When I read the following column by Will Hutton, lambasting private equity firms for daring to take over big UK companies like supermarket J. Sainsbury or whoever, I laughed out loud. Here is his lead paragraph in Friday’s Guardian:
It is time to come to the defence of the public limited company, one of the great Enlightenment gifts to western civilisation. Increasingly capital, in the quest for higher returns to make vast personal fortunes, is going private to escape the demands of public accountability on stock markets. If uninterrupted, the long-term adverse consequences of this privatisation of capital for our economy, society and democracy will be profound.
Rubbish. Firms that are floated on the London Stock Exchange, Nasdaq or the Martian 250 are privately owned, Will. They are not owned by the state. True, limited liability laws, as the libertarian writer and friend of mine, Sean Gabb, likes to point out, present serious issues in terms of the gap between ownership, responsibility and control (I wrote about this topic a while ago). But to argue that private equity shops like Apax, Carlyle or Texas Pacific – those evil Amerikans – are taking what should be ‘public’ into grubby ‘private’ hands is economic illiterate nonsense. Firms exist to make a profit, Will. As Milton Friedman trenchantly put it without hint of apology to the gods of ‘social responsibility’, a company’s job is to make a profit for their owners, not to further whatever corporatist/fascist/socialist/ist agenda that happens to attract the gaze of Guardian editorialists.
Why the current wave of hysteria about private equity? It is being fuelled by two things: fear and envy. Fear of the power of these sometimes shadowy firms to buy up famous companies with great wodges of debt finance, or leverage, as the finance geeks put it. Envy, because of the large bonuses that the private equity honchos pay themselves and the often high profits they make in turning firms around. And of course no story about private equity can be written without referring to the Masters of the Universe lampooned by Oliver Stone in Wall Street or portrayed in books with such objective titles like Barbarians at the Gate.
In the main, what these firms do is target cash-rich firms that are run by often lazy executives who have presided over crappy business decisions. Take the meltdown of Marconi a few years ago, one of Britain’s most famous companies. That was a listed company. The destruction of value and jobs in that company remains, in my mind, one of the most disgraceful episodes in British corporate history and who knows, it might have been saved from making big errors had a private equity fund been in charge, rather than deluded executives. Private equity firms helped stymie Deutsche Börse’s foolish bid for the London Stock Exchange 2 years ago, and have turned around businesses. They typically buy and hold a firm for 5 years or more, take a hands-on approach to running firms before spinning them off to another buyer or floating them in an IPO. So Will Hutton should spare us sentimental guff about how limited liability firms floated on the stock exchange represent the perfect model of doing business or something that Adam Smith or Voltaire would exalt. They are merely one of the many ways in which economic activity manifests itself. As interest rates rise and the economic cycle turns, some of the excesses of leveraged buyouts will fade and private equity transactions will decline. No doubt Will Hutton will forget everything he has written and go back to bashing listed firms for their “short-termist” fixation with pleasing shareholders, or whatever.
As mentioned several times in these pages, by the way, one additional reason why listed firms go private is because their bosses prefer not to have to put up with onerous reporting requirements under US and other laws, like the onerous Sarbanes-Oxley rules. If Hutton or other big government advocates are worried about the migration of companies off the listed stock market, they might like to remember that point.
Right, my rant of the day is over. Enjoy the rest of the weekend.
Update: have slightly amended the text about Marconi, just to reinforce the point. One commenter, Bryan Appleyard, has argued that firms become “cultural” forces, as if released from the laws of supply and demand. I have heard some odd attacks on private ownership and M&A before, but that is a new one. Companies that have been taken over by private equity include the Automobile Association, Kwik Fit, Debenhams, various property firms, HEA, the US health chain, and many more. I don’t really see how the cultural issue makes a bit of difference to the folk who work in them or buy their products.
I’d also add that I think some of these private equity deals are in danger of coming unstuck, and no doubt much gloating and gnashing of teeth will occur when or if this happens. It is partly a function of low interest rates and the impact this has on asset prices. Monetary growth is strong at the moment and this is one of the ways in which money supply growth comes out. Another lesson from Friedman to remember.
