Sports Governance, Financial Controls and their Impact on the Brazilian Football

Sports Governance, Financial Controls and their Impact on the Brazilian Football

by Marcos Motta[1] and Pedro Fida[2], Partners of Bichara e Motta Advogados

*Published in Football Legal, #2 – Special Report on Financial Controls of Football Clubs (December 2014).

 

I.Introduction

Sport is commonly seen as a social tool around the world, not only for establishing hidden links between all types of people living in society, but especially for developing itself along with societies. Secular political instrument, sport has become a relevant worldwide industry, and frequently its players produce extremely creative financial innovations, that may generate economical or sportive preoccupations.

Football in Brazil is clearly a social tool, and it has gradually evolved as a significant and complex industry that needs proper management, governance, and financial controls.

Following the tragic result for Brazil after the match played against Germany during the semi-final of the FIFA World Cup 2014, the Brazilians could not believe in the final score, and it ultimately provoked several reactions in the entire nation, specially the will to modernize and restructure the Brazilian football from grassroots to the board of directors of clubs and federations. In this sense, the present article gathers recent discussions and reflections in Brazil about sports governance, management, and financial controls applied to the football industry.

 

II.Overview of Brazilian Football: Facts and Numbers

As a threshold matter, we clarify that – save for few local but successful initiatives as in the São Paulo State Football Federation – the Confederação Brasileira de Futebol (“CBF”), the national governing body of football in Brazil, currently does not have in place any national mechanism or regulations of financial controls in football. Therefore, players of the football industry have been discussing alternatives and potential mechanisms to implement concrete changes.

The structure of the Brazilian football competition is divided into two different and independent pyramids, which are regulated at national and state level, respectively. The National competition is overseen by the CBF, which is responsible for all four different divisions, “Séries” A, B, C and D, which in practical terms represent respectively 1st, 2nd, 3rd and 4th divisions. An average of twenty teams integrate each Série, except for Série D, which includes approximately forty teams. Série A and B each play competitions on national and state levels, whereas Série C and D each play a regional group format. As with every other league, the four top placed teams of each division and the four bottom placed teams are promoted or relegated, respectively to the appropriate division.

Additionally, the four top placed teams of the Série A automatically qualify for the Copa Libertadores da América which is the equivalent to the UEFA Champions League, but less lucrative. Due to the numerous teams competing in the (26) twenty-six States of Brazil, each State organizes a state championship, which would allow non-league clubs to participate, and the four top placed clubs would qualify for Série D. Clubs have managed to rise through the divisions and compete in the Série A. It has also been witnessed that clubs who were top tier material have found themselves relegated down through the leagues and drop off to State Championship. [3]

The twenty‑six respective State football federations, for example the Federação Paulista de Futebol (¨FPF¨) of the State of São Paulo, regulates the State competitions in São Paulo. Moreover, there is no uniformity in the method of regulation for competition; for example, some States play a round robin fixture others do not. The State competition is divided up to four tiers, with São Paulo being the only State to have teams on all four divisions. All Brazilian teams play the Copa do Brasil, which gives the winning team automatic qualification to the Copa Libertadores.

 

III. Brazilian Football: An Economic Perspective

According to recent economic studies and research, Brazilian football clubs had their revenues increased from 28% (2011) to 31% (2012), backed by an increase in TV broadcasting contracts, ticketing and the sale of economic rights of football players[4]. As naturally expected, the clubs invested most of their assets in the improvement of the main squads by hiring new talents, as well as with the payment of endless debts that accumulated throughout the years and presidential mandates.

 During the past years, most of the Brazilian clubs have had a drastic economic performance, because of precarious management that seem to ignore basic principles of finance and assets management. It might sound strange, but as an example, the vast majority of Brazilian clubs hired more players than needed, frequently for significant prices, and usually as a response to the fans’ pressure. Added to that, the economic rights of football players have always been one of the main and beloved income resources for Brazilian clubs, which ultimately could count on these rights to keep their activities and existence.

