Thursday 3 May 2018

OPINION ARTICLE: "The fall of the Glasgow Rangers" by Greg M., Mark M., Michael N. and others, April 2018

The fall of the Glasgow Rangers:
Ethical ramifications and lessons to be learned
By: Greg M., Michael N., Mark M., Michael I., and Anna M. (a mix of Rangers and Celtic supporters and non-football followers)

Abstract
In this article we apply business ethics theories (justice, ethics of care, deontology, and utilitarianism) to the actions of Scottish football’s Glasgow Rangers FC prior to its 2012 liquidation. In the authors’ opinion, justice was not done in Rangers’ case. Previous owner David Murray got off relatively lightly; there were no arrests in relation to the tax fraud involving Rangers. Rangers’ punishment did not fit the crime; even though it was demoted in the league (to the fourth-division backwater of League Two), it climbed relatively quickly to be one of the biggest clubs in Scottish football again. In our opinion, we could make a case for Rangers to be stripped of name and history as a deterrent to other football clubs. Using utilitarianism, we can see that Murray’s actions caused short-term happiness in the club; there was no concern for the longer term which ultimately saw the consequences of these actions cause more unhappiness than good. A further lesson that can be learned is that individual boards of directors must remain independent of the owner.

Introduction
In 2012, shockwaves were sent through Scottish Football when Rangers FC owner Craig Whyte formally filed for the club to enter administration, during a court battle over a tax bill owed to HMRC totalling £49million, including penalties from failing to pay tax previously. This tax bill Rangers faced arose from a row under previous owner David Murray, in which it was discovered that Murray had been using Employee Benefit Trusts (EBTs) between 2001 and 2010 to pay his players’ and staffs’ wages. HMRC argued that Rangers had managed to avoid paying substantial amounts of tax whilst using this scheme. This decision made by Craig Whyte left Rangers fans confused and concerned as to what would happen to their club and left fans of other Scottish clubs concerned about the future of Scottish football without one of the biggest clubs. In June 2012, a Company Voluntary Agreement set out by new prospective owner Charles Green was rejected by HMRC which left Green to buy Rangers’ assets and form a new company, whilst liquidating the old business and confining Rangers to the lowest tier of professional Scottish football, the  fourth- division (League Two).

Sir David Murray must also be in consideration for the blame for Rangers’ demise, due to the massive financial crisis he left the club in. Under his ownership, Rangers was hugely successful with Murray’s extravagant spending; however this led to the club reporting massive debts and large annual losses during this period. Rangers even reached a net debt of £82million in 2003 during the peak of Murray’s ownership. Fans did eventually realize the cost this success meant for Rangers, as in 2009 they urged Murray to sell his share in the club, with Lloyds Banking Group looking to recover debts owed to them, which were estimated to be £25-£30million. Walter Smith, manager of Rangers at the time, even said that effectively Lloyds Banking Group were in charge of the club’s spending, which also meant uncertainty involving the future of the club’s players.

Rangers’ demise has not gone unnoticed; one of the most successful football teams - in terms of trophies – had failed and collapsed despite assurances from many influential figures that the club would be safe. Players and staff were left facing uncertain futures and supporters potentially having no team to support. This article looks into detail how ethically Rangers acted during this period and how the club’s owners’ actions pre-administration and during administration had effectively pushed a financially sinking ship underwater.

Justice
Justice, according to the Cambridge dictionary (Cambridge Dictionary, n/d), is the fairness in which people are dealt with. By using tax avoidance schemes, Rangers Football Club gained an unfair sporting advantage and therefore acted in an unethical manner. Therefore, it must be considered whether the company was punished fairly for acting unethically and whether the company was punished in line with the other football scandals that happened previously.

Any company that uses understatement or concealment can be punished by up to 200% of the tax due. This includes companies which move money to secret bank accounts and companies which use false contracts to facilitate paying less tax (Anon., n/d). In fact, the penalties for tax avoidance can be as severe as lengthy prison sentences, as occurred in various cases in 2016. For example, four men were sentenced to a total of twenty-nine years for falsely inflating company expenses by more than £275million. In another case, two men were sentenced to a total of 19 years when they fraudulently claimed more than £5million in gift aid payments (HMRC, 2017). Therefore, it can be seen that the punishments for tax avoidance can be very serious and severe.

