The Business Book

(Joyce) #1


In the UK, a similar fate awaited
figures such as Fred Goodwin (CEO
of Royal Bank of Scotland when it
collapsed in 2008) and James Crosby
(CEO of Halifax Bank of Scotland
until 2006). Both were blamed for
the dramatic collapses of their
banks in 2008, and for their part in
the subsequent economic turmoil.
Is it fair that a company’s
bosses should have to take the
blame for failure so personally?
After all, it is inconceivable that the
CEO is the only one to blame for the
failure of a business. Objectively,
the answer is clear, because
business failure is certainly the
responsibility of more than just the
CEO. Yet high-profile executives
often strive to associate themselves
so closely with the company—
making it seem as though they
personally are the business—and
are so eager to back this up with
massive remuneration packages,
that it can be no surprise when the
public and the media turn on them.

Taxpayers to the rescue
In mature, developed economies,
businesses are supposed to take
risks in pursuit of reward. Failure

should, on this basis, lead to the
death of the business. Austrian-
American economist Joseph
Schumpeter, in his classic 1942
book Capitalism, Socialism, and
Democracy, made the famous
statement: “The process of Creative
Destruction is the essential fact
about capitalism.” Schumpeter, like
many others, viewed recessions as
a cleansing mechanism, allowing
the weak to fall back and new,
stronger companies to emerge.
Yet modern governments seem
to see things differently, certainly
in relation to large businesses. The


Italian food giant Parmalat’s 2004
$1.6-billion accounting cover-up was
primarily due to fraud. The effects were
sharply felt by shareholders and the
many employees who lost their jobs.

term “too big to fail” illustrates that
business risks have been transferred
to the taxpayer. Faced with the
bankruptcy of General Motors and
Chrysler in 2009, the US government
—in other words, US taxpayers—
took on billions of dollars’ of debt to
give the companies a fresh start.
In the UK and Europe, bank
bailouts in 2008 and 2009 saved
the private sector from huge losses.
In Europe, what was put forward as
a Eurozone government problem
was in fact a private-sector problem,
as banks faced nonrepayment of
loans to businesses within Greece,
Portugal, or Italy. The bailouts
were arranged and financed by
governments, meaning that
taxpayers turned out to be the risk
takers, even though nobody asked
their opinion. American economist
Nouriel Roubini summed this up
by saying: “This is again a case
of privatizing the gains and
socializing the losses; a bailout
and socialism for the rich, the
well-connected, and Wall Street.”
This issue has stretched far
wider than the US and Europe,
influencing the economic situation
in both Japan and China in recent
decades. From the start of its
20-year depression in 1990, land
prices in Japan fell by more than 80
percent, and today remain far below
the levels reached in 1988 before the
recession began. In effect, almost
every bank in Japan was insolvent
as a result of vast portfolios of
nonperforming loans—loans that
were made to companies that could
neither repay the debt, nor pay the
interest on that debt. Only the
support of the Japanese central

Risk comes from
not knowing what
you are doing.
Warren Buffett
US investor (1930 –)
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