FIFA’s Scandal: Death by Corruption?

corruption-schoolFIFA, the international football federation (soccer), has been shaken to the core by the recent indictment of the US Department of Justice, where 9 high-ranking officers of FIFA (the chairman isn’t one of them) and 7 of them were arrested with charges of racketeering, wire fraud and paying bribes worth more than $150m. On a parallel note, it was also disclosed that the government of Switzerland is also investigating the procedure whereby Qatar was awarded the World Cup in 2022.

Granted, the aforementioned indictments are just a preliminary stage of a most probably long judicial process. No sentence has been issued. Nonetheless, the US Department of Justice, despite its human limitations, carries a great deal of global credibility, whereas FIFA’s handling of business affairs doesn’t; quite the opposite.

FIFA has been a prime suspect of systemic global corruption on a grand scale for decades.

Any organization where:

  • Transparency and accountability are not fundamental,
  • Coupled with the generation of sizeable cash surpluses,
  • With no owners

As is FIFA’s case, prone to excesses. In other words, governance at FIFA is very poor. Moreover, it seems to have been a deliberate issue, to facilitate the opaque way in which it is handled.

A point in case is the weights implied in the voting system. FIFA is composed of several regional confederations, encompassing the whole planet: UEFA (Europe, 53 votes), CAF (Africa, 54), CONCACAF (North, Central America & The Caribbean, 35), COMMEBOL (South America, 10), AFC (Asia & Middle East, 46), and OFC (Oceania, 11).

There is no question where the largest market for soccer is: Europe. That’s where most of the best players are, where the most valuable clubs operate: Real Madrid, $3.4 billion;  Barcelona, $3.2 bn;  Manchester United, $2.8 bn; Bayern Munich, $1.9 bn; Arsenal, $1.3 bn; Chelsea $ 868 million; Manchester City, $863 m; AC Milan, $856 m; Juventus, $850 m; and, Liverpool, $691 million. Despite it, UEFA, the European confederation of soccer, has a grotesque subrepresentation since Africa, for instance, has one vote more than the UEFA. South America, the cradle of many of the best players in the world (Messi from Argentina and so many luminaries from Brazil) likewise is outrageously underrepresented, as can be seen in the previous paragraph.

Another very worrisome signal is the permanency of the chairman of the board in that position. Through 3 re-elections, Sepp Blatter already has been at the helm for 17 years (he was first elected in 1998), notwithstanding his most recent re-election, the fourth one, whereby he is programmed to maintain his post until 2019. Never mind that he already is a 79 years old, not exactly the ideal age for that kind of responsibility.

The amount of money managed in world soccer is several tens of billions of dollars a year, in sponsorships, advertising, television rights, memorabilia, among the most important subjects. To put things into a proper perspective in this point, in the four years concluded in the 2014 World Cup in Brazil, FIFA’s revenues were $5.7 bn.

A highly unregulated, opaque and essentially unaccountable non-profit organization, like FIFA,  at the center of a uniquely profitable ecosystem is an easy prey of corruption in many ways and forms. Soccer is a global phenomena. In the absence of effective global governance, the US DoJ initiative must be applauded.

The non-profit denomination of any organization frequently is a source of confusion regarding the internal management of funds of that type of entity (see Globalization and The Olympics). For practical purposes, the non-profit status simply means that these organizations are not subject to income tax. However, that fact in no way means that they can’t be extremely profitable organizations, able to amass vast amounts of wealth in their day-to-day engagements. Of course, this capability only  refers to the relatively few non-profit organizations that are financially self-sustainable, like hospitals, universities, and yes FIFA.

In order to avoid confusion, it is very helpful to visualize the financially self-sustainable non-profit organizations like entrepreneurial non-profit entities.

From another angle, the non-profit legal status simply means that surpluses are not classified as profits, from the legal and accounting standpoint. Since non-profit entities have no shareholders, the surpluses generated cannot be distributed as cash dividends.

FIFA has an extremely profitable and powerful business model, mostly based on being a monopoly of the world’s most popular sport.

fifa-corruption-cartoon-beelerIn FIFA’s case, vast surpluses are generated and surely, a significant proportion of them, are distributed among the inner circle in the form of (very high) salaries, fees, perks and all sort of fringe benefits. Moreover, the temptation to bite those surpluses by the mostly unaccountable FIFA officers before those funds officially get into FIFA’s accounting system is ever-present, and a very powerful human force. If poor accountability and a very opaque system is in place, all elements for rampant corruption of all sorts is very evident.

Due the extremely poor checks-and-balances mechanism at work, FIFA’s been abducted by its management, from the board downwards throughout a great deal of the whole organization. For practical purposes, the board acts like if they were owners.

Recent statements made by Sepp Blatter, FIFA’s chairman, regarding the corruption scandal and warning big corporations sponsors of soccers games about how much they would lose by abandoning FIFA’s soccer games, are a most evident manifestation of arrogance and a feeling that he can walk on water attitude. He knows that, as things stand today, for practical purposes he is accountable to no one.

Though Sepp Blatter announced his resignation from the FIFA yesterday, it will go into effect sometime between December 2015 and March 2016. Given this condition, we will have to wait and see how things really pan out.

The Economist’s (May 30th issue) recommendation for UEFA to quit FIFA and operate independently (possibly forming a competing world organization) seems to me an excellent idea. Most of the time, market and business pressures can achieve more comprehensive and quicker  positive results than the legal approach, complementing the later on a very effective manner.

The Frankenstein FIFA has evolved into should not go on as it is now. Fundamental governance restructuring has to be done. Feudal organizations like FIFA should not be permitted to operate with impunity, unaccountable to no one.

 

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About Martin Marmolejo

Global Investment Manager | Founder & Managing Director at MMA Global Investment Management | Proud husband and father | Follow me @globalmarmolejo.

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