What we can learn from Americans - and Thomas Edison - about business failure: Rashmi Dube

It is likely to be a combination of mindset and good governance, directors’ duties and just general good ethics. Is this what the Americans have? A better mindset to us when it comes to failure and a different set of ethics? Or do we excel at ethics, duties and governance?

I could of course be oversimplifying the matter but there is a concern - the insolvency practitioners are seeing movement towards insolvency and turnaround specialists have been busy. I am not sure I have ever had a conversation with anyone growing up who said “it’s OK to fail because you learn from it.” In business, as an entrepreneur, is the question ‘To Fail or Not Fail?’

The smaller business possibly has it hardest - the S of the SME - usually operating with no backing.

There are no investors, just the founder(s). Their life’s work, blood and sweat poured into the business and more than likely today will have the wolf howling at the door and forcing its way in, being guided by increases in energy bills, supply issues, and the price of gas going through the roof.

It feels unfair to have survived lockdowns and the pandemic, in many cases pivoting, but still not quite making it. Success is just around the corner but how much more of a mental strain can the small business owner take? The pressures are also internal from the person worried about a failing business – What will people think? How will they react? Who am I without the business – a failure? What would I do?

But the real question here is why is failure still such a taboo here in Britain? We are not conditioned to see failure as a chance to learn to grow and do better. Thomas Edison said, “I have not failed. I just found 10,000 ways it has not worked.” Should we be ashamed of failure?

The Americans definitely are not and are taught early on in life that failure is a learning curve. If that is the case then it is understandable that in the instances where the SME limited company folds into liquidation (and there are indeed some instances, much to the dismay, frustration and anger of debtors), then the directors might proceed to continue in business in another guise in what seems to be the very next day. Should the creditors in England be more accepting of failures and does this view differ for the larger corporates?

Surely their processes and board of directors follow good governance practices and yet still they have issues, often of their own making and not related to the economic backdrop, or at least that can often be argued, such as some retail stores did not adapt in

time when one could see the impact of the internet. Maybe this is considered a different type of failure and therefore acceptable. I take solace in that, in principal, companies operate on the proviso of good governance and ethics towards the creditors.

Yet there is a gap between the Americans and English in terms insolvency and bankruptcy. In the UK there is often a stigma which is often associated with bankruptcy with it being seen as the “end of the road” – you have failed, do not pass go and do not collect £200 and there is no get of jail free

card.

The States however see it as an opportunity for management to rescue the business, albeit under the supervision of a judge. But then ethics come into play– what could possibly be different?

Consider the controversial Texas Two-Step bankruptcy. In carrying out a Texas Two-Step bankruptcy, a company first creates a new legal entity into which it transfers any breaches of duties while transferring a relatively small portion of the original company’s assets. The newly created corporation then files for bankruptcy, effectively shielding the original company from the tort liability costs. It allows companies to hide from their legal responsibilities.

Ethics don’t come into it nor directors’ duties to stakeholders or good old-fashioned governance.

To talk about the word failure and the perception of it in such binary terms is misguided. As for the S of the SME, it is a hard pill to swallow. We cannot change society’s perception of us or failure but maybe we should just look to ourselves and practice good ethics, duties as directors and governance, and take comfort that in the main us English folk maybe learning to change our attitudes to failure, but we are pretty much an ethical bunch.

Rashmi Dube is a partner at gunnercooke