Page 143 - (DK) The Business Book

MAKING MONEY WORK 141

See also: Managing risk 40–41 ■ Play by the rules 120–23 ■ Accountability and governance 130–31 ■ Leverage and
excess risk 150–51 ■ Off-balance-sheet risk 154 ■ Balancing long- versus short-termism 190–91 ■ Morality in business 222

The burden of risk associated with a business is spread wider as its financial
affairs grow more complex. Executives and staff stand to lose financially and
perhaps even punitively—with prison sentences possible—if the company fails.
Creditors and shareholders can lose financially, while in the worst-case scenario
taxpayers may bear the heaviest burden of all—in the form of high taxation and
low economic growth—if their government chooses to rescue the business.

Shareholders Creditors

Venture capitalists, such as Indian-
born Vinod Khosla of Sun Microsystems, Business
invest in companies at an early stage
and risk bearing the brunt of failure.
But returns can be high with success.

Executives Staff
The association of risk with the
shareholder is beneficial in many
respects. A risk-bearing shareholder
in a large, multinational bank would
be inclined to discourage senior
Taxpayers
management from taking large risks
with the bank’s capital or reputation.
Calculated risks may be considered, Risk of financial
loss
but not risks that threaten the
existence of the business. The Risk of criminal
prosecution
shareholder can play a significant
part in the business process, acting
as a natural check on the company’s code gives a struggling business business’s assets are sold after it
propensity to take risks. This view substantial protection from those to has entered bankruptcy. The assets
of business has been held since the whom it owes money (its creditors, and operating model are sold to
foundations of modern capitalism such as suppliers of raw materials, new owners, leaving the original
in the 18th century. ingredients, or subsidiary services). business entity behind. Suppliers
This protection is intended to allow and other creditors may receive no
Suppliers and creditors a company to rethink its business more than a token payment, such
The traditional view may be plan and perhaps find a more as 10 percent of the value of their
threatened due to effects of new profitable business model. claims on the business. The new
rules and practices. In an attempt In the UK, a struggling company shareholders then have a debt-free
to encourage entrepreneurship, can choose to enter a phase of “pre- business with all the assets of the
Chapter 11 of the US bankruptcy pack administration,” in which the old company, but with none of the ❯❯