Chapter 11 comes to India

Pritish Nandy in the Times of India

One of the best things in last week’s Union Budget, which has gone largely unnoticed, is the finance minister’s pledge to bring in a comprehensive Bankruptcy Code. Bankruptcy law reform is now a priority for improving the ease of doing business, said Arun Jaitley, thus telling us for the first time that the government has finally come to accept the fact that shit happens. And it’s time that we, as a nation, realized this and found ways and means to deal with it.

Till now, every failure was chased by a lynch mob hardwired to believe that failure is deliberate and must be punished. Not only countless lives and careers have been destroyed by this attitude but it has also fostered a business climate where people either stay away from taking the kind of crucial risks businessmen ought to take or, worse, it has brought risk taking and failure (which are at the heart of all serious entrepreneurship) into unnecessary disrepute. We, as a people, actually believe that every business that fails is a deliberate deep-rooted conspiracy, a plan to loot others. In this perverse worldview, we ignore the simple fact that most bankruptcies owe their origins to Black Swan events that have become increasingly commonplace. Not the greed and wickedness of businessmen.

History shows that the best businessmen go through many failures. They may not always talk about them but these failures teach them the lessons that eventually make them successful. The very failures we despise are the bedrock on which shining empires are built. Bankruptcy, or Chapter 11 as the Americans love to call it, is hardly a dirty word in today’s business scenario, where everything changes all the time, abruptly and without any notice. In fact, failure is a badge of honour that many successful entrepreneurs openly wear. For who will ever risk investing in a business where the promoter claims he has never known failure?

Hiding failure, in fact, is the worst thing one can do. It causes all round damage. Acknowledging it and then finding ways and means to mitigate it and move on is the way all civilised societies deal with failure. As Nassim Nicholas Taleb, my favourite economist recently said, failure is the only real asset of a nation and knowing how to fail is its biggest talent. Taleb also added that failure may be the best mantra for India’s success. For a nation that has not experienced failure and learnt from it is hugely handicapped in today’s world where everything changes at short notice, including the nature of risks. A nation that turns away from risk is not a nation yet ready for success.

He cites the examples of France and Japan. Their economies are doing poorly, Taleb argues, because the failure rate is so low. In the US, on the other hand, the highest fail rate is in California which also has the most inspiring success stories. Walt Disney is an example. He was fired by his editor because he “lacked imagination and had no good ideas”. He went bankrupt several times before he built Disneyland. In fact, even the proposal for Disneyland was rejected by the city of Anaheim on the ground that it would attract only riffraff. Henry Ford went bankrupt before he could steer Ford Motors to its huge success. So did HJ Heinz, founder of Heinz. And William Durant who created General Motors. And Milton Hershey, founder of Hershey Chocolates. The day Trump Towers was being announced with huge fanfare in Mumbai I read that Trump Taj Mahal in Atlantic City had gone belly up.

Business is not about not taking risks. It’s about riding the right risks to build institutions and create wealth. Sports, media, entertainment have had its share of bankrupts. From Larry King to Francis Ford Coppola to rapper MC Hammer to Stan Lee, founder of Marvel Comics, to blogger Perez Hilton to Mick Fleetwood, and Bob Guccione, founder of Penthouse, all have faced bankruptcy. Even famous US Presidents have. Abraham Lincoln, Ulysses S Grant, William McKinley, Thomas Jefferson. In recent years, Steve Jobs went almost bankrupt. So did Apple. Today it’s the world’s richest, strongest brand, seemingly indestructible.

Restaurants improve every time they fail. So do cars, trains, planes. They become safer because we always over-compensate after a disaster. Every shock strengthens us, readies us better for the future. Businesses too are like that and I am glad the Finance Minister has realised it and removed the stigma.

Have I ever gone bankrupt? No, but I have teetered on the edge often enough and never been embarrassed to admit it.

Funnily, as Taleb points out, the only business that never learns from failure is banks. When a bank crashes today, the probability of a bank crashing tomorrow actually increases. Banking is clearly not a business that learns from its mistakes. History proves that too.