“We need entrepreneurs who are individually liable”
Yesterday, I raised the subject of a system that was in need of change. To cut a long story short, it is the system of liability. The point I will try to make here would be more obvious had the financial crises, that started in 2007, never occurred. However, it is still valid and can be easily applied to the circumstances.
If one traces the financial crisis back to its roots, one will see that the actual reasons were forced, but ill-conceived, expansions of businesses (mainly the so-called dot-com firms); not necessarily expansions in foreign countries, but more domestic ones which had to happen extremely quickly in order to satisfy the shareholders. The one downside that most quick decisions share is that the decision-makers did not think long enough about them. Partly, because they are hard-pressed for time, but likewise because they know, they themselves, cannot lose out. All these businesses were market-listed, but if they got bankrupt it was certainly not the decision-makers would have to compensate for it – in the end it was the taxpayer.
This scenario easily shows how mistakes can be made just because of this feeling of security. This not only happens in economics: Caesar, for example, felt pretty secure when he entered the Theatre of Pompey for a session of the senate – I am not quite sure whether this feeling remained when the senators, all standing in front of him, produced their daggers.
This should mean that, by taking this secure feeling away of the decision-makers, they will come up with sensible and responsible decisions. But how can this be achieved? Simple question, simple answer: our economy needs more liability. If owners were personally liable, i.e. they accounted for their decisions, which, for example, had led to bankruptcy with their personal assets, they would think more than twice about risky decisions, most often driven by greed.
If decisions this sensible and responsible are made, then this will guarantee for a successful business. Now, it can be argued that there are businesses which do not act this way and are very successful – and I can accept this point of view with no objections. The only questions I would ask myself were: ‘Will this success stop soon?‘, ‘What about their financial position? Are they in debt? Did they raise credits?‘ and ‘Are they greedy for more?‘. If one of these questions can be answered with ‘yes‘, I would doubt the success of this business. Certainly greed will inevitably lead to failure.
For businesses that work perfectly this way the system is in no need of change. But since there are a lot which do not, we have to care about both types. More importantly, we have to distinguish between businesses with limited liability and ones with unlimited liability.
Enterprises around the world should, for the reasons explained above, be encouraged to switch to unlimited liability. Here I want to pick up a suggestion by Mr Grupp: the distinction can be made through different tax rates. Firms with unlimited liability should be rewarded for the risk they take with (a) a lower corporation tax or (b) a reduction of the top tax rate for the decision-makers. Disasters, as they happened in France, where the top rate was increased to seventy-five per cent and in consequence many wealthy people left the country, could have been avoided this way. Furthermore, this benefits both types of business with respect to the ultimate MCA: businesses with limited liability or their managers continue paying the government a lot of money, which, in the worst situation, can be used to bail them out. On the other hand, businesses with unlimited liability on their managers are able to save more money which, in the worst situation, will be taken to bail them out.
Unlimited liability not only brings about reasonable decisions, but it also creates a special trust from the work force below in the managers above. As explained yesterday, this belongs to the second pillar of a successful business. Moreover, unlimited liability has proved a recipe for sustained success, because managers realise the opportunity cost of risky ideas and do not even dare implementing them. Through this, the third pillar of a successful businesses is created: the sensible, responsible and liable manager(s).
Of course, this is special skill that people will start to acquire as they enter a business. As time goes by, the wheat gets separated from the chaff: those who manage to completely internalise this way of approaching decisions will later become the important people, i.e. the management positions. This is also a reason why there cannot be any discussion about too high manager salaries – the real managers deserve it.
Unfortunately, a blind man may perchance hit the mark and, therefore, sometimes even lame ducks get to this position; these are most often the ones who mess the business up, are then not held responsible for their failure – it is more easy to catch the tail of a soaped pig than to prove a manager‘s lapse – and spend their sunset years on a one-hundred-million-dollar yacht. Yes, these managers do not deserve their salary, but I would not even call them real managers. So, how do we prevent that from happening? By encouraging unlimited liability in our economy.
Mr Grupp is an entrepreneur who realised and still realises bad decisions right from the beginning. When he took over, Trigema was deeply indebted because of the great product diversification his father started. He cut this back severely, increased the revenue from €8.7m to €28.1m and decreased commercial debts from €5.1m to zero (all values are converted from Deutsche Mark to Euro). This he did in less than six years and since 1975 he has managed to increase revenues year by year without borrowing any penny. Why? Because he took a step back, thought about his decision and avoided greed. Moreover, to make sure he would never be fooled into doing otherwise, he rebranded the business from a GmbH (limited liability) to e.K. (unlimited liability). Mr Grupp is the only one responsible for failure or success of his business and he takes a pride in this, no one can sticks one‘s oar in his business: “Even a Bill Gates cannot buy Trigema without my consent”.
Entrepreneurs do not only take responsibility for their business, they take it for their land, their capital and their labour. This is the definition of an entrepreneur, he is someone who takes the risk of setting up a business, why should others be responsible for this? And only if they care about these three parts of their enterprise, will they eventually be successful.
Mr Grupp is a great example of a successful and responsible business man. When it comes to expansion, he first thinks of his employees, whether his factories are working to capacity and if there really is a need for it. There are many other entrepreneurs of this kind out in the world. These are the ones we need and in the future need to find. They will make sensible decisions that will then not only benefit their own enterprise but the whole economy. This third pillar of a successful business is essential to hold the other two. It is common sense that responsibility will ultimately lead to success. So, why should we not have it in our economy?
Tomorrow‘s final episode of the Swabianomics series will be an assessment of the extent to which these pillars are feasible and which areas of the world economy are desperately in need of an improvement through this concept.