III.1. Revenues

Despite of the fact that the revenues of Brazilian football clubs usually derive from TV rights, advertising/sponsorship, sale of players, ticketing, fans’ programs, and stadium rentals, the difference in values is very significant between the first division clubs. Generally, clubs with a bigger fan base and better managerial structure present higher revenues in all the previously mentioned segments, as detailed below. In this regard, the increase of the clubs’ revenues also followed a similar logic.

In general, by analyzing the financial statements of Brazilian clubs as from 2011, they usually depend on the sale of players and competition titles in order to present yearly a significant or minimal variation of revenues.

(i) TV Rights

The relationship between TV and sports has become “increasingly intertwined throughout the world, and in Brazil, this is no different[5]. Due to an increase in the number of Brazilians with higher incomes, and a boom in telecoms, media and entertainment, the relationship between sport and TV has witnessed an exponential growth. TV rights, depending on the agreed terms between the parties involved in significant deals, allow football matches in Brazil to be broadcasted, and viewed at a larger scale.

In Brazil, the most recent TV rights’ deals between clubs and the national broadcaster Globo registered high amounts being paid to clubs, and even higher amounts are expected when those deals will be renewed in 2015. As expected, Brazilian clubs have shared the income from such TV Rights and in fact, this is reflected in their total yearly revenues, with at least 36% being attributed to TV rights[6].

However, the distribution of this income is not equal among all clubs, and it follows a similar structure as seen in the Spanish league, with the top five Brazilian clubs – in terms of fans’ numbers – earning a significant sum in comparison to the remaining clubs. As an example, the income disproportion attributed to TV rights can reach a difference of almost six times between the first best-paid club and the top bottom clubs.

Unfortunately, due to the lack of cash flow in the Brazilian football clubs, the revenues derived from TV rights are usually paid in advance by Globo to clubs, and long before the broadcasting contracts expire. As an example, in 2014, most of the Brazilian clubs requested the anticipation of their payments, related to the 2015 TV rights, to the national broadcaster Globo.

Consequently, these attitudes compromise the clubs’ future years and cash flow, by impeding them to rely on the revenues they were entitled to. Furthermore, given that the clubs’ presidents and board of directors frequently change in Brazil, it is common to see situations in which a new coming president cannot count on the TV rights’ revenues that year because his predecessor had already spent it the year before. In view of conducts like this, fans and Brazilians frequently attest a low level of professionalism, poor management and practically no corporate governance principles in the daily routines of clubs.

(ii) Sale of Players & Economic Rights 

According to the FIFA Regulations on the Status and Transfer of Players, the sale of a player consists in the sale of the player’s registration rights from one club to another. In general, if such registration rights have not been transferred from the club, then no sale has been concluded. In this sense, and as defined by the Court of Arbitration for Sport in its solid jurisprudence on the definition of economic rights, “a club holding an employment contract with a player may assign, with the player’s consent, the contract rights to another club in exchange for a given sum of money or other consideration, and those contract rights are the so-called “economic rights to the performances of a player” […]; this commercial transaction is legally possible only with regard to players who are under contract, since players who are free from contractual engagements – the so-called “free agents” – may be hired by any club freely, with no economic rights involved.”[7]

The distinction between the registration and economic rights have caused a debate among the members of the football family, due to the increase of third parties’ investments in football. As seen in Portugal, Spain, South American countries and many others around Europe, third party investments usually allow clubs to purchase and sell players’ economic rights and thus facilitate the renewal of squads. Moreover, the sale of economic rights result in the injection of revenues in the clubs, and allow them to count on a significant source of income with less bureaucracy than banks.

In Brazil, transfers involving the purchase and sale of economic rights is a reality, and more than 80% of the Brazilian squads in the first division “Série A” are composed by players with economic rights divided between the clubs, players themselves, investors, and other third parties.

Additionally, given that Brazil is the biggest exporter of football players around the world, as acknowledged by the FIFA TMS Report (2014 Edition)[8], from January 2011 to June 2014, the highest number of worldwide transfers involved Brazilian clubs. Besides, Brazilians were the most transferred players worldwide, with 5,526 transfers in total during said period, which is the double of the second most transferred nationality, the Argentinian with 2,632 transfers. As a result, these transfers provide a positive result to Brazilian clubs and a relevant source of income that cannot be ignored, especially because most of these transfers are concluded involving some sort of third party investment.

