The Business Book

141

Venture capitalists, such as Indian-
born Vinod Khosla of Sun Microsystems,
invest in companies at an early stage
and risk bearing the brunt of failure.
But returns can be high with success.

The association of risk with the
shareholder is beneficial in many
respects. A risk-bearing shareholder
in a large, multinational bank would
be inclined to discourage senior
management from taking large risks
with the bank’s capital or reputation.
Calculated risks may be considered,
but not risks that threaten the
existence of the business. The
shareholder can play a significant
part in the business process, acting
as a natural check on the company’s
propensity to take risks. This view
of business has been held since the
foundations of modern capitalism
in the 18th century.

Suppliers and creditors
The traditional view may be
threatened due to effects of new
rules and practices. In an attempt
to encourage entrepreneurship,
Chapter 11 of the US bankruptcy

code gives a struggling business

substantial protection from those to

whom it owes money (its creditors,

such as suppliers of raw materials,

ingredients, or subsidiary services).

This protection is intended to allow

a company to rethink its business

plan and perhaps find a more

profitable business model.

In the UK, a struggling company

can choose to enter a phase of “pre-

pack administration,” in which the

business’s assets are sold after it

has entered bankruptcy. The assets

and operating model are sold to

new owners, leaving the original

business entity behind. Suppliers

and other creditors may receive no

more than a token payment, such

as 10 percent of the value of their

claims on the business. The new

shareholders then have a debt-free

business with all the assets of the

old company, but with none of the ❯❯

See also: Managing risk 40–41 ■ Play by the rules 120–23 ■ Accountability and governance 130–31 ■ Leverage and
excess risk 150–51 ■ Off-balance-sheet risk 154 ■ Balancing long- versus short-termism 190–91 ■ Morality in business 222

MAKING MONEY WORK

Executives Staff

Taxpayers

Shareholders Creditors

Risk of financial

loss

Risk of criminal

prosecution

The burden of risk associated with a business is spread wider as its financial

affairs grow more complex. Executives and staff stand to lose financially and

perhaps even punitively—with prison sentences possible—if the company fails.

Creditors and shareholders can lose financially, while in the worst-case scenario

taxpayers may bear the heaviest burden of all—in the form of high taxation and

low economic growth—if their government chooses to rescue the business.

Business