Company directors often spend more time protecting themselves from personal liability, fearing risks will backfire on them, than they do on building the business.
The latest Director Sentiment Index by the Australian Institute of Company Directors (AICD) found that almost 75% believe there is a risk-averse decision-making culture on boards.
And 85% say that the risk of personal liability has caused them to take an overly cautious approach to decision-making at some point.
Today’s innovation statement by prime minister Malcolm Turnbull is pitched as a blueprint for transforming the Australian economy.
“Innovation, however, is not just about encouraging bright minds to generate ideas that will fuel the nation’s growth,” John Brogden, CEO of the AICD, told his 37,000 member-directors in an email today.
“It needs to consider more than tax breaks and government funding. Successful innovation requires reforms to insolvency and liability laws to allow directors to take the kind of risks that let innovation flourish.
“We need to embrace the risk of failure in order to allow innovation to succeed.”
He says innovation means reforms to insolvency and liability laws to allow directors to take the kind of risks which allow businesses to flourish.
Brogden says billions of dollars of wealth and tens of thousands of jobs are destroyed when businesses fail because insolvency laws frustrate innovation.
“They have the perverse outcome of forcing directors to focus on their own interests ahead of the interests of the organisation when the risk of insolvency is real,” he says.
The Productivity Commission has explored options for insolvency which focuses on corporate recovery, trying to save companies instead of encouraging the appointment of administrators.
Brogden says one measure the government is reported to be considering is a so-called safe harbour.
“Such a mechanism would allow directors to explore restructuring options without incurring personal liability for insolvent trading and consequently give them greater capacity to evaluate a struggling company’s options,” he says.
“There is more than good reason to salvage viable companies, both established businesses and those in their relative infancy. It preserves employment and stimulates economic growth.”
(Disclosure: Chris Pash is a member of the Australian Institute of Company Directors.)
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