Limited Liability for Corporations

The Ten Worst Corporations of 2001 lists foul deeds of a number of large companies. I agree with the article in that companies are not always ethical in their pursuit of the bigger bottom line, and that many of the things listed are unethical, if not illegal. I strongly disagree with their proposed solution of making shareholders liable for the corporations’ actions. Read on to see why.

The old saying goes “it takes money to make money”, and that statement is generally correct. The stock market provides a means for people to invest in ideas that they think are good, and for companies to get the money that they need in order to grow their businesses. The shareholders have a stake in the company’s future, but individuals have very little control over how the business runs on a day-to-day basis.

And that’s the primary problem with making shareholders liable for things that the corporation may do. Those shareholders don’t generally have visibility into how the business really runs. To make matters worse, many people own stock in companies through mutual funds. I am certain that there are people who have 401(k) accounts that have invested money in mutual funds and don’t know which individual companies those funds own stock in. How would those people feel if they got a $500,000 fine for something a corporation in their 401(k) mutual fund portfolio did, when they may never have ever heard of that company?

Some might make the argument that people should take a greater interest in their investments and be more involved. The last I looked, days are still 24 hours long, and I know that I have enough going on in my life that I don’t want to spend my time trying to dig up dirt on any company that I may happen to have a stake in.

The authors of the article didn’t seem to be proposing that shareholders have to become that involved in the goings on at the corporations. Rather, they propose that corporations buy insurance to protect the shareholders from harm. Gadzooks. The only thing I can think of is that they must own stock of insurance companies. I can hardly imagine any solution to the problem that would be more expensive. Think of it: any large (more than 10,000 employees) company could have a significant possibility that someone, somewhere in the organization would do something that is “unethical” (as determined by a board). These companies and their shareholders could potentially be liable for huge damages, and therefore the insurance premiums would be outrageous. Just imagine every box of cereal you buy costing $1.00 more to pay for this insurance (yes, I’m making that figure up).

Again, I agree that many businesses may operate in ways that people do not approve of. But, there are other solutions that I think are more viable:

1) Vote with your dollars. If you care so much, use your power as a consumer to make a change. Don’t give your money to businesses you disapprove (and, ideally, tell them why).

2) Make the “unethical” behaviors illegal. The article talks about setting up a board to watch for “unethical” behavior. I think there is already a system set up for that: Congress and the Courts. If people believe that this behavior is bad, then laws should be passed to make that behavior illegal.

3) Let the punishment fit the crime. “Limited liability” for corporations is not a completely unlimited thing. If someone within a company breaks the law, that person may still go to jail or face fines, so some deterrent is already there. One thing that needs to happen is that the laws should allow for punishments that reflect the level of the crime and the damage done, up to and including the Corporate Death Penalty. If a company is uniformly breaking a serious law, and the law breaking starts at the top and works its way down, that company should get the death penalty. It may seem harsh because of the number of people that lose their jobs and the number of shareholders that lose large portions of their investments, but it is much less harsh than breaking the liability limits for shareholders.