The ethics of Rangers’ collapse are very similar to that of Enron, as that company’s collapse had huge financial implications for its staff and the taxpayers. The case of Enron occurred in 2001 and it is still one of the most famous cases of tax avoidance in the world. Enron had grown to become one of the largest companies in America and this was partly due to the fact that it was using Mark to Market accounting procedures, whereby the company would measure the value of an asset based on its current market value rather than its book value. Enron would transfer any losses to its subsidiaries, allowing the company to look more profitable (Segal, 2018). It was found out that the company had paid no income tax between the years of 1996 and 1999, which, although it wasn’t explicitly illegal, was still hugely unethical (Teather, 2003). As the company went into bankruptcy most of the company staff were unable to sell their shares because of 401K restrictions, leaving many of them without life savings (CNN, 2017). However, what is different about Rangers’ situation is the fact that none of the directors has been sentenced to any prison time. Therefore, in that sense justice hasn’t been done. Although Enron had much higher debts than Rangers, the comparison is still relevant as both companies cheated the taxpayer.

Rangers Football Club also acted unethically in a sporting sense and did not act with sporting integrity. Rangers used Employee Benefit Trusts to pay players in loans rather than in pay, and thus avoiding tax, with Chairman David Murray claiming, “It gave us an opportunity to get players that we perhaps would not be able to afford” (Murray cited in McCafferty, 2017). The company incurred significant debt in this period and made losses of tens of millions of pounds year on year. Rangers was able to win various trophies, with players that it couldn’t afford and in doing so gained an unfair advantage (The Guardian, n/d; Thomson, 2015)

Gretna was a small club which came from playing in the non-professional Unibond League in England to representing Scotland in European competition within a matter of six years. With the financial backing of millionaire Brooks Mileson, the team had three successive promotions and took its place in the final of the premier cup competition in Scotland before representing Scotland in the Uefa Cup. However, as Mileson took ill, the finances of the football club began to crumble with the club eventually being liquidated. The new club had to start form the very bottom as Gretna 2008 (Macpherson, 2015).

This Gretna case is significant for the Rangers’ situation as the punishments that were handed out to Gretna were not handed out to Rangers. Rangers FC have not been stripped of the trophies that it won in its period of gaining an unfair advantage and it was not automatically demoted to the lower divisions (below League Two). In fact every club in Scotland was given the right to vote as to whether the new Rangers club should remain in the top division after its liquidation (Evening Times, 2012). One could argue that, had Rangers been allowed to stay in the top division, it would not have been punished at all for its wrongdoing.

Therefore, although the use of Employee Benefit Trusts (EBT) was not illegal, it still allowed Rangers to attract a higher calibre of player that it could have otherwise afforded. Furthermore, the use of EBTs has subsequently been outlawed to stop other companies using them. Rangers cheated the taxpayer and many creditors out of millions of pounds and therefore it was hugely unethical. The question as to whether it was punished fairly is harder to answer. But by looking at the evidence for tax avoidance and the punishments handed out in the previous footballing cases, it could be argued that Rangers was not punished in line with the standards that had already been set.

Ethics of care
The two moral demands placed by the ethics of care theory within a business setting are:
(a)    preserving relationships with all stakeholders; and
(b)  exercising special care with the stakeholders by attending to their needs, values, and desires.
And within these there are four elements of care ethics as noted by Tronto (n/d):
(a)  Attentiveness - the requirement to recognize stakeholders’ needs and to respond to them;
(b)   Responsibility - although ambiguous and not the right of obligation (situation where a reaction or action is due), it does however allow for ebbs and flows between gender roles and class structure, that ties responsibility to those befitting the roles;
(c)   Competence - to provide the necessary care, not to simply acknowledge it but to accept responsibility to provide it; and
(d)  Responsiveness – another method to understand vulnerability inequality by understanding what has been expressed by stakeholders.

