Friday, February 15, 2013

evil corporations

People oppose corporations for various reasons.

The left condemn them by equating "profit" with "greed". But everyone who makes an income either makes a profit or a loss, and no one can maintain losses indefinitely.

Some libertarians condemn them as "creatures of the state" and claim that they could not exist in a free society. The concept of "limited liability" particularly seems to annoy these critics.

Like all potentially large, bureaucratic forms of organization, corporations can go wrong. There's no reason to believe that people stop facing temptation once they gain employment. The question is, do employees of a corporation face more temptation than employees of sole proprietorships, or coops, or nonprofits, or government? Or perhaps the corporate critics also condemn the very idea of employment, in which case they should stop complaining about limited liability and attack the more general problem.

I'm not a lawyer, so maybe I am wrong about this, but I understand limited liability to mean that stockholders can lose their investment, but can't be sued for further damages if the corporation fails to pay its debts or other legal liabilities, including damage awards for lawsuits (torts). If a corporation goes bankrupt, the stockholders stand at the end of the line of people with a claim on the remaining assets. If employees of a corporation commit crimes, the employees themselves are criminally liable. If a boss directly orders an employee to commit a crime, the boss is guilty of the crime as well. If the employees cause damage without breaking criminal laws, the corporation is liable.

Can we achieve limited liability by using pure contract and common law? I think so, but maybe I am putting too much confidence in the enforceability and flexibility of contracts. To me, equity looks a lot like debt plus a default contract. Neither debt holders nor counterparties to contracts are automatically liable for the torts of their debtors or counterparties, so if someone can use a debt contract to simulate stock shares, that is the same as limited liability. So, instead of buying stock, I make a loan to the firm and specify a bunch of restrictions in the debt contract, creating shares, allowing me to trade the shares to other people, giving shareholders various powers. Voila.

Why do the critics object to limited liability? They fear that investors will choose to invest in dangerous schemes and hide from the consequences of their choices. In the extreme, a person might transfer all his/her assets to a corporation created specifically to make that person "judgement-proof," so that the court could not seize any assets belonging to that person.

What does this extreme case have to do with the ordinary corporation and its possible vices and virtues? Not much. What are the real dangers? A corporation can declare bankruptcy due to inability to pay its debts. In this case, the corporation's creditors will split up the corporation's assets and may take a loss compared to what would have happened if the corporation remained solvent. But the creditors took a risk knowingly. The most serious possibility involves a case where corporate employees cause some major disaster, like the BP oil spill, and the assets of the now-bankrupt corporation come nowhere near repaying the damaged parties.

Where are the real-world examples of this abuse of the corporate form of business? In Bhopal, Union Carbide paid a settlement and did not go bankrupt. The Indian government charged various persons with manslaughter. Exxon paid settlements for the Valdez, BP shelled out for Deepwater Horizon. These cases may demonstrate various problems with existing legal systems, but in none of these cases did investors hide behind limited liability. If these businesses had been sole proprietorships with unlimited liability, nothing about the outcome necessarily would have changed.

These notorious corporation-caused disasters came immediately to my mind. Perhaps I failed to notice the actual cases where someone abused limited liability, in which case I'd appreciate some links to the specifics.

Let me emphasize again, I am not a lawyer. Please comment if you think I've made a mistake.

No one wants to deal with large, faceless, corrupt, indifferent, bureaucratic corporations, either as an employee, a customer, or even as a bystander. But we gain nothing by turning such corporations into sole proprietorships, or nonprofits, or coops, or branches of some government. If we want to strike the root, we need something that cures faceless indifference, corruption, and bureaucracy, but eliminating limited liability won't do the trick.

2 comments:

Darjeelingzen said...

https://t.co/rKSPuBn5JK

Darjeelingzen said...

http://mises.org/journals/lf/1969/1969_06_15.pdf

http://c4ss.org/content/10498