Remember that Hutton is writing in The Guardian, most of whose readers think that money grows on trees in a small wood tended by government officials.
Nothing like a good rant to start the weekend!
I would have thought that a better target for the reporters ire would be the investment companies which are just interested in quickly pumping up share prices to make a quick buck, with no thought to the businesses long term health.
Regards
The Dude
One reason companies are being “delisted” is the vast web of regulations that have been imposed on stock market companies – regulations that William Hutton supports.
Mr Hutton wants corportations to act as if they were state owned (as long as he, or people like him, were in control of the state) thus he supports ever more regulations. He fails to see that this means that companies will evenutally face a choice – delist (“go private”) or go bankrupt.
A company that acts for the “social good” or the “good of the stakeholders not just the stockholders” can only exist in the long term if it is being subsidized. Which means that other companies (and individuals) must be being taxed to keep this politically correct company in operation.
If ALL business enterprises operated for the “social good” (or whatever) rather than private profit, there would be no one to be hit for these subsidies – so the whole economy would collapse.
Of course people who claim to trade for “public benefit” (rather than their own profit) are normally crooks anyway.
On limited liability itself.
This existed long before the limited liabilty acts of the 19th century.
There have always been organizations (both commercial and non commercial) which had assets of their own (going right back to Roman times and before) – and one could sue the orgainzation (be it a college, a trading company, a burial club or whatever) for money but not the individual owners.
As long as this is KNOWN IN ADVANCE there is nothing unliberatian about it.
“But X company went bankrupt oweing me money – and I see the shareholders still driving their big cars to their nice houses”.
As long as their was no fraud there is nothing to complain of here.
This is why companies used to have “Ltd” (for limited liabilty in Britain) and “Inc” (for incorporated in the United States) always shown after their names – it served as a warning that one traded with such an enterprise at the risk that it might go bust (and not pay its outstanding liabilities), with one still seeing rich exshareholders of the company.
On “control”.
Corporate managers (and their “high minded” statist friends like Mr Hutton) have managed to get a web of regulations on the books to protect them from shareholders.
This is why taking over a company is so difficult and so expensive – and why take over specialists make so much money.
Things like the 1967 Williams Act in the United States helped undermine the doctrine that the company was just the property of the shareholders who could sell their shares any way they liked, at any time they liked, to whoever they wished to.
Indeed the S.E.C. (with all its regualtions) goes back to the 1930’s – and to the false notion that “specualtion” came out of nowhere and caused the Great Depression (in fact the credit money bubble was government created – by the Federal Reserve Board system).
Another reason for the decline in importance of the individual shareholder (and the rise in importance of such things as pension funds) is that such things as capital gains tax and death tax do not really apply so much to “institutional investors”.
The way to deal with this is NOT to impose such taxes pension funds and other such (thus undermining people’s pensions and the ecomomy generally), but to remove them from individuals.
In such countries as France and Australia there was (for example) no such thing as Capital Gains tax till the 1970’s.
Want to restore long term investment by restoring the importance of individual investors who think for the long term?
Then get rid of high rates of personal income tax, and abolish capital gains tax and inheritance tax. And get rid of the regulations (also stop producing the credit money bubbles that produce boom and bust cycles).
If someone does not want to do this then they should stop talking about “long term investment” (and other such) because they do not really believe in it.
Limited Liability is an unnecessary invention. If one is to be limited from liability to people with whom it does business, this is a matter for the contracts, warranties, etc. There is no need for a blanket liability on top of contracts when contracts have the power to make that stipulation.
However, if someone buys a truck with bad brakes, incorporates a trucking company, and then kills a family in a car, why should his liability be limited to the value of the truck minus the loan amount due on it?
It is one thing to limit his liability to his customers, another thing entirely to limit his liability to people that have had nothing to do with him other than bad luck to share the same road.