When asking how an institution such as Rangers could end up in liquidation we have to look at the ethical dilemmas faced by this and ask if all was done to protect the stakeholders within the company. Rangers had been carrying debts to fund its success and ambitions and, while trying to maintain these, it ran into serious tax problems resulting from the payments of employees through Employee Benefit Trusts, of which over £50million back tax was due and this resulted in the current process of liquidation being carried out.

Stakeholders within a football company can be split into two groups:
(a)    a group that is primarily concerned with the ability to provide success with no emphasis placed on sustainability (fans etc.); and
(b)   a group that is concerned with the club as a business and its ability to continue as a profit-making entity (this includes shareholders, directors, employees from playing staff to admin staff, creditors etc.)

When looking at the collapse of Rangers the ethical questions posed to these two different groups of stakeholders will have differing answers.

It can be argued that the ethics of care was initially provided to this first group of stakeholders as the main focus was on the success of the club (Attentiveness to the fans’ wants and needs). Enabling the club to obtain far superior players is giving the fans what is required to be able to provide the success, but then you have to question the price to be paid.

Inevitably the use of EBTs and subsequent tax demands which led to liquidation, eventually breached the care duty owed to the fans (Responsibility, Competence, and Responsiveness) as a result of the death of the club (the club-versus-company debate is one for the legal teams of HMRC to sift through) so the ethic of care was breached by the directors, owners, and shareholders in that respect due to their decisions in allowing the club’s finances to be perilous, and leaving the fans with an inferior team languishing in the depths of the football leagues with very little opportunity to increase revenues and become successful.

So how could the club have acted morally and ethically to provide the care to maintain a sustainable business? Well, the main issue would have been to operate within its financial limits, with the addition of playing staff and their remunerations being within financial constraints and also being legal within the tax system. 

Deontology
Deontology is an ethical theory that uses rules to distinguish right from wrong. It is based on the work of the famous philosopher Immanuel Kant, who believed that ethical actions follow universal moral laws. These laws dictate where the ethical limits stand and simply require that people follow the set rules and do their duty. The theory does not require weighing the costs and benefits of a situation because, unlike consequentialism, it does not judge actions by their results and therefore avoids uncertainty and subjectivity. However, there is also a significant limitation in following deontology, which is the fact that many people find it unacceptable. A classic example illustrates this point: suppose an engineer learns that a nuclear missile is about to launch and start a war but he has the skills to hack the network and cancel the launch. Although breaking into any software system without permission is against the employee professional code of ethics, letting the missile launch will lead to thousands of deaths. According to the theory it is right not to violate this rule; however personal moral values may dictate the person to act otherwise.

In the case of the liquidation of the world-famous Rangers Football Club, a breach of ethical codes happened. The road to disaster started in 1988, when Sir David Murray, one of Scotland’s greatest self-made businessmen, bought Rangers and instantly pumped the football club with money. The 1990s turned out to be very successful for Rangers, with just a few minor voices expressing their worry at the road being taken by the club. The owner was wealthy and this wealth was very much built on debt. Murray never worried about bearing hundreds of millions in debt viewing the problem instead as a necessary stepping-stone to greater rewards. However, it was soon proven that Murray overestimated the amount of debts which he could bear.

Coming back to the example of a software engineer who had a choice of preventing a nuclear war or following professional code of ethics, it can be concluded that, in the case of Rangers Football Club, the owners decided to launch the bomb, and they did this continuously. Murray’s ideology reflects the fact that he has viewed debt as a means to success and tax avoidance as a way to prosperity. Although he followed his own set of rules, he could not foresee the danger of his actions and the outcomes they were leading to. If he was more concerned with the potential results, in line with consequentialism theory, he would be in a position to measure the advantages and disadvantages of his decisions, which would perhaps have led to different and more responsible actions. So, although following the rules makes deontology easy to apply, it also means disregarding the possible consequences of our actions when determining what is right and what is wrong.

