Gambling in professional sport: the enabling role of “regulatory legitimacy”

• DOI: https://doi.org/10.1108/CG-07-2021-0251
• Published date: 20 January 2022
• Date: 20 January 2022
• Pages: 1078-1093
• Subject Matter: Strategy,Corporate governance
• Author: Richard Evans,Geoff Walters,Sean Hamil

Gambling in professional sport: the

enabling role of “regulatory legitimacy”

Richard Evans, Geoff Walters and Sean Hamil

Abstract

Purpose –This study aims to explain why organisations remain vulnerable to financial failure despite

increasing financialregulation to improve governance.Using a case study of gambling and regulation in

professional football in England, it introduces the concept of ‘‘regulatory legitimacy’’ to show how this

enablesfootball clubs to gamble.

Design/methodology/approach –The study quantifies the extent to which football clubs in the

Championship of the English Football League (EFL) adopt a conventionally economically irrational

decision to run a loss-making budget in the hopeof achieving sporting success. The study postulates

criteria for evidenceof this form of gambling by overspending on playing talent with datafrom the clubs’

published financial statements. A pay-off matrix is developed to compare the intended and actual

outcomes.

Findings –The research finds thatthis strategy was both prevalent and the most successfulto achieve

promotion.

Originality/value –This study makes three contributions. The first is the qu antification of the

prevalence of this form of gambling. The second is the finding that, des pite regulations to limit

spending on wages, gambling is rational in the non-economic sense because it is almost a

necessary strategy to achieve promotion if the club had not b een relegated from the Premier League

in the previous season. The third contribution is the deve lopment of the concept of ‘‘regulatory

legitimacy’’ as a way to understand the process thr ough which regulations are implemented yet are

ineffective at curbing financial gambling.

Keywords Gambling, Financial regulation, Professional football, Regulatory legitimacy

Paper type Research paper

Introduction

The Championship is not financially sustainable, it’s a bubble waiting to burst [...][...] there are

Championship clubs chasing that Premier League dream and when the gamble doesn’t come

off somebody has to foot the bill and if they can’t afford it, the club could end up in administration

David Sharpe, former WiganAthletic chairman (reported by the BBC) [1]:

With the support and backing of the owner we took what was, in essence, a financial gamble on

securing immediate promotion.

Newcastle United Press Release,18 May 2018 [2]:

Aston Villa have “gone to the casino, rolled the dice and it hasn’t worked”

Mark Ansell, former AstonVilla finance director (reported by the BBC) [3].

Financial crises, whether at organisational level or at the level of a particular industry, occur

in large part due to excessive financial risk-taking which is a form of gambling. The role of

financial regulation is to put in place constraints to regulate corporate governance and to

minimise financial risk-taking through gambling (Sorensen and Miller, 2017). The imposition

Richard Evans,

Geoff Walters and

Sean Hamil are all based at

the Department of

Management, Birkbeck,

University of London,

London, UK.

Received 5 July 2021

Revised 17 December 2021

Accepted 23 December 2021

PAGE 1078 jCORPORATE GOVERNANCE jVOL. 22 NO. 5 2022, pp. 1078-1093, ©EmeraldPublishing Limited, ISSN 1472-0701 DOI 10.1108/CG-07-2021-0251

of financial regulation is, therefore, an important element and mechanism used in

contemporary governance systems to minimise risk and has an impact on organisational

behaviour (Marsden, 2010:Vibert, 2014;De Vita and Luo, 2018). Governance crises, often

linked to financial failings (Wearing, 2005), expose industry sectors and act as a catalyst for

regulatory reform (Hancher and Moran, 1989), including enhanced financial regulation. For

example, following the global financial crisis in 2008, changes to the regulatory framework

in the US led to more resilience on the part of the banks (Tarullo, 2019). It is evident,

therefore, that accounting and financial regulation seeks to curb excessive financial

gambling and thus enhance corporate governance, at both the level of the firm and more

widely across an industry (Kumar and Zattoni,2016).

Despite the imposition of enhanced financial regulation, corporate governance failures

persist. Understanding why this is the case is the aim of this article. This article focusses on

the professional football industryin the UK. In keeping with arguments that sport represents

a microcosm of society (Wolfe et al.,2005;Day et al., 2012), we argue that understanding

governance in sport can provide a platformto explore and develop insights into mainstream

governance and regulation (Breitbarth et al., 2015). Within the professional football industry

in the UK, a persistent cycle of financial failures and systemic crises exist (Hamil and

Walters, 2010). Deloitte (2019) cites 59 cases of insolvency involving 47 clubs in England

from 1992 to 2019. Despite this, there are relatively few clubs that go out of business as

football trades on its status as one of the most powerful cultural and social assets in the

country (Hamil and Walters, 2010). Storm and Nielsen (2012) argue that the paradox of a

high survival rate of football clubs, despite persistent deficits and growing debts, can be

explained by the “soft” budget constraints that football clubs operate within.

A number of scholars have sought to understandthe reasons for financial crises. Szymanski

(2012) tests the hypothesis of exuberant spending or demand shock, such as the collapse

of the independent television Digital contract in 2002, as alternative causes of insolvency of

English football clubs and finds support for the latter. This research was extended by

Scelles et al. (2018) to examine insolvency in the top three divisions in France, which also

found that “[...] demand (attendance) shocks can account for insolvency to a significant

degree.” (Scelles et al., p. 1). The industry –like many other sectors facing corporate

governance failures –has introduced regulations aimed at curbing excessive financial

gambling. As such, there exists a considerable body of work reviewing the implications of

changes to financial regulations in professional football as a response to financial crisis. For

example, analysis has focussed on the operation of the salary cost management protocol

(Evans et al., 2019) or Financial Fair Play Regulations (FFP) (Dimitropoulos and Tsagkanos,

2012;Peeters and Szymanski, 2014;Plumley et al., 2019). Others have shown differences

between countries across Europe (Acero et al.,2017), demonstrating that where there is

stronger regulation on club finances (for example, in Germany),there are significantly fewer

cases of financial mismanagement. In the context of English football, however, what is

lacking is explanation of why, despite increasing financial regulation (as has been seen in

other countries such as Germany), the sector remains extremely vulnerable to financial

failure.

This study focusses on the Championship of theEnglish Football League (EFL), the second

tier league of professional football. The aim of this study is twofold: firstly, it will quantify the

extent of financial gambling by owners of clubs in the Championship of the EFL by

overspending on playing talent and the effectiveness of this strategy in achieving sporting

success. While an amount of spending on wages is required of a professional football club,

this paper considers limits for this spending such that spending in excess of these limits

constitutes an excessive financial risk by the club owner. Data for this analysis is takenfrom

the financial accounts of the clubs. What is particularly interesting is that there are financial

regulations in place in the Championship, and so the second aim of the article is to

postulate why these regulations appear to havenot resulted in curtailing excessive financial

VOL. 22 NO. 5 2022 jCORPORATE GOVERNANCEjPAGE 1079