In view of the foregoing, should a ban be implemented on the so called Third Party Ownership (“TPO”), as announced by FIFA in the second semester of 2014, the Brazilian clubs would suffer an enormous economic impact, given that the revenues originated from the sale of economic rights correspond to the second most lucrative source of income for clubs[9].

(iii) Advertising & Sponsorship

Due to football’s global reach, sponsorship and advertising consist in a revenue source that is beneficial for all football clubs.

There is a distinction between the two forms, since advertising is generally carried out by the traditional media and include a creative process of developing ideas or products that are aimed at promoting a specific service, product or brand. On the other hand, sponsorships in sports usually consist in “an investment in cash or in kind in an activity, in return or access to the exploitable commercial and marketing potential associated with that activity. Sports sponsorship is generally either of an event, a league, a governing body, a particular team or individual or the broadcast of an event.[10]

Furthermore, sponsorship can be considered as a “below the line form of advertising, that is, advertising which is not carried by the traditional media. Rather than actually paying for brand advertising in the media, a sponsor is able to raise awareness indirectly, such as by its name being mentioned in an event title, or having its logo on athlete’s clothing or on stadium advertising boards.”[11]

In view of the above, sponsorship in football can be generally more interesting to clubs, since the long-term contracts allow them to better plan their finances ahead with a guaranteed source of income.

Clubs’ revenues derived from advertisement and sponsorship in Brazil, correspond to approximately 20%, and have increased yearly since 2010[12]. However, these revenues tend to be more consistent in the most consolidated clubs and those with higher number of fans, such as Flamengo, Corinthians, São Paulo, Atlético-MG, amongst others.

In 2009, eighteen master sponsors used to support and sponsor football clubs in Brazil, whereas in 2014 this number reduced to only ten[13]. Lately, the number of master sponsors has decreased and several clubs from the first division have currently lost them. Experts name violence at stadiums as one of the reasons for brands and companies to avoid an association between their names with the clubs’.

In general, thanks to the Brazilian state bank Caixa, several clubs have been able to keep a high level of revenues derived from sponsorship. As an example, Caixa has renewed in 2014 its sponsorship with the Brazilian football club Corinthians for USD 12.5 million. However, even though Caixa also sponsors other Brazilian clubs, the sponsorship with Corinthians is important because it consisted in the highest amount ever paid by the bank to a football club – this occurred in view of the club’s national relevance, its new stadium and the second biggest fan base in Brazil[14]. Another example of sponsor is the company Huawei, which has also concluded a sponsorship deal with Santos FC that may be extended after its conclusion at the end of 2014.

(iv) Ticketing & Fans’ Programs

As experience shows, the performance of any team will have an impact on ticket sales and the attendance of fans in stadiums. However, clubs now do not only have to take into consideration the performance of the clubs, but also the stadium facilities, the broadcasting audience and a slew of other issues on how to attract fans to make the effort to watch the matches at the stadium or via pay-per-view.

As ironic as it might seem, the country with an enormous football tradition and the highest number in transfers of players has less fans in stadiums than other consolidated football leagues such as the English, Spanish, Italian or German. In accordance with a recent study published by the Brazilian financial consultancy Pluri Consultoria[15], the average number of attendants in football matches in Brazil amounted to 14.951 people between 2013-2014, which contrasted with the surprising average number in the German Bundesliga with 43.173 people, or the 36.589 of people in the English Premier League during the same period.

Besides, Brazilian clubs have created fan programs to ensure that fans attend more frequently the matches. Although not as lucrative as other revenue streams, these are still valid mechanisms for any club. Even though such programs consist in a good source of income, the clubs still require a good sportive performance, preferably with competitive squads that may assure new titles, in order for fans to actually participate and purchase the programs and match tickets.

