Now more than ever Ireland needs entrepreneurs and risk takers - we should be encouraging them rather than penalising those who run into trouble, writes Richard Guiney
As the waves of foreign direct investment ebb, and our ability to attract inward investment faces growing international competition, Ireland will increasingly rely on indigenous start-ups and the development of Irish small and medium enterprises (SMEs) into global players to sustain its economic growth in the future.
Experienced business people know that starting and growing a company involves risk and requires people who will seek out and take the necessary gambles.
Following the wave of corporate scandals in the late 1990s and early 21st century, both in Ireland and abroad, it was inevitable that the privilege of limited-liability status would come with increased regulatory obligations and that business practices would be more diligently policed in the future.
It was in this context that the establishment in 2001 of the office of the director of corporate enforcement (ODCE) was, for the most part, well received by the business community. While some muffled voices have alluded to over-regulation and the watering down of limited-liability status, the ODCE has been at pains to explain that its role is not to inhibit entrepreneurial endeavour and business initiative, but to ensure that all companies abide by the same high standards.
Whether well-founded or not, concerns still exist among company directors that one failure may mean their business ambitions being extinguished for at least five years. Perhaps this is why a Deloitte and Amárach survey in 2004 found that two in every three directors were less likely to accept a directorship than they were five years ago. It may also account for why up to 30 per cent of directors were willing to accept restriction voluntarily, at a time when the majority of those who chose to defend their actions were ruled to have acted honestly and responsibly by the court.
It is also worth noting that, since 2001, the number of liquidations requested by creditors has fallen by 35 per cent, while the number of companies placed in liquidation by their own directors has increased by 35 per cent. In its latest annual report, the ODCE has welcomed the "substantial rise in recent years of solvent companies being liquidated" (ODCE Annual Report 2004 ) .
However, the question arises: why are more directors of solvent companies choosing to place their companies in liquidation? Are they acting too quickly to terminate potentially viable companies for fear that attempts to trade out of difficulty will lead to their restriction or even disqualification for reckless trading?
If there are misplaced fears among directors and potential directors, then these issues must be addressed. Ireland needs entrepreneurs and risk-takers now more than ever if we are to encourage start-ups and the significant expansion of existing SMEs to become global players in their own right. We need people who can take on a challenge and make tough decisions while the finances of the organisation are fragile. The Irish economy will fail if directors run to liquidate at the first sign of trouble.
Growing start-ups and SMEs also involves venture capital investment. Investment funds will require experienced business people to sit on boards to protect their interests, and these same business people will bring their wealth of experience and connections to bear in developing the companies in question. However, if experienced individuals are afraid of damaging their reputations by taking up a directorship in a risky company, are we not throwing the baby out with the bathwater? In the US, many successful businesses have been built by people who have failed in the past and, in the current regulatory environment, may have found themselves restricted.
The question then arises: at what point should the company cease trading and make its workforce redundant? Is it acceptable to continue to trade when the company is insolvent but when there is a likelihood it will turn its fortunes around? These are questions likely to face many company directors at some point and, as our recent exceptional rates of growth moderate, the questions will be asked with increasing frequency.
Fraudulent and reckless trading cannot be tolerated. However, it must be recognised that when a company appears to be in difficulty, it makes sense on occasion to seek a solution to its problems by, for example, attempting to trade out of difficulty. This is not an irresponsible act.
It involves risk which sometimes will pay off and sometimes will not - an essential part of being in business.
In short, we must differentiate between fraudulent trading and normal business failure. We must also look to the motives and actions of directors and recognise normal business failure as an integral part of a vibrant economy.
Richard Guiney is head of corporate services at the Chambers of Commerce of Ireland