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Editorials:
Questions and concerns
By Hazel O'Callaghan

For someone who was banned from the maths O-Level class because I was so enumerate that the teacher was in danger of having a nervous breakdown, opening a financial prospectus full of columns of figures is always scary. However, having ploughed my way through it, I've got a lot of questions that I'm hoping that someone out there from the Trust can shed some light on before the EGM next month. I also have some real concerns about the direction that we seem to be taking.

The need to raise just over Ł5m so soon after the last share issue must be of concern to all fans, especially as the funds will only provide sufficient working capital to keep the club going...

"...it became apparent last year that costs had not been brought under control sufficiently..."

This does beg the questions, when did it become apparent (was it mentioned at the AGM some eight weeks ago?), why was there a failure to get the sums right, what has been learned that will prevent it happening this time too?

Some initial questions:

It is interesting to note that Strand Associates, the parent company of Strand Partners who advise on financial matters and have endorsed this prospectus, will increase their holding to around 11%. Does this dual role of advisor and investor represent a conflict of interest?
Then there is the case of Mr Wilson whose shares are registered in his wife's name and not his own. Why would someone do that, shouldn't his wife be the director (now there's an idea!) and what do we know about this gentleman?

The proposals in the prospectus will result in new investment in the parent company of the football club, Watford Leisure, and a significant shift in the ownership of shares. Most obvious is the arrival of the Russo brothers, who will own just over 30% of shares. According to the Chair's opening letter without this investment, we are again in danger of going into administration. The brothers do not pretend to be Watford fans, indeed they are open about their support for Chelsea, and so their investment is a financial one. Presumably at some point, they will want to see a return on it. This seems reasonable enough on the surface. Unfortunately as the latest figures from Deloitte and Touche show, very few football clubs actually make a profit. In fact, the incentive is always to invest whatever funds there may be into strengthening the team and increasing success on the field [Hamil et al 2003]. This fact has prompted a new discussion within the game about the nature of football clubs and the ways in which they fit neither the company model, nor the charity model [Hamil et al 2003]. The question then arises, if you are investing for financial reasons where will your return come from? For the anxious fan, the words "stripping" and "assets" slip into the mind. This is not to question the good faith of these gentlemen, but the reality is that a profitable football club is the exception and not the rule.

The other more fundamental change is the decision by the board of the football club to delegate its powers and responsibilities for financial and operational matters to a committee. This committee to be made up only of directors who also sit on the board of the parent company. All sorts of reasonable arguments for this move will be put forward, not least that of streamlining the decision making process. What is worrying is the composition of the committee and the fact that it makes the football club's board irrelevant to all intents and purposes. The change concentrates power into the hands of a very narrow group of interests and is contrary to many of the principles of good corporate governance, set out in the voluntary Combined Code. The Code is incorporated into the listings of the London stock exchange. The supporters trust movement draws on the Code as a way of measuring the effectiveness and openness of football clubs and argues for compliance with it.

It recommends that company directors be drawn from as wide a constituency as possible, to ensure a breadth and depth of experience is brought to bear on the decision making process.
It recommends that no less than one third of the board is comprised of non-executive directors and the inclusion of independent non-executive directors (INED) as a way of achieving an even greater range of experience. INED's have to meet certain criteria, two of which are their independence from the company and that they have had no association with it for nine years. Their inclusion not only acts as a further check and balance against the concentration of power around narrow interests - and the mistakes that can flow from that - but also allows the company to engage with major stakeholders who may not be major shareholders. In the case of a football club, one such stakeholder is the fans.
It recommends a separation of powers between the Chair of the board and the Chief Executive. This is to ensure that the Chair is acting objectively and is seen to be doing so, untainted by any conflict of interest arising from a salaried position. At Watford we have already breached this particular recommendation. When taken in isolation it is a little worrying, but taken alongside of the other changes on the horizon it ought to give rise to concern. It must be stressed that this is not a question of the individual's integrity, it just isn't good practice - no matter who holds the posts.

In effect, the proposal to set up this committee is an extremely dangerous one. It takes us away from the more open and responsive approach that was developed during the last crisis. It concentrates the decision making process into the hands of narrow interests and leaves us open to decision making that will reflect those interests, rather than the long term interests of the club, and leaves no room at all for a role for stakeholders. What adds to the concern is that one of the first decisions to have been made, in advance of the new investors becoming directors, is to issue redundancies to two members of staff most closely associated (in different ways) with the club's community face.