Before being a successful entrepreneur, Henry Ford was a failed one. In 1901, his first company went bankrupt, because of poor management and high production costs. Yet, only two years later, he founded the Ford Motors Company and went on to create the modern car industry, to revolutionize manufacturing, and to become one of the most successful industrialists of his generation.
Bankruptcy is not a sin. It is often the consequence of factors which are beyond the control of an individual entrepreneur: a slump in demand, a financial crisis, the emergence of a new competitor… It is sometimes the consequence of honest mistakes made by those who tried hard but did not succeed, as in the case of the young Henry Ford. (It is always a tragedy for the entrepreneur, for the workers, and for some of the creditors, a tragedy that can result in huge losses or that can be a platform from where to rebound.
Indeed, bankruptcy is part of the functioning of a successful market economy. Firms are born, they develop, and they die – as they are replaced by new ones. The development of an economy is almost organic, with each generation of enterprises going through successive phases of growth and decline, and being displaced by a new generation, with different, often more sophisticated products. The challenge is to make this process of destruction / creation as effective and as painless as possible.
Insolvency laws and “second chance programs” play an important role in this respect. They largely determine whether there can be a new life for bankrupt companies and entrepreneurs – or not. And in turn, this determines how much risk people, both entrepreneurs and creditors, are willing to take. So how does Poland fare in this context ?
Poland’s insolvency system needs to shift from liquidating companies to facilitating their restructuring – along the line of the recent recommendations by Judge Janusz Płoch and the commission he led. Because the current system is not helping the economy: out of 28,000 firms who filed for bankruptcy in the seven largest business cities between 2005 and 2012, only 3 percent initiated a restructuring – in developed countries many more do (get restructured). Just think of the number of jobs that could have been saved !
Poland also needs to give its entrepreneurs a second chance. Of course, not all failed entrepreneurs will become successful ones. But it is mistaken to place a social stigma on those who tried and did not succeed. In fact, some “business angels” in Silicon Valley specialize in supporting entrepreneurs who have experienced bankruptcy – because they are seen as more likely to succeed than those who have yet to learn their lessons.
There was a time when bankrupt entrepreneurs were expected to blow their brain off. Had this been the practice in the US, the world would probably never have heard of Henry Ford, nor of H.J. Heinz (bankrupt in 1875 before inventing ketchup in 1876), Milton Hershey (bankrupt in 1882 before launching his famous chocolate candies in 1900), or Walt Disney (bankrupt in 1923 before creating Mickey Mouse in 1928)… To strive in the 21st century, Poland needs to encourage entrepreneurship and innovation. Both are risky endeavors, and some of those people who try will fail. But this is not a sin and both the enterprises and the entrepreneurs should be given a second chance.
The Government recently announced its intent to revamp the insolvency law and to launch a new second chance program. These reforms are important steps in the right direction. They should be carried through, and effectively implemented.