Entrepreneur’s Diary – #43 “Personal Liability – Yes, Of Course”

As the name says, the InterFace AG is a public limited company. It was originally founded as a private limited company (InterFace Connection GmbH). Later on, we changed it into a public limited company.

When we founded it, I followed my instincts, without thinking a lot about what I had learned at school. Even back in the Jacob Fugger Business Grammar School at Augsburg, we were taught that you should always establish an enterprise as a limited corporation. Above all, you should never take the risk of personal liability! Consequently, we founded InterFace as a private limited company.

By now, I prefer joint stock companies and would personally only start a new company as a joint stock company. Our business evaluator, too, sees this as a sincere alternative. In his experience, joint stock companies mostly develop better and more sustainable than capital companies. Being a partner in a joint stock company, he himself is also personally liable.

Here are my reasons:

In a joint stock company, all shareholders vouch with their entire property. As a consequence, the degree of cautiousness displayed by the management, all of whom are liable, increases considerably.

On leaving the company, shareholders who no longer can or want to play an active role will wish to leave the company for a reasonable price. Otherwise, they would remain liable, even though no longer having any influence on the company’s management. In this way, room is made for new partners (active shareholders), just like in a consulting firm. As you see, non-incorporated firms are very much to be recommended if several persons together establish a new company.

The personal liability is also something you can easily accept form the moral viewpoint. When founding a company, an entrepreneur hopes to gain more than average profit through this step. With freelance or even wage-based work, this would not be possible. If you want to make a huge profit, you also have to be prepared to take a higher risk. This is especially true since we in Germany now have a relatively liberal legislation with respect to private insolvency. It considerably softens the consequences of a business crash.

In a limited company or a public company, all managing directors have a special responsibility. The managing board, in particular, has quite a few disadvantages if you take the current security mentality as a standard. There is no dismissal protection for a board member. The law says that his working contract can not have a longer span than five years. Consequently, there is also no termination pay that increases (more than) in proportion with the number of years you have loyally served the company.

Salaried employees of a public company are also personally liable. Incidentally, the same is true for the board of representatives. But the managing directors are those who are more and more forced to take responsibility by our laws. The latest is that they, for example, also get to bear the brunt in case of privacy protection law violation!

The share holders (i.e. the participators) are in a nice position. It is a lot easier for them, because, with the exception of losing their often cheaply bought shares, they have no personal risk. Profits and gains of value are considered self-evident, but in case of loss everybody is angry with the management. Or else the management is just replaced. To me, it sounds better and archetypically more ideal if those who act and are responsible are the same people as those who take the risks and participate in the success.

If you buy shares at a high price and with a lot of speculation, you also have to take loss of value into consideration. Since, however, our legal system still considers the protection of property and creditors an extremely important value, capital is protected particularly well. In our laws, many regulations support this idea; one of them is about risk management. First and foremost, all these measures serve to protect capital.

This might just no longer be altogether the best concept in our modern times. In former times, capital was dear and consequently well worth protection. And it also (seemingly) meant security, for example for old age. Today, we have an abundance of capital tramping all over the place and looking to be used for speculation. To make up for it, we no longer have any security (which, incidentally, we never really had, anyway).

No. Somehow or other I find private companies where the “capitalists” are liable, fairer. Ideally, every shareholder should be permitted to participate in the business and also have to take responsibility for the consequences. Part of the profit should be set aside and the rest should be distributed fairly among the shareholders.

At InterFace AG, we have four managing directors. Once in a while, I hear people say that four are too much for a medium-size enterprise. That is not how I feel about it. I am glad there are four of us. Counting everybody, there are about 100 persons and their relatives depending on our business success. We on the managing board share this responsibility. My three fellow managing directors are and behave like entrepreneurs in charge of a medium-sized enterprise. Each of them has his own business sector and they all take extra responsibility in the enterprise “horizontally”.

And the way each managing director acts reflects the idea that he feels responsible with his personal property. As I see it, this is also something that makes InterFace AG special.

(Translated by EG)

One reason for converting InterFace Connection GmbH into a public company was the wish to let employees participate. After our foundation, it did not take long for a number of colleagues to buy 10% of InterFace Connection. That is why we established a society that held the share and was represented by a trustee during the management director’s meetings.

In practice, these shares were not fungible. In order to modify this, we made InterFace Connection a public company and converted the shares of the employees concerned into stock.

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