He should be personally liable for damages to non-consenting parties. He should have insurance to cover that risk. If he cannot afford the insurance then he is just one more freeloader.
Limited liability is the major cause/justification of government interference in business activities. If we stopped sheltering businesses behind the government, we would have no need for the government to supervise how business is conducted. It could stick to its just role as a mediator between people, not a manager of them.
A few years ago, listing rules in London were set by the Stock Exchange. The Exchange needed to attract both IPOs and investors to its markets, so balanced between protecting investors and imposing unreasonable demands on companies. It did this very well and thrived.
Gordon Brown’s treasury then decided that a private company such as the Exchange had no business in such weighty matters, and moved the whole shebang to the FSA, with a view to creating the same kind of meddling governmental regime that hampers New York.
So now what we have is the common perception that regulation is some kind of government way of ensuring companies are working for The Common Good. It’s a shocking mess and a real tragedy.
If Sainsbury’s can’t make money from selling over-priced vegetables, then it should be flogged off. Only the greed of investors is important, and greed, of course, is good.
Midwesterner.
If a group of people get togther to finance a truck building company and one of their workmen builds a truck with “bad brakes” (what does that mean – the best brakes of the 1960’s would be considered “bad” now, technology has been improved by thought and trial and error) or a manager agrees to a design for bad brakes – OF COURSE the liablity only extends to the assets of the company.
Actually it may be unjust to take money from the company (accidents happen, people get killed – sometimes it is not anyone’s fault). Shareholders are hurt by losing some money they invested in the company – but to go after shareholders private resources is crazy.
If this were the practice – then no one would invest in any commercial enterprise (at least not in the United States where courts are known to give out damages when no fault has really been proven). Think about it – you are sitting at home and as soon as their is a big damages claim on a company you happened to invest in you can lose your home (to pay the claim) and get tossed out onto the street.
The idea that every investor in an enterprise is personally liable for everything connected with any activity of that enterprise (on the grounds that he is a part owner) simply will not work.
So you would return to an economy where each person only made things themselves (or in a family group). This would have very bad effect on overall productivity.
Or one might have a situation where every enterprise was oned by one person (or a very small group who trusted each other as a band-of-brothers) and depended for all investment on loans (actually Mr Hutton likes the idea of corporations depending on bank loans).
For those of us who think that many corporations have rather too much debt altready this is not a nice idea.
However, I agree that there was no special need for the limited liabilty statutes. There were indeed many legal ways before them to have a similar effect.
Of course the loans would not be made to a “corporation” (there no longer being any such thing). But to a specific individual (who would liable for them).
Oddly (although the Ford corporation continued to exist) Ford was once in a position that was similar (in a way) to this.
Henry Ford got irritated (to say the least) by court judgements in the 1920’s that ruled in the favour of minority share owners against his management judgements (even though he was the majority shareholder).
Conrad Black should have had Ford’s experience in the courts pointed out to him – but that is another story.
Anyway Henry Ford reacted by buying back every share – so that there was noone who could take him to court.
So whilst the Ford motor company was still a corporation (with limited liability) Henry Ford owned all of it.
As Henry Ford also believed in reinvesting a lot of profits (rather than just relying on bank loans for investment) he was able to survive the Great Depression.
Although he did consider closing down the Ford motor company (as he had done when the courts ruled against him in the 1920’s) when government regulations forced unions on him.
The Ford family either sold or gave away (to the charitable foundation) most of their shares long ago.
So Ford today is really just another corp.
Paul, that’s BS.
I have a car. I am personally liable for what it does. I cannot begin to pay for the potential consequences. Does this absolve me from responsibility. Of course not! I buy INSURANCE!
When stock holders are allowed to displace the consequences of risk on to its victims yet still profit from the added risk, that is redistribution.
I have heard you talk about how FDIC type programs guaranteed the Savings and Loan collapse. That is what happens when you separate the one who assumes the risk and its rewards from the person who pays the consequences of failure.
