Highly regulated business environment stifles entrepreneurial risk taking

The leaders of some of WA’s top private businesses say overregulation is stifling the development of an entrepreneurial culture in Australia.

SOME of the state’s leading entrepreneurial figures believe government has little to offer those wanting to create new businesses and would be best to get out of the way.

Asked by Ernst & Young partner Peter McIver what governments can do to encourage entrepreneurship the response was not that surprising, given the nature of those being questioned - five of the state’s leading players from across several economic eras.

The five: engineer Harold Clough; fuel retailer Fred Rae; former fishing and pearling industry player Patricia Kailis; major chemicals producer Gordon Martin; and shipbuilder John Rothwell were part of a panel discussion held at Indiana Restaurant in Cottesloe prior to judging on the Western Australian master entrepreneur award for Ernst & Young’s Entrepreneur of the Year Awards.

There is a strong self-made streak running through these business leaders and the general feeling was that successful entrepreneurs already had the odds stacked against them by tackling new areas of business.

All of these panellists have had extensive business interests; most have been involved in the public company space, which they generally agreed is more risk averse than the private business sector where they all had their roots.

Clough, for instance, is now majority owned by South African-based Murray & Roberts, and recently hit a market capitalisation of $1 billion. The market values Austal, a leading fast-ferry manufacturer that is rapidly developing naval combat platforms, at about $230 million.

Gull Petroleum’s WA operations were sold by the Rae family about two years ago to Archer Capital’s Ausfuel business, based in Darwin. Archer recently sold Ausfuel to global group Puma Energy. The Raes still own a fuel business in New Zealand.

MG Kailis is 35th on the WA Business News list of private companies and has turnover of about $100 million.

Coogee Chemicals is one of WA’s top 25 private businesses with a turnover of more than $200 million.

Private companies in WA generally provide limited financial data. All but the biggest can avoid supplying key numbers such as revenue and turnover in annual returns to the Australian Securities and Investments Commission. WA Business News has collected data on the leading businesses for many years, either from official documents lodged with ASIC or from other public sources, which we endeavour to confirm with the companies themselves.

Most of the companies on this list are first or second-generation businesses started by entrepreneurs who took advantage of the high growth in WA since the 1950s.

Good examples are the three leaders of the list: home building and materials business BGC, led by founder Len Buckeridge; major iron ore business Hancock Prospecting, founded by Lang Hancock; and national fast food enterprise Competitive Foods, started by Jack Cowin.

Many of the entrepreneurs above have lashed out over government interference in their sectors, which has stifled their ability to invest.

Mr Clough believes there is very little governments can do for business and he preferred they simply kept out of your way.

“Entrepreneurial businesses tend to be a bit different - that upsets the bureaucrats,” he said.

“They don’t fall into the right boxes.

“I don’t think governments can assist entrepreneurship.”

Founder of fuel distributor and retailer Gull Petroleum, Mr Rae said that governments seemed to like encouraging businesses to establish and then hit them with retrospective taxes. Such actions discouraged those that followed.

Discouraging factors

Dr Kailis, a medical doctor who was involved with the MG Kailis fishing and pearling business with her late husband Michael, and chaired it when he passed away, said political leaders could be more positive about the role of those who innovate in business.

“They don’t encourage any respect for entrepreneurs,” she said.

Her view comes after several very public battles between entrepreneurs and the federal government, notably Andrew Forrest and Gina Rinehart.

“It is often political comments that engender that, and kick it all off,” Dr Kailis said.

Coogee Chemicals chairman Mr Martin said the media had to take a great deal of the blame for encouraging politicians in their efforts to split the community along gender or class lines.

“That is so divisive,” he said.

“The media seizes on it because it sells papers, it is not good.”

He highlighted the fact that failed US presidential candidate Mitt Romney was criticised for being too successful, something that had never previously occurred in what is regarded as the home of entrepreneurialism.

Mr Rothwell, the executive chairman of Austal, the listed shipbuilder he founded several decades ago, believes governments can’t do a lot.

“I don’t know anyone that is helped by government,” he said.

However, he noted that governments could encourage a culture of entrepreneurialism by giving leaders a free hand.