(v) Stadiums

Stadiums are fixed assets, which hold much potential for many clubs. This is so, since these assets are transferrable and thus, can be sold, loaned or partly owned by various different entities, including clubs.

As an example, a club that is in debt may be able to use its stadium as a means to generate profit, especially given the stadium’s branding opportunity. Leases, hosting of shows, MMA fighting events, entertainment or corporate events have been sources of revenues that Brazilian clubs witnessed recently. Unfortunately, the industry of naming rights has not developed properly in Brazil and the fans seem still resistant to changes in the names of their beloved teams’ stadiums.

As an example, the State of Rio de Janeiro prohibited the commercialization of naming rights related to the Maracanã. Therefore, the construction companies that won the bidding process to rebuild it for the FIFA World Cup 2014 had to agree to this condition. In the past, there were other attempts to negotiate naming rights of Brazilian football stadiums, but the majority of them did not evolve.

On the other hand, the club S.E. Palmeiras can be considered a role model in relation to the management and exploitation of its assets. Having built with its own money a modern and efficient stadium, this club innovated when signing a millionaire naming rights contract with the insurance company Allianz for a total of twenty years, and which resulted in the creation of the “Allianz Parque”. With an architecturally sophisticated arena, modern and multi-use, Palmeiras definitely showed other Brazilian clubs that an efficient and innovative management could break paradigms and diversify the sources of revenues.

III.2. Costs and Expenses

In 2013, the Brazilian clubs’ total costs and expenses increased 16%. Comparatively to the total net revenues, these increased only 9%[16]. In this respect, since 2011 clubs have had slight increases in their net revenues; however, in 2013 several first division clubs presented a negative EBITDA, with their costs and expenses 4% higher than their net revenues.

Commonly, clubs assume long-term costs, such as the employment of players for periods varying from one to five years, which inevitably generate a recurrent payment obligation of salaries, which are usually high and may represent a burden to the clubs in future years. Thus, it is not surprising to see a real labor crisis initiating in 2014 amongst several first division Brazilian clubs, which presented unpaid salaries over three months, not to say unpaid image rights to dozens of players.

Moreover, the costs and expenses are usually not as uncertain as the revenues of Brazilian clubs, since these may vary constantly due to sponsors, ticketing, advertising and sale of players. Clubs are hardly able to foresee other sources of revenues than TV rights.

In view of this analysis and the Brazilian scenario, it seems that the Brazilian football and clubs shall be proactive in taking the initiative to deal with the mismanagement described above.

Clubs frequently put themselves in situations of financial risk. They usually have an inefficient hiring mechanism that leads to unbalanced teams; do not invest significantly in the structure and programs of youth academies; and frequently hire expensive but not necessarily appropriate starlets. As a consequence, Brazilian clubs usually do not present an efficient collective and competitive work on field and, thus, clubs play championships with unbalanced teams, which do not bring significant results or titles. Therefore, sponsors gradually fade away, the fans stop going to the stadiums, the sale of players reduce, and, consequently, revenues decrease.

 

IV. Mechanisms and Alternatives to Improving Governance and Financial Controls in Brazilian Football

IV.1. Third Party Ownership (TPO) and its Financial Impacts on the Brazilian Football

In September 2014, the FIFA Executive Committee, voted to ban the practice of third party ownership, as the practice was deemed detrimental to football clubs, and by extension the football community. In essence, third parties provided an immediate injection of cash flow in return for a predetermined percentage of a club’s future earning upon the transfer, whether temporary or permanent, of a player.

Since the ban is still new on a worldwide scale, the impact on football is yet to be seen. However, given that three European countries have already banned the practice, anyone would be able to conclude how this will affect the football market. However, taking into consideration these three European markets, two of which form part of the main five European leagues, is not a valid comparison for Brazilian clubs and by extension South American clubs too. This is so since Brazilian football does not come close to the highly profitable European football.

The Brazilian clubs rely heavily on third party investment and given that the practice has been a part of the football culture since decades, it has become an intrinsic part of football business. Therefore, the ban will require not only an amendment of the regulations, but also a change in common practices and the structuration of transactions between clubs. The ban will require football clubs to find other funding alternatives and to completely restructure themselves to ensure their existence.