Stock holders should carry insurance on their stock. It can be calculated into the cost of the stock. Right now, people have no incentive to vote their shares to compell responsible conduct by their corporate employees. But they still have every incentive to vote high profit margins. It’s S&L style risk redistibution. And worse, since the loss is limited to the value of the stock, you are incentivising the shareholders to take huge risks since payouts are limited and payoffs are not.
You are using bad law and bad legal precident as a rationalization for more bad laws and more bad legal precidents. Jimmy stole from Bob, so Bob should be allowed to steal from Karen is hardly the basis for sound practice.
The destruction of value and jobs in that company remains, in my mind, one of the most disgraceful episodes in British corporate history.
Indeed. I joined Marconi as a graduate engineer in September 2000 when their share price was £12.50. I left in July 2001 when it was 4p.
It was a disgrace. Marconi insisted that it would invest its pension pot in Marconi stocks, thus meaning that when people lost their jobs they lost their entire pensions too. I knew one Scouse lady who retired in January 2001 after 44 years with the company, from age 16 to 60. She left with a hefty pension. A male colleague decided to hang on another six months, and left penniless.
That smug git Lord Simpson retired with a fat payoff to go an play golf, but to be honest who is to blame here? Simpson’s track record was abysmal, he either sent companies down the drain or flogged them when the going got a bit tough.
Some of the management decisions they made were preposterous, including the one which sent every graduate employee in the world to Disneyland Paris for a jolly. I enjoyed myself immensely, but I am to this day still bewildered about what the purpose of this was.
Excellent rant. You should rant more!
Mid, are you, perchance, a trial lawyer? Just curious.
Hutton doesn’t get it, but neither do you Johnathan (Is that right?). This empty emphasis solely on figures has crashed and burned many times before and will do so again. Companies may well be financial constructs, but, in becoming so, they also become cultural entities. The idea of the vile, braying types that hang around Berkeley Square buying up companies at random is repellent – and not only culturally. They will screw it up as their predecessors have done so often in the past and we will be left with the wreckage.
I don’t know that there is any need for corporations. They were not created by the U.S. government for quite some time, and we got along just fine. Given a choice, I would choose a libertarian society that did not charter corporations.
No, Bryan. I would love them to be just cultural entities because the state has no role whatsoever in creating culture (to wit, I present the great ‘cultural’ artefact “the Millennium Dome”). States sustain states. Society, not state, makes culture. A state can destroy a culture but it cannot make one.
A great many things are repellent, but that does not mean the state should always be criminalising them. Personally I find a great deal of popular ‘culture’ repellent. My guess is the ‘braying types’ do not find buying up companies repellent and I have a problem with you using the threat of violence (i.e. a law) to make your view prevail that ‘this’ transaction is okay but not ‘that’ one. Are you really that wise?
And adding a political dimension to a social transaction will make things… better? Really? And that would be because the track record of politically directing the economy in the past hardly ever leaves economic and social wreckage that ‘we’ will be left clearing up, eh? Bryan, you are a smart guy, do you really think that will be an improvement?
Bryan, your comments are bizarre. A company comes a “cultural entity”? Like what, the works of William Shakespeare or the art of John Constable? Horsefeathers.
As for the idea that it is somehow “repellent” for a group of funds to buy a firm while it is apparently ok for thousands of day-traders to buy and sell a firm’s stock without regard to the cummulative impact of their actions, you should explain why it is repellent.
What is really important is if a firm is operating in a competitive environment and hence benefiting consumers, not the exact ownership structure – listed, unlisted, partnership, or whatever. Hutton’s argument is a nonsense. He is also inconsistent because in his 1995 book, the State We’re In, he attacked listed firms because they were prone to “short-termism”. Private equity firms often buy companies and run them intensely for many years, far more long-termist in fact than if the main owners are day-traders sitting in their homes.
Sorry Bryan, and no offence, but you are talking bs.
No, CFM. But I do buy a lot of insurance. I know my insurance agent well enough to remember his phone number and hang out at office to talk football and other sports. He often tries to get me to take jobs for him.