Utilitarianism
Utilitarianism theory is based on a moral code; acts should be judged as right or wrong based on their consequences (Glover, 1990). Everything else achieved is only good or bad according to its tendency to produce happiness or unhappiness. Individuals using this theory consider an action to be right if it maximizes the overall wellbeing of society and wrong if it does not. Businesses applying utilitarianism will engage in activities that increase their profits while at the same time serve the best interests of their customers, community, and the government (AWB, 2016).

Sir David Murray’s running of Rangers defied this moral theory on several different occasions with respect to the customers, community or government. Murray’s spending had huge short-term gains but was the catalyst for the longer-term problems which Rangers faced. Murray spent amounts of cash acquiring and paying wages which were unheard of in Scottish football at the time. These assets allowed Rangers to dominate Scottish football during the 1990s. Applying the theory here was a good thing for the customers (fans) as it brought them happiness when they saw their team take trophies. This hugely benefited the community as with large wins comes in large revenues and Rangers could employ more locals in their area of Ibrox; these wins were also beneficial for the taxman for increased revenue equals increased corporation tax. However, this was a dangerous cocktail of success as it led Murray to state that “for every five pounds Celtic spends we will spend ten”.

The long-term ramifications were starting to show as in 1999 the Bank of Scotland secured a floating charge over the club, and two years later Rangers’ debt stood at £50million. It was around this time that Rangers employed EBTs. While these were technically allowed, Rangers employed over 80 individual workers on these contracts, compared to Celtic only having one person on this type of contract.  Applying the theory, we feel that these EBTs did break a “moral (utilitarian) duty”. This allowed Rangers to avoid taxation and National Insurance for sorely the company’s benefit.  This would have resulted in a loss of tax receipts and national insurance for the government; you can see this would be “bad” from the government’s point of view. This would eventually affect the community and customers later down the line, as by September the taxman gave Rangers a final warning over a £49million tax bill due. This eventually led to administrators taking control and freezing the assets. The damages of the EBTs now hit the fans (customers) as their trust was completely broken in their club. The community was also badly affected by this as Rangers went into liquidation. Ordinary creditors including small businesses received nothing while HMRC is still in the process of trying to recover its tax bill.

Conclusion
In regard to ethics of care within a business setting, the lessons that can be learned from these breaches are that directors must stay within a reasonable spending limit, which should be a main objective of all companies. However, within Rangers, reviewing its downfall leads us to believe that its dream of conquering the European Cup was more important to it than were wise restraints on spending. The lesson learnt from this is that, while a company should dream big dreams, those dreams should be acted upon in a sustainable and realistic manner.

In our opinion, justice was not done in Rangers’ case. David Murray got off relatively lightly; there were no arrests in relation to the tax fraud involving Rangers. To save this happening again there must be a united front from HMRC and the governing bodies that make the rules for football. Rangers’ punishment did not fit the crime; even though it was demoted in the league it climbed relatively quickly to be one of the biggest clubs in Scottish football. In our opinion, we could make a case for Rangers to be stripped of name and history as a deterrent to other football clubs. History is an important part of any football club; we feel the stripping of this would be the strongest punishment for any club. HMRC fully restricted EBTs, and the case created a precedent that tax and national insurance must be repaid.

The lessons learned from the ethics we have discussed are quite plain to see. Using utilitarianism first we can see that David Murray’s actions caused short-term happiness in the club; there was no concern for the longer term which ultimately saw the consequences of these actions cause more unhappiness than good. A strong ethical duty must be the backbone of a company, and instilled from the owner and the board.

A further lesson that can be learned is that individual boards of directors must remain independent of the owner; Murray had too much influence and power over his board, this led to decisions that were in the best interests of Murray’s dreams and goals and not in the long-term best interests of the club. Decisions such as the EBTs and financing debt with loans from his other companies should have been scrutinized by his board more closely. An owner shouldn’t be able to spend what he wants; a club should only spend based on its own revenues and serviced debt, and not based on the owner’s wealth. This is what UEFA is trying to achieve with its financial fair play.

This article was an essay submitted to the University of the West of Scotland for the Business & Professional Ethics module, 2017-18 (posted here with authors’ permission).

References
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