IV.2. Investments in Youth Academies

According to the Itaú BBA Report[17], from 2010 to 2013 Brazilian clubs have increased their investments in the acquisition of players, as well as with the renovation of stadiums and structure. As for the youth academies and programs, Brazilian clubs slightly increased their investments throughout the years, but they remain residual in comparison to the amounts of money spent in purchasing or loaning players from other clubs and countries.

As an example, in 2013, the youth academies represented only 15% of the clubs’ overall investment.[18]

Given Brazil’s recent performance in the FIFA 2014 World Cup, it would be ideal to overhaul the football system and encourage the German Football Association’s approach towards youth academies. Brazil, according to the FIFA TMS, is already the leading exporter of football players[19] without a solid and efficient grassroots program. However, if Brazilian youth academies were restructured and modernized, this could promote significant changes, but would require funds and investment that the Brazilian clubs do not possess. Or at least do not seem to prioritize.

Yet, if such funds and investments did exist and clubs and entities were truly willing to invest in more solid grassroots programs, then by developing the youth academies the Brazilian clubs could be able to balance their EBITDA in the long-term by not compromising excessively their cash flow with the purchase and sale of players – as is the current scenario in Brazil. Furthermore, with a more structured and oriented investment in youth players, this could likely reflect in the numbers of international transfers in the future.

IV.3. Corporate Governance

The efficient control of a club or an association is usually determined under a good corporate governance structure, which ensures a better management of the club or association, especially with respect to the resources available, current or prospective. The basis of corporate governance is based on three rules: (i) planning – the assets and objectives of the club; (ii) organizational performance – the monitoring of performances and ensuring that the goals and objectives are achieved; and (iii) leadership – ensuring the club or association is governed based on the best interests of the club.

It is clear that the current management systems employed by the Brazilian football clubs are failing at maintaining a high level of football activity and generating enough revenue for clubs to enjoy a successful operation yearly. Hence, an elite sporting club must have a proper governance in order to better structure itself and manage its daily activities by professional and independent managers who are accustomed to working within a corporate system and have enough knowledge and expertise to ensure the delivery of the clubs’ goals in all needed areas.

Fundamentally, once a club is known for its good governance, a level of confidence is associated with it, which will naturally attract investments and sponsorship opportunities, because it would be considered as a coherent and more predictable investment. Hence, the continuation of proper and successful governance would only increase the confidence of stakeholders and potential sponsors in the clubs with a proper governance.

In view of the above, it seems urgent that corporate governance principles and concepts migrate to the Brazilian football clubs, promoting real changes in their daily businesses, and affecting the way managers conduct the future of their clubs. Regardless of the type of legal entity that predominates in Brazilian clubs, i.e. associations, European and North American experiences show that it is possible to manage clubs with a more careful and predictable planning.

IV.4. Financial Fair Play:

In view of the financial abuses that Brazilian clubs usually commit in every season, it is time for Brazil to adopt and implement in a national level a financial control and regulation over clubs, as UEFA has successfully implemented in Europe throughout the past years with the UEFA Financial Fair Play Regulations.

Aimed at introducing more discipline and rationality in club football finances, decreasing pressure on salaries and transfer fees and limiting inflationary effect, encouraging clubs to compete with(in) their revenues, encouraging long-term investments in the youth sector and infrastructure, protecting the long-term viability of Brazilian club football, and ensuring clubs settle their labor and tax liabilities on a timely basis, it seems that the creation and implementation of a financial fair-play regulation on a national level could help clubs to have a better governance.

In line with the UEFA model, the football federation from the State of São Paulo has implemented a similar system, by means of which it established some financial and sporting criteria for clubs to fulfill in order for them to compete in the state-level competitions by means of a special license.

