ON RISK AND ENTREPRENEURSHIP.(bankruptcy of HIH Insurance Ltd.)

If human nature felt no temptation to take a chance ... there might not be much investment as a result of cold calculation.

--John Maynard Keynes (1936)

IN THE WAKE of the collapse of HIH, the public and the media are baying for blood, a Royal Commission is being formed to investigate the collapse of the company and criminal charges may be laid against some of the former directors and management of HIH. It is a pitiful sight to see the damage that has been caused by the insolvency of this insurance company; many people have been left in the lurch as financial payments that they depended on and deserved have stopped. The bankruptcy of HIH will cause other enterprises and individuals to face insolvency, a spiralling financial problem which will take years to settle. The federal and state governments face the prospect of having to pay millions, if not billions, in taxpayers' dollars to help cushion the blow of this financial mess.

So at this emotionally charged time, it is a bit presumptuous, if not foolhardy, to suggest that the way we view risk and reward in Australia is contrary to some of the basic tenets of capitalism. Rather than view risk of failure as an integral part of the "destructive creativity" of capitalism, we instead view most corporate failures as resulting from fraud or gross mismanagement which must be punished. By continually seeking to find blame in corporate failures, vilifying entrepreneurial failure almost as much as success, we discourage people from wanting to take the risks that are critical to any vibrant capitalist society.

Let's start with some basic premises. One of the main tenets that helped create the capitalist system was the concept of limited liability. With the development of the idea of a company with limited liability, investors were able to join together to pursue an economic plan knowing that if the endeavour failed, the extent of their risk was limited to the amount of their investment. The rest of their assets remained protected. Without the legal protection of limited liability, investors would never have been found to take risks in the commercial ventures that built the modern capitalist system. Risk of failure has always been part of the equation, and failure of economic endeavours must always exist in a capitalist system. Without the risk of failure, the rewards of success would be minimal or non-existent.

The Western nation-state granted companies the status of a legal "person" which is responsible for its debts, and not its shareholders. The state did impose conditions as to how the company had to be managed and what it could do. Alter learning from the damage caused to a financial system by the collapse of companies involved in the business of banking and insurance, governments decided to regulate and supervise companies conducting these types of business. The HIH fiasco shows the consequence of the failure of such regulation or the regulators, or both.

But other than in these special cases, the basic rule holds true: companies are the vehicles in a Western capitalist system that are used to take economic risk in a business venture and, if that venture fails, it is the company and not its shareholders who are responsible.