April 24, 2012 6:34 pm

Companies aren’t to blame for every ill

Litigious culture hampers good business thinking

Every sane person knows that perfection is impossible in the real world. The fact is people are flawed creatures and, in life, things go wrong – all the time, in lots of big and small ways.

But it seems we don’t apply this to institutions – large corporates for example – or even entrepreneurial companies.

This era of elevated expectations means the penalties for entrepreneurs over cock-ups are greater than ever. The demands from society for absolute standards over safety, honesty, quality and other difficult issues can never be properly satisfied. Regulators and critics have rarely had any experience of running a company, so are oblivious to the consequences of their actions.

Modern products, services and processes are simply too complicated to be error-free. Moreover, as my doctor friend says, “drugs have side effects”. If we want technical advances, we must take risks – or face stagnation.

Multinationals are so large and diverse that they are almost certain to suffer from daily accidents, frauds and other problems – especially if they are trying to innovate. Human frailties, natural uncertainties and bad luck are responsible for most things that go wrong – not negligence, gross incompetence or deceit.

But thanks to computerisation, customers think every experience must be 100 per cent right in all aspects. Anything that isn’t immaculate leads to a complaint and a threat to blow the whistle to the media or regulators. Often there is implied blackmail: pay us off or we will report you, be it disabled access or health and safety inspections. It is an attitude among much of society that inhibits entrepreneurship.

Unfortunately we always insist that someone must take the blame – and indeed pay – if there is injury, damage or loss of almost any kind. This insistence on compensation applies even if the upset was an accident and unavoidable – or even the victim’s fault. Insurance encourages this attitude – because, say the industry’s big players, “it doesn’t really cost the company anything”. Except premiums go up – and so prices rise for all.

For example, the difficulties Toyota suffered over allegations of “unintended acceleration” in its vehicles a few years ago forced the company to launch a massive recall. The ensuing litigation cost the carmaker at least $2bn and damaged its reputation, even though a US government investigation declared that Toyotas were safe to drive.

This urge to punish business with hysterical campaigns is not always driven by pure intentions. The main facilitators are lawyers, often joined by anti-capitalists of one type or another – unions, Occupy activists, leftwing agitators. All tend to have dubious motives, cloaked in weasel words such as “holding the powerful to account”, “fairness” and “preventing exploitation”.

The BP Gulf oil spill of two years ago cost the business perhaps $40bn in fines, clean-up expenses and payments to various sufferers. No doubt a high proportion of that cash will end up in the hands of law firms that specialise in getting money out of big companies in class action lawsuits. It was certainly a tragedy, with 11 deaths on the rig. Management clearly made serious mistakes. But the west needs oil and drilling for it is inherently dangerous. Are we not all at least partly complicit, by virtue of our addiction to cheap petrol to fuel our consumer lifestyles?

Diverting money from industry that would otherwise be invested to create jobs can only make nations such as the US and Britain less competitive. The huge damage to News International caused by the scandal over phone hacking has so far cost the business at least £400m. Newspapers are already under grave threat from digital media like Google, which siphon off their advertising revenues. Journalists and those who care about a viable, free press will be the long-term losers; many may dislike Rupert Murdoch, but whoever replaces him as owner is likely to be worse.

Companies are sometimes guilty of boasting too much in their advertising, and promising goods they cannot deliver. And occasionally rogues work within organisations, behaving badly in various ways. But if we persist in bashing and suing business like a competitive sport, then how can it grow, generate jobs and help maintain our standard of living? And who would want to be a business leader?

lukej@riskcapitalpartners.co.uk
The writer runs Risk Capital Partners, a private equity firm, and is chairman of the Royal Society of Arts

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