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For there to be executives, there must first be entrepreneurs--the reverse does not apply: Why Government should want a strong private business sector.
October 15, 2017
Economies today have the opportunity and challenge of rapid change. Change occurs on a technological level at an astonishing rate, but it also occurs because of regulation needed to address new knowledge about the environment, and because of global geo-political change such as globalisation and the backlash against it. The large publicly traded company lacks the flexibility to adapt successfully to such changes. In the modern environment, we need bold people to guess where things will go and bet their lives on it. Canada’s DNA is still risk averse, though much less so than before, and government needs to facilitate starting enterprises: though many will fail, or have only short periods of success, it is a highly flexible assortment of smaller businesses that can, in the aggregate, create economic stability and thus real security for Canadians, and reduce our dependency on resource extraction and branch plants.
Private businesses offer many other advantages to the country over publicly traded ones. The owners live here and spend their profits here. The owners care about Canadian services and infrastructure, the education system and the hospitals, and support governments that invest in them. Senior managers make strategic decisions in Canadian head offices, rather than merely localizing strategy for foreign head offices: our best and most talented can find fulfilling rewarding careers in Canada, instead of needing to leave the country for the next advancement.
Most importantly, the owners are at risk. For stability and wise resource allocation, capitalism depends on risk and reward being closely linked. Often, private business owners’ houses are pledged and they have personal exposure to their business’s debts. Once they have achieved some degree of success, they take increasingly measured risks: they are not, like the paid executives of private companies, betting with other people’s money.
Economic studies have shown that fear of loss concentrates the mind and is a strong motivator to success: perhaps more so than desire for wealth. Entire public companies have failed because their managers have driven up the stock price at the expense of sustainability, motivated by stock options they did not have to mortgage their houses to earn. (Some would explain the demise of Nortel in this way.) Many public company executives are responsible managers, but it can be difficult to think long term when the market is watching quarterly results. Private companies also answer to a smaller more manageable group of shareholders who understand the business intimately, and can be more patient, less focused on quarterly results and more interested in long term sustainable value.
Generally, the key decision maker is the largest shareholder, providing for more nimble strategies. Private companies adapt more quickly to changing market conditions, new technologies, new regulations. Most importantly, private companies are betting with their own money: risk and reward are tightly linked, not severed from each other as they can be in professionally managed publicly traded corporations.
An employee manager of a public company enjoys a situation akin to a gambler who enters a casino with a special privilege: they can only win. Why not bet, bet big, and bet without calculating the risk? Not so the private company owner operator. He or she weighs their bets with care. In a complex world, care and diligence do not preclude failure, but they improve the odds of success. The great business writer Peter Drucker said of entrepreneurs that their primary function, once they have taken the key risks to get the business established, is to continually take better informed risks, to reduce risk, to improve the odds of success.
When I hear politicians talk about taxes on private businesses, making comparisons between what an entrepreneur making $500,000 a year would pay versus what an executive would pay on the same income, I am mystified by the equivalency they are making. There is no argument for it.
For there to be executives, there must first be entrepreneurs. The reverse does not apply.
Executives do not have personal guarantees for their employers’ bank lines. If they make mistakes and their companies fail, they lose their jobs. Often, they get generous severances, and have had increasing incomes over many years from which to salt away savings. The complaint that they are trapped in a limiting tax regime while entrepreneurs have opportunities not available to them is absurd: if they want these opportunities, they can leave their well-paid jobs and depend on their own resourcefulness to make a living: they can start their own businesses.
The more successful an entrepreneur’s company has been, the more likely they are to have had to increase their personal guarantees to provide the business with the capital it needed to grow. Should they fail, they can find themselves personally bankrupt, if the company has not reached enough maturity to allow them to create a personal safety net. On the other hand, if they succeed, and gain financial independence, they will deploy their wealth to make it grow, often by supporting early stage businesses that will in turn make contributions to the Canadian economy.
The enlightened self-interest of the successful is an important contributor to a healthy society. Most successful entrepreneurs know that their own success is due to good public education, infrastructure, and a socially cohesive society, and do not resent paying for it, through taxation. They know that their abilities have enabled them to profit from these building blocks exponentially compared to others, and they should support social and industrial infrastructure proportionally. Many also become philanthropists and give time and money to community building activities.
Nevertheless, there must first be wealth to distribute: it is not enough to know how to cut up the pie, you must first bake it. The beauty of a tax regime that provides more reward to entrepreneurs than to employees is twofold: by reducing the personal lifestyle drawings the owner needs it increases the capital available to invest in the business and create more growth and therefore jobs for others; and it avoids the need for government to try to pick winners and develop industry specific knowhow in order to do so, rewarding only those who have shown they can identify opportunity and successfully develop it to the benefit of the economy and the country. The independence and lifestyles enjoyed by successful entrepreneurs are enviable: they should motivate others to emulate them, rather than to jealously begrudge them their tax advantages.