Mr Rothwell noted that this is evident in China, whereas more developed economies such as Taiwan and Japan had become bureaucratic.

“Taiwan has developed and has a million rules,” he said.

“In China the mayor can make things happen.

“China gives their people space to do stuff and put their city on the map. It can be much broader than individuals in our group. It can be a culture of a country.”

Mr Martin said that one of the consequences of overregulation was that there were fewer business start-ups.

“For an economy to thrive you need multiples of companies trying new things,” he said.

“The community suffers because eventually you get fewer and fewer (businesses) who don’t change enough, they become too bureaucratic.”

Mr Rae agreed that new business challenging the old was important in an economy.

“Competition breeds efficiency,” Mr Rae said.

Breeding new businesses

Mr Clough believes the unexpected jolts of economic upheaval create the conditions for new businesses to start.

“Volatility is what you are looking for,” Mr Clough said. “In a fast-changing economy, it gives you opportunity.

Mr Rae recalls the early days of his business when government was in some ways, more interfering, especially through powerful bureaucrats.

Mr Rae said that, as an entrepreneur, he decided the best way to deal with that was to work within the law, but that was the only limit.

“I decided I could do what I liked, unless there was a law or statute to stop me,” he said.

Extending his idea of entrepreneurialism as constrained by culture, Mr Rothwell wondered whether the education system was too strict and formulaic to encourage the kind of free thinking entrepreneurs had.

“Why should a child be marked up (just) for getting the right answer?” Mr Rothwell asked.

“Why not be marked on speed for getting it pretty close? There are too many rules, it is all about discipline.

“Every one of the entrepreneurs we know has stepped out of the norm and had a go.”

Those conditions ought not apply only to start-ups. Mr Rothwell notes that his business has lost some of the flair it once had, perhaps as a result of shifting from a private business with a few shareholders to a listed one with many.

“If I could do it again I would not allow so much corporate culture to creep into the business,” he said.

Dr Kailis agreed that the risk-taking of entrepreneurs was difficult to equate with the listed environment.

“It is very hard, entrepreneurship carries with it an innate sense of risk,” she said.

Mr Martin supported this view.

“It is a lot easier to be an entrepreneur in the private sector than inside the public (listed companies) sector,” Mr Martin said.

“The consequences are too great.”

He believes entrepreneurs, arguably the key building blocks of major private businesses, have special qualities to allow them to believe in their idea and overcome the obstacles that tend throw themselves into their path.

“They need to be hungry, you need discipline, (and) pig-headed determination,” Mr Martin said.

“Every new area you go into has road blocks.

“You find ways around it. It is about not accepting failure.”

Mr Clough noted it was not the lure of riches that pushed him to succeed, but the fear of failure.

“There were always challenges; it was never the incentive of a bigger prize out there, it was the fear of bankruptcy that is the needle up your back side.”

Private employees

These business leaders talked extensively about how to reward their employees to ensure the private organisation established by an entrepreneur remains successful as it grows and brings in new management.

All of them said it had been a difficult process. Mr Rae recalled promoting his best workers into management roles they may not have been best suited to.

“If you don’t elevate them you lose them,” he said about this conundrum.

Mr Clough said it was a challenge to get it right. Often, he said, he wanted his most talented employees working on the most difficult projects, because they could save him a lot of money that might otherwise have been lost. This was difficult to reward on the basis of profitability.

“I found giving bonuses impossible to do by formula,” he said. “It became discretionary.”

Mr Martin said it was up to the leader to create the vision and passion to keep employees excited.

“Normally you need some form of equity,” he said. “We have eight or nine people in Coogee who have employee shares. We lend them the money for it. They take the rise and the fall.

“It took 15 years to develop the model.”

Mr Martin said individual performance was rewarded with annual remuneration and bonuses.

“The answer is having them motivated, having them on side,” he said. “It has to be the right people. Attitude is critical.”

Mr Rothwell said a big challenge was to keep people focused when the business or the economy was not at a stage conducive to that.

“It is very easy to de-motivate,” he said.

“People can be in the wrong phase of the business.”