One of the world’s greatest investors, Warren Buffett was once asked to define risk. There are a multitude of definitions, strategies and papers written on the subject, every Business School in the world including Harvard, devotes huge amounts of time and intellectual capital into defining, identifying and more often than not, negating risk. Buffett’s answer though was stunningly simple:
“Risk comes from not knowing what you’re doing.”
In the latest edition of EvertonBusinessMatters podcast we talked for an hour on the risks facing Everton Football Club now and in the future. However, I first want to take a step back to look at how we got to where we are now.
I’d argue that the decline in our competitive position, financially and on the pitch (in terms of being genuine contenders for silverware) since the beginnings of the Premier League is because the people charged with running the club (the directors) have never known what they are doing. We have been exposed to Buffett’s definition of risk and all suffered as a result of that.
If that sounds harsh, then I suppose I should explain what I mean by “have never known what they are doing”. I mean that the people running the club have got almost every single strategic decision wrong for over 25 years.
They failed to anticipate and recognise the boom years that lay ahead for successful Premier League clubs, opting for a safety-first approach which secured Premier League participation but nothing else of significance, certainly not competing for silverware, or even participation in the money pot of the Champions League. There was no growth strategy other than reliance upon periodic increases in broadcasting income, negotiated and awarded by the Premier League.
This approach was not exclusive to our footballing ambitions, but was clear in every commercial decision (perhaps more accurately, non-decision) the club has made. As a result, we tied ourselves to long term arrangements, be it sponsorship or our outsourcing models that were non-competitive relative to our peers and in a booming market got increasingly less competitive year after year.
As is universally known, we failed on several stadia moves, condemning us to the continued occupation of the much loved, yet financially restrictive and wholly inadequate, Goodison Park. We failed principally because we did not have the capital required, nor sought that capital, to move at any time.
Ultimately, that on reflection, is our greatest failure and the greatest risk the club was exposed to. It was often said that the owners, principally Kenwright, Woods and Robert Earl would not allow anyone access to “their trainset”. The three of them believed that their best interests were served by retaining their control and ownership of the club even in the full knowledge that Everton was massively under-capitalised and slipping behind our competitors year by year at an increasing rate. Mistakenly, oh how mistakenly, they would not countenance giving up a part of their equity in return for external capital. That capital would have developed the club on many occasions (exhibit (A) Kings Dock, for example with many others).
It would have allowed their reduced ownership to become significantly more valuable in the longer term. It was the very definition of “not knowing what they were doing”
The impact of not knowing what they were doing
When eventually the call for external investors and fresh investment became so loud that even they recognised it, the cost of their poor decisions over many years was reflected in the value put on the club. Let’s not forget Moshiri bought half the club at a very generous valuation (to the selling shareholders), valuing the whole club at £175 million. Based on fundamentals, the business was worth far less than that, perhaps no more than £80 million. Compare that to our once peers back at the formation of the Premier League, each of them who were valued at between £1bn and perhaps £2.5bn (in the case of Manchester United) at the time of Moshiri’s purchase.
The risk that the then owners exposed themselves and the club too, i.e. they didn’t know what they were doing, is there for all to see with significant consequences for them and the club. What should have been equity stakes worth hundreds of millions in a properly run club based on the correct strategic decisions, turns out only to be tens of millions because of the decisions they made over many years.
Enough of the history lesson.
Fast forward to now and there’s a huge number of strategic and commercial decisions to be made.
The stadium. The stadium will define the club for generations. Like nothing else the club has done for decades, it will define the scale of our ambitions, the true abilities of the board, the willingness of Moshiri to invest in the club, and our attractiveness to lenders.
Will we opt for a full-blown version of a new stadium with the maximum capacity the site can house, or will we take what some might mistakenly consider a lower risk strategy of “Bramley-Moore Lite”? As is described in the podcast anything other than the full blown version is considerably higher risk in my opinion, offering smaller marginal gains and negative associations in terms of the ambition of the club for marginal savings on expenditure.
We have funding decisions to make. Will it be with the Council plus additional lenders or Moshiri underwriting the remaining capital required, or will it be a more traditional financing structure including equity and bank debt?
We have commercial decisions to make, our kit supplier and distribution deals with Umbro and Fanatics respectively conclude in May of 2019. We are only a few months away from announcing our next commercial partners.
We have a global growth strategy to consider (or not). Are we going to exploit the undoubted goodwill and name-awareness of Everton across the globe to our financial benefit?
The question is this: is this board any more qualified to make the right decisions than the previous? Do we have enough people with enough commercial experience and business acumen to ensure that the mistakes of the past are not replicated?
Is the addition of Sasha Ryazantsev and Keith Harris with their newly defined responsibilities sufficient to change decades of poor strategy and decision making?
Compared to other boards of the “big 6” it would seem that even if Ryazantsev and Harris excel in their positions we are short of experience, talent and decision-making capacity.
If we are to “de-risk” the future of the club, using Warren Buffett’s explanation of the source of risk, it is clear we must minimise the chance of “not knowing what you are doing”. That can only be achieved by bringing fresh talent into the board room.
Just as on the pitch the squad has clear deficiencies in key areas the same can be said of the board. Whilst our director of football looks for new LB, CB, CM and an attacker, Farhad Moshiri must look for a new Executive Chairman, additionally someone with great global commercial experience and perhaps above all else, a strategist that can determine the moves we must make to become competitive once more.
By ensuring we know what we are doing, we reduce risk, thereby increasing the likelihood of a successful outcome. That can only be done with additions to the Board
Over to you Mr Moshiri…..