Hi, Yves. This post by Richard Murphy correctly points out the substantial costs of limited liability, which is ubiquitous in modern commerce, but offers no solution. That’s because the very existence of very large corporations depends on limited liability. No one would want to be a CEO, or serve on the board of a corporation of any size, if they could be held personally liable, especially since the wealthiest people would lose their money just as much as community leaders with lower net worths. For this reason, even if limited liability protects corporate executives, corporations of any size also carry directors and officers insurance to further protect their nominally responsible persons from the consequences of their wrongdoing or negligence.
Murphy is proposing breakup, which is never going to happen. But while it’s not completely impossible — just highly unlikely — there are a few things that could go a long way toward making corporate executives and boards of directors more accountable and reducing the dangers and unfairness of our current “heads: I win, tails: you lose” legal system.
When I was in Australia (early 2000s), and I think the standard also applied in the UK at the time, directors were personally liable if the company was found to be “commercially insolvent”, i.e. had expenses and other anticipated liabilities that it could not pay. This at least encouraged directors to keep a very close eye on the company’s books, expenses and commitments, and they quickly filed the company for insolvency if the company began to stray into “commercially insolvent” territory.
That being said, this alone is not much of a solution as larger companies will almost certainly purchase directors and officers insurance to protect their senior management even under the constraints of “trade insolvency”.
Second, implement a system proposed by, of all people, a former president of the New York Fed and partner at Goldman Sachs: give top executives what Taleb calls “out of their own pockets” and keep their bonuses (above a modest base salary level) and other incentives and deferred compensation in the company for at least five years, as Warren Buffett has done for years with his reinsurance executives. Buffett does this so that any problems with the policies underwritten by his top team can be uncovered and written off before he pays them profit-sharing compensation. Otherwise, he risks compensating his executives with income they have not actually earned.
In the XX version of the scheme, this pool would act as subordinated shares: they would be paid out first in the event of a major litigation loss or bankruptcy.
Another approach is to eliminate limitations on secondary liability. Surprisingly, in the United States, shareholders and creditors cannot sue lawyers or accountants who give them bad advice that leads to the company’s collapse or huge losses. They can only sue their clients, such as the board of directors and officers. As they write in ECONNED:
Lawmakers should also reinstate secondary liability. Careful readers may recall that a 1994 Supreme Court decision did not allow advisors, such as accountants or lawyers, to sue for aiding and abetting fraud. In other words, plaintiffs could only sue those who deceived them, but could not seek damages from those who enabled the fraud, such as accounting firms that prepared misleading financial statements. The 1994 decision runs counter to 60 years of court decisions, criminal law practice (the driver of a bank robber’s car is an accomplice), and common sense. Restoring secondary liability would make it much harder to commit bad acts.
Now, for the main event.
By Richard Murphy, Adjunct Professor of Accounting Practice at the School of Management, University of Sheffield, Director of the Corporate Accountability Network, Member of Finance for the Future LLP, and Director of Tax Research LLP. Originally published in Funding the Future
Post Summary
Limited liability is a privilege that protects directors and shareholders from personal repercussions if the company incurs debt. Historically, this has enabled capital accumulation and promoted economic growth, but is it fair that it can be subject to disproportionate abuse, particularly by small and medium-sized businesses?
In this morning’s video, limited responsibility Corporations in their modern form have existed for about 170 years, but back then no one imagined that there would be over 5 million corporations in existence. So is it really the right thing to do today to give limited liability to everyone who wants it? Or should we be more cautious?
An audio version of this video can be found here:
The records are as follows:
Limited liability is a privilege.
This is something I have enjoyed many times throughout my career, as I have served as a director of so many companies over the past 40+ years. Companies were formed to carry out economic activity, and as directors and shareholders (I was both), we were protected from the consequences of our actions by the existence of limited liability.
Limited liability was first known in the Elizabethan era, but in its modern form it wasn’t until the 1850s that companies were allowed to be registered with limited liability for the first time, by a group of potential shareholders who signed a document declaring that they would become a company. companyApply for and be granted limited liability by the Registrar.
That registrar still exists today. Registrar of Companies In the UK, Business RegistryThe IRS records all the companies that enjoy the privilege of limited liability to this day. There are currently more than 5 million companies that have this privilege.
But I emphasize that this is a privilege. If you think about it, this is an utterly ridiculous privilege. Imagine if someone today, one or two people (one would be enough) came up with the idea that if they signed a piece of paper and said they wanted to become a limited liability company, then as a result, if something went wrong in the transaction they engaged in, in most cases, they would not be liable to the creditors of the company they formed for debts incurred by that company, even if those creditors were employees, suppliers, tax authorities, or even if those creditors owed money to the company in good faith. Everyone would say that this is an abuse of the rights of employees, creditors, and tax authorities. And they would be perfectly right to say so, because limited liability is an abuse of the rights of those people.
Those who dealt with the company in good faith ended up being deceived, moneyand little or no recourse. That’s OK. Shareholders can walk away. loss Someone will suffer and society will benefit.
In fact, society as a whole has likely benefited from the existence of limited liability: there is evidence that this ability to form limited liability companies has made it possible to accumulate capital from a wide range of sources and to establish business entities that would not otherwise exist.
For example, Britain’s railways would not have been built without the existence of limited liability companies, and many other large companies have since accumulated capital in this way, and on the whole we have benefited from it.
However, the concept is still used today, and today more than 95% of all businesses are small, with only one or two employees. Do they need limited liability? Only they know, especially: account The information they are required to put on the public record is very limited in scope and not available until nine months after the end of the fiscal year, placing anyone doing business with them at significant risk in most cases.
Should that privilege still be offered to all who ask for it, or should its provision be more tightly regulated?
For example, should people be given this privilege of limited liability when it comes to paying taxes? Why?
In terms of obligations to employees, should that be made public and why?
And is it fair to do this about this? Trade creditors Similarly? People who supplied goods in good faith but ended up losing money.
These are serious questions that need to be answered because they are costs that society at large bears, and there is no hard evidence that the benefits are significant, particularly for small and medium-sized businesses.
There is ample evidence that benefits are being misused, and we know that many companies are set up without ever accounting for what they do.
We also know that 30% of small businesses are not paying payroll. Corporate Tax If they have debts, then they will probably have to pay the VAT and Withholding tax It was also found to have debts to HM Revenue and Customs in respect of deductions payable by employees and staff.
So, do we want to do this?
I ask this question seriously because I believe the assumption that limited liability is a universally good thing is one that we now need to challenge.
The time has come to ask whether the availability of limited liability regimes needs to be fundamentally reformed to ensure that they provide benefits to society rather than costs.
