reluctant to convert the cooperative society to a Plc. From the farmers' perspective, the new structures allowed them retain some 'control' in the running of the cooperative.

Since each of Avonmore, Waterford, and Kerry have retained in some degree substantial interest of the cooperative predecessor, each farmer has in effect a two stock portfolio. His first stock is the conventionally tradable Plc shares, his second is his non-transferable cooperative share. Farmer's portfolio management is unique in that it is two tiered - they are holding tradable Plc shares, which also entails involvement in non-marketable assets. This involvement is due to their holding non-tradable 'B' shares in the vestigial society cooperative of their Plcs.

The introduction of three cooperatives to the stock exchange represents the single most important advance in broader share ownership during the past two decades (Hogan, 1989). Between them, they have 22,500 shareholders from diverse rural areas, the vast majority of whom are unlikely to have had any previous direct share ownership. The restrictive share structure is designed to prevent takeovers, which in Hogan's view is a necessary spur for economic efficiency.

The new Plc Coop structure provided a new funding mechanism for these organisations, but it had also more far-reaching effects. Along with solving the funding problem, it provided a means by which many of the problems associated with vertical ownership by farmers, and with the cooperative structure could be overcome. Incentives were enhanced through the use of staff equity participation and the use of stock options. It provided a mechanism by which the 'straight jacket' of the cooperative form could be shed and the growth potential of the enterprise realised (Harte, 1997).

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Parallels for Football Clubs

Some football analysts and indeed supporters will argue that television and television money has made a major contribution to the newfound popularity of soccer. According to John Williams (cited by Dempsey and Reilly, 1998), people now want to be identified with a football club, not because it is authentic and gritty and working class, but because it is hot and sexy and people are buying into it, and you have to have a connection to be authentic. Showing an interest in the game is like saying 'I am aware of what is happening'. Football is the hot leisure and cultural pursuit to be involved in. Fans are not simply the people that come and watch. Fans are in the truest sense of the word, consumers.

But, this was not always the case. Football clubs during the 1980s lacked organisational skills and focus which became evident in such catastrophes like Heysel and Hillsborough. By 1990, it was imperative for clubs to plough money in to their facilities and as Conn (1997) has outlined short termism ruled, as a result the funding strategies employed allowed individuals with money who professed to having an interest in the game to gain control of many clubs. Had a more long-term approach been taken, and the core support of the game been better informed, interested and organised, organisational structures in place in many clubs might be different today.

The plight of the dairy industry in Ireland at the same time was slightly different. There was plenty of interest in its fortunes, but it was regulated and the management style of cooperatives was very conservative, and bereft of a forward-looking perspective. The introduction of milk quotas forced dairy cooperatives to consider diversification strategies. To extend their business activities beyond the milk business, it was essential to change the organisational ethos and introduce a more professional style of management and gain access to funds. The notion of conversion to Plc status was not greeted warmly by a large proportion of members of the cooperatives, but the arrangement put in place guaranteeing these members 'control' of the new business structure (as outlined above) went a long way to allaying members fears.

Manchester United changed its organisational structure becoming a Plc in 1991. It currently has 27,737 small shareholders controlling 23.4% of the issued capital (see Annual Report, 1998). It has been documented that many years ago people who had shares in the club were relieved of them by individuals who possessed business acumen, and an appreciation of the real value of shares in a private company. Had there been a broader and more informed shareholder base in the club prior to the conversion to a Plc, plus the recognition of the need to maintain this, then the Plc cooperative would fit neatly into the club structure. The adoption of cooperative principles (giving one person one vote) would not have restricted the growth and development of the club.

All four Irish dairy Plc Cooperatives have experienced major growth since the new structure was adopted. For example in the case of the Kerry Group Plc, turnover since 1986 has risen from 265.2m to 1,344.1m in 1997; and operating profit in 1986 was 11.2m, by 1997 it had risen to 104.9m. The Kerry Group has internationalised mainly by acquisitions and now has many wholly owned subsidiaries outside Ireland - in Europe, North America, Australia and New Zealand. There has been similar patterns of growth and expansion at the other three organisations (see Annual Reports).

