The Economist - 19_25 April 2014

56 Business The Economist April 19th 2014SchumpeterMunk’s taleHow a formerrefugee from the Nazis made and lost several fortunesYOU can’t be right all the time. In a 1995 profile of Peter Munk,the founder of Barrick Gold, a mining giant, The Economistconcluded that the biggest problem facing the company was whowould replace him as boss. Mr Munkwill at last step down as thecompany’s chairman at the annual meeting on April 30th, aged86. In the same profile we fretted that by spending $500m on aproperty company, Mr Munk risked ending up in the same boatas two fellow Canadian tycoons, Paul Reichmann and RobertCampeau, who had gone spectacularly bankrupt. In 2006 MrMunkhad the last laugh, selling the company for $9 billion.There were lots of reasons why our 1995 profile was so pessimistic.Mr Munk was already 67. The mining industry is an unforgivingone. Diversifying into property is a well-known road toruin. And Mr Munk had a catalogue of failures to his name. Butwe forgot one vital thing: his ability to turn failure into successand threat into opportunity.Failure is a hot topic in American business at the moment. SiliconValley entrepreneurs argue that the valley’s success is its tolerancefor failure. Historians apply the same argument to thegreat arc ofAmerican history: the United States has pulled aheadof its rivals in part because its entrepreneurs have always had atalent for picking themselves up, and its bankruptcy laws areamong the most lenient in the world.In Mr Munk’s early years, “threat” meant more than the possibilitythat his latest app might not get the nod from some venturecapitalist; and “opportunity” meant more than the chance ofbeing bought out by Facebook. In 1944 he fled his native Hungaryon the “Kastnertrain”, which carried almost1,700 Jews who wereable to pay for their passage to Switzerland and thus escape thegas chambers. Four years laterhe arrived in Canada with his familyfortune gone, and worked his way through university, cleaningcars and selling Christmas trees, ending up with a degree inelectronic engineering.His first business, the Clairtone Sound Corporation, wentfrom boom to bust in 11 years. One moment the former pennilessimmigrant was driving a Pierce-Arrow convertible down MadisonAvenue and payingFrankSinatra to endorse his hi-fi systems.The next moment he was unceremoniously dumped from thecompany, which then folded, the victim ofoverambitious expansionand Japanese competition. Nina Munk, one of his five children,says that his first experience offailure marked him for life. Itprobably lay behind his penchant for hedging output when hestarted in mining, an innovation at the time among gold miners.“Every human being makes mistakes,” he says. “You have tohedge so that if a decision goes wrong it does not eliminate yourabilityto stayatthe table and playon.” Butitdid notdull his appetitefor venturing into challenging businesses.After the collapse of Clairtone Mr Munk “played on” by investingin hotels in the South Pacific. The threat of failure continuedto stalk him. A resort he tried to build in Egypt with AdnanKhashoggi, an arms dealer, went nowhere. Abusiness park he developedsouth of Berlin after the Soviet empire imploded beganwell but was undercut by competing parks on the Berlin ringroad. Nevertheless, he succeeded in restoring his fortune.Mr Munk’s greatest gamble was his move into mining whenhe founded Barrick in 1983. He knew little about the business atthe time—just as he had known little about hotels before that. Buthis ignorance freed him from the assumptions that dominatedthe industry. It was mostly run by geologists and engineerswhose aim was to dig enormous holes with other people’s money,paying little regard to shareholder returns. Gold miners weresupposed to be “believers” in gold rather than efficient managersout to maximise profits. “Bullshit,” thought Mr Munk; he soonchanged all that. A string of ever-more audacious acquisitionsturned Barrick into what was for a while the world’s largest goldminer and is still among the biggest.MrMunkalso turned outto be a first-rate managerof hisgrowingbusiness empire. He may have been willing to overrule oldhands when it came to whether mining should be run by managersor miners—and do it with absolute self-confidence thatbrooked no question. But he was also willing to delegate operationaldecisions to experts. Indeed, he explicitly refused to micromanage,to give himselftime to thinkbig thoughts.Sailing into stormy weatherIn recent years Barrick’s competitive advantage has been erodedin partbecause everyotherminingcompanyhasnowrecognisedthe force of his insight. He is leaving the company he created at adifficult time: last year Barrick lost $10.4 billion as the gold pricetumbled; and a huge project in the Andes, that the firm has beenworking on for years, was halted. But none ofthese problems hasdulled his appetite for risk. He may yet have some big, farewelldeal for Barrick up his sleeve. Even if not, he can now give his fullattention to a side-project he has been working on for years, toturn an old naval dockyard in Montenegro into a marina wherethe super-rich can parktheir yachts alongside his.Whether fortune will smile on his latest venture is unclear:will Russian oligarchs, its most obvious customers, be impoverishedby Western sanctions over Russia’s meddling in Ukraine, orwill they flock to his marina to hunker down until the stormblows over? But Mr Munk is less troubled by the prospect of failurethis time around. He plans to give almost all of his fortune tocharity, and has already made a start by giving $160m to hospitalsand universities in Canada and Israel. He wishes to spare his childrenthe curse of too much inherited wealth. Take it from a manwho knows a thing or two about success or failure: there are fewthings more dangerous than making life too easy. 7Economist.com/blogs/schumpeter