Tuesday, July 24, 2012

Clarity at the Top

In four decades of following the sports business, a period that included the dawn of Major League Baseball free agency, numerous labor stoppages, and the introduction of arcane designations brought on by collective bargaining agreements, I can't remember a more compelling case study than The Arsenal. It raises so many issues about governance, strategy, individual decision-making, and brand development, and the club is pretty transparent about these matters.

Thanks to the club's openness and FA and UEFA requirements, we can draw a clear picture of the structure of the business and the strategy driving it. I believe this analysis can help us understand what's going on in the day to day, including the distinctive style of play that makes discussions about the business even more fascinating.

A very public private corporation


Arsenal Holdings, PLC, the club's holding company, is a privately held corporation with a limited number of shares that rarely change hands. According to its July 2012 report, American investor Stan Kroenke owns 66.83 percent of the holding company, while Red & White Securities, itself jointly owned by Alisher Usmanov and Farad Moshri, owns 29.72 percent. Sources suggest that between 600 and 700 individual shareholders, most through Arsenal Fanshare, own the remaining 3.5 percent of the company.

This ownership structure took shape over the past five years, Kroenke having begun his involvement with a 9.9 percent stake in 2007. The key moment came in April 2011, when Kroenke took majority control by buying out major shareholders Lady Nina Bracewell-Smith and the late Danny Fiszman, as well as smaller shareholders headed by Peter Hill-Wood, still the club chairman. The takeover triggered an automatic bid from Kroenke for Usmanov's stake, which was rejected. See The Guardian's football blog for a detailed account of the transaction.

Kroenke has sat on a six-member Board of Directors since September 2008. Despite his dominance now, he has not fundamentally changed the direction of the business, as some other relatively new owners of English clubs have done. Indeed, recent statements from CEO Ivan Gazidis reaffirm the board's unanimity about the company's strategy, a strategy that took shape before Kroenke became a controlling influence.

Usmanov, who does not have a seat on the board, has made public his disagreements with the board's decisions, but corporate governance in the capitalist system being what it is, Kroenke and the rest of the board can orient the business the way they see fit. Its goal, as it should be with any responsible corporate governing body, is to create the most valuable company it can.

A strategy obvious, yet not

In addition to a set of choices about how to allocate resources, strategy, the experts emphasize, is as much about what organizations don't do as it is about what they do. In the case of Arsenal, the board made a clear choice not to rely on the wealth of an owner who would fund operational losses; that was the option chosen by Chelsea when Roman Abramovich took over in 2003.

Instead, the club's leadership oriented it to live within its means, or in a more technical description, to keep its operating income positive. You'd think that was basic business, but in the modern world of professional football, it is extraordinary: Arsenal's record of annual profitability since 2002 is unparalleled among top-level English football clubs.

This "self-sustaining model" is pure Arsenal: understandable, sensible in a 20th-century English sense, functional, and, to a certain degree, consciously righteous.

Elements of strategy: calculated risks

The approach seems so sensible on its face and so in line with perceptions of the club that many observers overlook the quite considerable risks the board is willing to take. Instead of equating risk-taking with a willingness to spend outsized amounts on individual players, let's look at the risks the board has taken in service of the strategy.

The two most prominent examples of the board's risk-reward calculus are the decision to finance privately and build the Emirates Stadium and the decision to shape the accounts in anticipation of UEFA's Financial Fair Play (FFP) standards. It's worth noting that no other Premier League team has embarked on a stadium project of the scope of the Emirates. This gives Arsenal a significant competitive advantage, in that it supports the club's tradition of setting a high standard, it creates a platform for the league's second-highest (to Man United's) match-day revenue, and it could in theory work to attract and keep players.

In some ways, the plan to adapt early to the stipulations of Financial Fair Play is an even bigger risk, because the club is relying on the governing body to enforce its stated regulations to the letter. It remains to be seen whether UEFA will put any force behind FFP, penalizing those clubs that do not live within their means. See the PudTheFirst blog for a particularly clear analysis of the prospects. If UEFA goes weak, Arsenal will be at a competitive disadvantage as the monied clubs continue to rely on the largesse of their owners and expand their payrolls.

There is a strong argument that joining the FFP-skirting feeding frenzy of Man City, Chelsea, and now PSG would leave Arsenal empty at its core. It would be presumptuous of me to say; however, it seems to me that this choice supports the club's core identity, which the board has rightly determined to be its most valuable intangible asset. I hope that some people reading this will be able to call upon many more years of club knowledge and support to testify to this interpretation.

This analysis of strategy leads to a discussion of how the club's leadership is positioning and managing the brand. If it's successful, that process capitalizes on the notion that football clubs are "more than a business." That will be the topic of my next entry.

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