It’s the people, stupid! Individual characteristics influencing bankruptcy

The prediction of bankruptcy, i.e. the assessment of the likelihood that a company might go bankrupt, is an important topic, with practical and legislative consequences (for an introduction to bankruptcy prediction, read here; for a recent attempt to create a global model for bankruptcy prediction, read here).  With a preventive mindset, the legislator tries to estimate this likelihood, in order to regulate accordingly. Evidently, also creditors and other interested parties try to assess whether a company they interact with is likely to enter bankruptcy proceedings.    

In a recent study (Graydon, De impact van het individu op een faillissement, 13 April 2017), A. ANTON examined the influence of certain characteristics of corporate managers and directors on the likelihood of bankruptcy proceedings for the company they manage or direct (the study is summarized in Dutch here). The idea that not only characteristics of the company itself, but also characteristics of the people behind it can be decisive when assessing the likelihood of bankruptcy is not new, but rarely emphasized and thoroughly investigated.

The study analyses the influence of several characteristics of a company’s directors and managers on the likelihood of bankruptcy. Interesting conclusions concern age, previous personal bankruptcy of a company’s director or manager, their previous work experiences and ‘job hopping’. One of the factors influencing the likelihood of a company’s bankruptcy seems to be the lack of gender diversification or male predominance amongst the directors and managers.

As far as gender is concerned, Belgian scholars recently emphasized that work is not done now that it is mandatory for Belgian listed companies to have a diversified board of directors. Diversification should be pursued in other than listed companies and outside the board of directors as well. (see: T. COEN en M. WYCKAERT,  “Time’s up: vertegenwoordiging van beide geslachten in de raad van bestuur is een feit”, TRV-RPS 2016, (1027) 1030). Perhaps this study can stimulate further diversification.

 Jasper Van Eetvelde
Assistent Jan Ronse Instituut voor Vennootschaps- en Financieel Recht