Policy – Why a second chance policy
"We must free ourselves of the hope that the sea will ever rest. We must learn to sail in high winds" - Aristoteles Onassis
Why a second chance?
Research shows that businesses set up by re-starters grow faster than businesses set up by 1st timers in terms of turnover and jobs created. This is important for society as a whole, as it mitigates losses caused by the bankruptcies that are inevitable in any economy.
Having already faced extreme challenges, many entrepreneurs who fail at the first hurdle are willing and able to learn from their mistakes. They may also have developed greater determination and a highly sensitive radar for dangers that will help them more effectively assess risks and opportunities.
See our presentation [107 KB]
Acting now to improve insolvency regulations and practices can yield a wealth of economic growth…
Some well-established companies would not exist if their founders had given up after their first failure, and we would have to go without many everyday items if the inventors had abandoned their pioneering instincts after their first failed attempts.
If we want to tap the full potential of business to create wealth and jobs in Europe business we should ensure that genuinely talented entrepreneurs have every opportunity to give it another try, even after an initial failure.
But the net loss due to the severity of bankruptcy only starts there. Studies show that Europeans are relatively risk-averse, and this can deter many people with otherwise great business ideas from starting their own company. The most common concerns are the risk of going bankrupt and losing personal property, in particular the negative impact on one's family. Another deterrent to entrepreneurship is the stigma attached to business failure in Europe. If we are to encourage more people to start their own business, we need to foster a positive attitude to risk-taking and failure, as well as providing appropriate support.
Bankruptcy and attitudes to bankruptcy are possibly the single most important reason to explain the entrepreneurship gap between Europe and the U.S.
…whilst making sure that the interests of society and all stakeholders are best served.
Small businesses will be much more severely affected by financial difficulties than larger companies as they often lack the resources to adapt to rapidly-changing market conditions. But if such businesses can be saved, their assets could be more valuable if they were retained in the business rather than being sold off to pay creditors. This approach would be more likely to preserve jobs, give creditors a larger return on their investment and allow the company to continue making a contribution to the economy. So we need to enhance the survival rate of viable businesses and encourage entrepreneurs in distress to take action early on.
Even if it proves impossible to save a company by restructuring, it should be easy to wind it up, to minimise the losses for all parties. Bankruptcy leaves debts unpaid and destroys capital and jobs. Efficient bankruptcy procedures are essential to strike a balance between the interests of the business, its investors and its staff.
Most European countries allow failed companies to be reorganised through court insolvency proceedings. If more businesses could be saved like this, creditors (and other affected people) would benefit.
Bankruptcy is the worst possible solution for creditors because they receive only a fraction of what they invested and lose the chance to benefit from the firm's potential future earnings
It's all about more jobs
Up to 18% of all entrepreneurs who go on to be successful fail in their first venture.
Entrepreneurs who have tried but failed need an opportunity for a fresh start. But even more than them, Europe needs to give them a second chance. Studies show that they learn from their mistakes, and that this leads to growth in GDP, employment and productivity. If Europe is to tap the full potential of its business self-starters, they need both financial and moral support for their second venture.
In as much as most media coverage focuses on insolvencies of large firms or those involving fraud, in reality, most insolvency involves nothing more than small, sometimes family-owned companies, fighting honestly for survival within the law.
The owners of such firms deserve praise for the energy they invest in their business, risking their own private property, and the damage they suffer when things go wrong: the loss of their business, property and livelihood. Branding such people criminals is not only unfair, the knock-on effect is a culture where fewer people are willing to take such risks in future.
The aim should never be to reduce insolvencies to zero, but to keep them to a minimum by supporting viable companies.