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Concluding Comments

Dunning (1997) points out that soccer (which originated in England) has attained international success, but this success has engendered a set of problems of its own. He summarises them as follows (a) the problem of corruption - deriving from the financial consequences of the game's success; (b) the related threat posed by the increasing involvement of television which could lead to an over enhancement of soccer's spectator character and destroy its character as a sport; (c) player indiscipline and violence and (d) the problem of football hooliganism.

Andy Mitten (1998) asserts that a football club isn't just like any other business and football fans aren't just any other customers. A fan supports a club because in his view it is in the blood, usually passed down from generations above and with that support comes an emotional investment that exceeds any share, dividend or equity option. Without supporters (fans) football clubs will cease to exist. They are as important for the long-term fortunes of the club as farmers have been for the continued existence of dairy cooperatives. Changing demands of the dairy sector in Ireland lead to the reorganisation of cooperatives, it is interesting to note that the important role of farmers (as suppliers) has been acknowledged, but within the football sector it seems that senior executives, consultants, analysts and their advisors believe that the fan base is stable and secure.

It is clear that the current ownership arrangements in most clubs (whether private of public companies) manages to concentrate ownership amongst a few, and ensure the fans have little or no involvement. Television may indeed destroy the character of the game so how will professional clubs manage for funding then? The need for a long-term focus among club management and personnel has already been stressed, and one way of so doing is engaging people at community level in the club, like cooperatives do with farmers.

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References

Conn, David, 1997, The Football Business, Mainstream Publishing.

Daft, Richard, 1995, Organisational Theory and Design, West Publications.

Dempsey, Paul and Reilly, Kevan, 1998, Big Money Beautiful Game, Nicolas Brearley Publishing.

Dunning, Eric, 1997, 'The Social Significance of Soccer', CRSS Leicester University.

Egerstrom, Lee, Bos, Pieter and vanDijk, Gert, 1996, Seizing Control - The International Market Power of Cooperatives, Lone Oak Press.

Harte, Laurence, 1997, 'Creeping Privatisation of Irish Co-operatives: a transaction Cost Explanation', in Nilsson, J. and vanDijk, Gert, (Eds.), Strategies and Structures in the Agro-food Industries, Van Gorcum

Hogan, John, 1989, Privatisation in Ireland - the example of Dairy Co-Operatives, Working Paper No. 3, Centre for Study of Financial Markets, Michael Smurfit Graduate School of Business, University College Dublin.

Hind, Abigail, 1997, The changing Values of the Cooperative and its Business Focus, American Journal of Agricultural Economics, Vol. 79, No. 4, pp 1077 - 1082.

Horseman, Mathew, 1997, Sky High - the Inside Story of B Sky B, Orion Books.

Mahon, Brendan, 1998, The Irish Dairy Industry: a Study of Farmer Members' Equity Shares in the Co-ops and Co-op PLCs, Unpublished Masters Dissertation, Faculty of Agriculture, University College Dublin.

McDonnell, Neil, 1998, Issues in Portfolio Management for Farmers with Equity in Co-operative PLCs, Unpublished MBS Dissertation, Smurfit Graduate School of Business, University College Dublin.

Mitten, Andy, 1998, 'Northern Soul', Manchester United, Vol. 6, No. 11, p. 11.

Nilsson, Jerker and vanDijk, Gert, 1997, Strategies and Structures in the Agro-food Industries, Van Gorcum.

Smith, Louis, 1983, 'Economists, Economic Theory and Co-operatives' in Kennedy, Liam (Ed.), Economic theory of Co-operative Enterprises, The Plunkett Foundation for Co-operative Studies.

  1. Rules for cooperatives are approved by the Irish Cooperative Organisation Society Limited (ICOS).
  2. In order to allow the cooperative stake in Kerry Group Plc to be reduced to a level below 50%, two extraordinary general meetings (EGMs) were held and the change was supported by 75% of the membership.
  3. Avonmore announced a name change from the Avonmore Foods Plc on Jan. 19 1999 - it will be known as Glanbia.


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