Innovation means taking risks, and the proposed laws makes it easier for companies to take them, writes John Brogden.
This article appeared in the Australian Financial Review on 8 December 2015 (subscription may be required).
Malcolm Turnbull's innovation statement will begin a transformation of the Australian economy by allowing companies and directors to take the necessary risks to innovate. The potential of these changes – subject to getting the legislation right – cannot be underestimated.
Monday's statement changes the game on insolvency laws. It isn't the US Chapter 11 law – and we are grateful to avoid its complexity and cost. Instead these changes will allow large numbers of viable Australian companies to trade through difficult times. They will save rather than destroy billions in wealth and tens of thousands of jobs.
Business has been calling for these laws for years. They will encourage greater risk-taking by directors. Their greatest achievement will be to reverse the purpose of our insolvency laws from solely protecting creditors to encouraging business recovery.
The reforms create a "safe harbour" for directors which allow them to bring in advisers early to assist businesses in financial distress to work out their difficulties. At present companies have few options other than calling in administrators or their lenders calling in receivers.
Another important measure allows companies who have put themselves into voluntary administration to preserve key contractual arrangements that will allow them to continue to trade. This allows such companies to remain viable while restructuring. In essence it keeps the core of the business viable during voluntary administration rather than becoming a carcass for creditors. These measures also apply to companies in the safe harbour period.
These reforms will help change our business culture. We need to embrace the risk of failure in order to allow innovation to succeed. This means recognising that in pursuing new ideas and opportunities, some businesses will fail.
Existing 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. Surely, this was never intended to be the case.
There are a number of significant pressures that create a risk-averse corporate culture in Australia, including a complex regulatory environment that too often forces directors to focus on regulation instead of the performance of their organisations. Such an environment is a disincentive for directors to make decisions that would encourage innovation and entrepreneurialism.
If directors only made decisions on the basis of 100 per cent guaranteed success, board meetings would be short and infrequent. Directors take risks all the time. Some risks fail, despite the fact they are based on the best information available and honest judgement.
Our markets punish failure. They encourage short-term, result-oriented decisions and actively punish long-term actions requiring patient capital and extended timeframes.
This helps create a situation in which boards are unwilling to take well-judged risks and are instead religiously governed by detailed planning and counterproductive group-think that eliminates any opportunities to innovate.
The biannual Director Sentiment Index conducted by the Australian Institute of Company Directors consistently proves this is the case. The index results for the second half of 2015, released on November 11, found almost 75 per cent of directors believe that there is a risk-averse decision-making culture on Australian boards. And 85 per cent claim the risk of personal liability has caused them to take an overly cautious approach in their decision-making at some point.
A properly designed safe harbour could help overcome these pressures and encourage directors and their companies to seek turnaround advice earlier, avoiding voluntary administration. Other developed countries already offer similar mechanisms, so it's entirely reasonable to suggest that the concept could be implemented in Australia.
The form of a workable safe harbour for directors is still open to discussion, but there are several elements which are key to its design. First, it must apply to all companies as innovation and the economic benefits it generates are by no means limited to start-up companies or digital disruptors.
Second, it is must be an uncomplicated mechanism that is not wrapped up in technicalities which makes it practical application almost impossible. Finally, an effective safe harbour might also have to extend to any advisers consulted by directors
Malcolm Turnbull's innovation plan can be a game changer for business in Australia if the law and our risk culture allow calculated risks and a willingness to wear failure as an element of success.