In view of the successful European model and the São Paulo State example, it appears that Brazil should adopt not only a financial fair play regulation, but also a club licensing system for the admission to national and state competitions such as the Brasileirão and the Copa do Brasil. Compliance with these rules should be a condition of entry and these regulations would be aimed at promoting financial fair play in Brazilian club competitions by improving the economic and financial capability of the clubs, increasing their transparency and credibility and by ensuring that clubs settle their liabilities with creditors punctually. One of the key requirements should be that clubs are not allowed any overdue payables towards other clubs and/or towards employees and tax/social security authority. Moreover, the absence of overdue payables towards other football clubs should be avoided, such as amounts due as a result of transfer activities.

IV.5. Licensing:

Along with the implementation of a national financial fair play regulation, Brazil should also consider implementing a licensing system for national and state competitions throughout the country.

As seen in other European countries such as in Spain, Italy and Germany, an independent body could be created in Brazil capable of analyzing the clubs’ finances and obligations before granting the competition licenses. Naturally, the implementation of the financial fair play regulations should be gradual, with yearly increases in the number of obligations and requirements to be fulfilled by clubs.

 

V. Conclusion:

In view of the foregoing, it seems clear that the Brazilian football suffers from a chronic problem of lack of structure and credibility, which ultimately limits and even repels their association with strategic stakeholders and potential partners from the market.

Brazilian clubs’ revenues seem to have similar origins, split between TV rights, the sale of players and their economic rights, sponsorship and advertising deals, ticketing, fans’ programs, as well as venues’ rentals for events, amongst other less relevant sources of revenues. However, it seems that the clubs’ overall revenues will be significantly affected during the future years in view of the ban of TPO and the economic rights from football, the decrease in sponsorship deals and amounts negotiated by the clubs, and the individual negotiation of TV rights between the clubs and the main national broadcaster – Globo.

Considering this potential decrease in the overall revenues during the next years, the clubs may face bigger challenges if they do not invest in a proper corporate governance structure, aimed at professionalizing their organizations and managers. Along with these improvements in the clubs’ level, it would be important for the state and national football federations to develop and implement financial fair play controls together with a wider club licensing system.

Once Brazilian clubs start improving their management and corporate governance level, as well as investing more in a constant development of their youth academies, not only the clubs’ sporting capacity will improve, but their sustainable growth and existence.

The current organizational challenges ahead Brazilian football seem harder than winning the FIFA World Cup 2014, but there are no doubts that efforts at this stage will definitely compensate in a near future, hopefully with effects already acknowledged during the next edition of the most important and international football tournament in Russia 2018.

[1] Marcos Motta, Partner at Bichara e Motta Advogados.

[2] Pedro Fida, Partner at Bichara e Motta Advogados, former Counsel to the Court of Arbitration for Sport (TAS-CAS)

 

List of References:

[3] http://afootballreport.com/post/564150774/thebrazilianfootballsystem (date of last access 17/10/2014)

[4] ITAÚ BBA Report – Economic & Financial Analysis of Brazilian Clubs – 2014.

[5] MATTOS, Cesar. Broadcasting Football Rights in Brazil: The Case of Globo and “Club of 13” in the Antitrust Perspective. Estado Econômico, São Paulo, vol. 42, n.2, p. 337-362, abr-jun. 2012.

[6] ITAÚ BBA Report – Economic & Financial Analysis of Brazilian Clubs – 2014.

[7] Arbitral Award CAS 2004/A/635.

[8] TMS Report – Market Insights: Brazil a key player in the international transfer market (2014).

[9] ITAÚ BBA Report.

[10] LEWIS, Adam and TAYLOR Jonathan. Sports Law and Practice. Butterworth’s, Edition 2006, pg.706.

[11] Idem.

[12] ITAÚ BBA Report.

[13] ITAÚ BBA Report.

[14] According to a research from conducted by the Brazilian newspaper LANCE! and national research institute Ibope, released in August 2014, the first Brazilian club in terms of fan base consists in Flamengo, with 32.5 million fans, whereas Corinthians is ranked second with 27.3 million fans.

[15] Report on Match Attendance – Pluri Consultoria (2014).

[16] ITAÚ BBA Report.

[17] ITAÚ BBA Report. pg. 16.

[18] ITAÚ BBA Report, pg. 16.

[19] FIFA TMS Report.