As a contractor who had to take out insurance on subs who didn’t have any and wouldn’t get their own I am no longer tolerant of people who use limited liability to be irresponsible and displace risk onto others.
If a sub on one of my jobs doing tile work broke a plate glass window, someone has too pay. With nothing but sponges and buckets for his business capital, who pays for the window? And he has absolutely no incentive to buy insurance if he is incorporated. What if something he does hurts a bystander?
And occasionally on jobs I was subbing on, I would find out that other contractors didn’t have insurance. But I did. Have you ever heard of ‘deep pockets’? Who do you think pays?
There are too many business possibilities out there where the investment is low enough and the potential payoff is high enough that limited liability is a license to gamble with other people’s life, liberty and property while keeping the profits from that risk for oneself.
It is theft.
“He should be personally liable for damages to non-consenting parties. He should have insurance to cover that risk. If he cannot afford the insurance then he is just one more freeloader.”
Midwesterner, I agree with your position in principle but I am a little worried: are you putting too much strain on insurance at this point?
Obviously, a death caused to a pedestrian by faulty brakes is a very serious matter. It is not really a thing that anyone would reasonably want to be considered liable for. That includes the guy who made the brakes, the CEO of the company that paid the guy and the stockholders that invest in the company. Why wouldn’t the insurance company (who after all, under this view, have to be individuals too at some point) be equally concerned about taking on unlimited liability?
How can we be so sure that a truly free market (as opposed to this one which deliberately removes liability and thus threatens individual rights) would actually develop a solution to this? We may find that development is stagnated due to people’s inability to take risks.
The opposite of limited liability is the monstrous US legal abomination called ‘joint and several liability’ (and proof positive that no lawyer should ever be permitted to run for public office on the grounds of manifest conflict of interest). In that, if you are party to any liability, no matter how small your share of it, you are liable for the whole thing (which means if you are judged 1% responsible for something and a partner of yours is 99% responsible but he is broke and you are not, you get forced to stump up 100% of the liability). Apply that logic to company ownership and a large proportion of all economic activity stops overnight.
If you contract with someone to give them money (i.e. you invest in their company) but only under the condition you are only liable to the value of what you invest, is it really justified to say you cannot do that?
‘Limited’ refers not to the dollar amount of the damages, but to who pays them.
There is something we have to be careful of. Lets avoid using those spectular 36 gazillion dollar settlements as an excuse and think instead of the reasonable consequences. Someone sustains a loss. That loss does not disappear through the magic of limited liability. It is redistributed onto someone else.
Whether ‘social security’ or ‘limited liability’ I have a gag-vomit response to redistribution schemes.
The truck with faulty brakes is, yet again, not an accidental choice on my part. Many many (we won’t go into how many) years ago, I bought a truck for 400 dollars. Even then, that was salvage value. (We have all been invincible when younger, most of us survive long enough to learn better.) I dropped a $100 junkyard engine in it and started using it. The truck had brakes that were more of a suggestion than an actual statement. One day with 5 tons of crushed limestone on the back, I came to a T intersection and couldn’t stop. I ended up taking a right turn at about 20 mph. The farmer I was hauling the limestone for said later he didn’t know whether to jump or stay. That smartened me up a bit and I bought the parts and fixed the brakes.
With a $500 dollar business investment, I had the power to cause amazing damage to innocent, non-consenting bystanders or drivers.
This kind of business judgement occurs on much larger corporate scales as well. If it were not for limited liability, I believe Union Carbide would have been managed with very different priorities and Bhopal would never have happened.
Regarding the insurance, they set their rates according to their assessment of the risk. This is the market putting a cash value on risk. They have many mechanisms (that I don’t think are the government’s business) for deciding how much to charge. When investors understand that without insurance, they risk their personal assets (which in my opinion is the only kind there are) they buy insurance. Insurance companies being in business to make money set the rates appropriately via market pricing. To grant lower rates, they charge less to companies that operate in a safer manner. This turns risk management (regulation) from being a government monopoly into being a market driven activity. In my opinion the cost of doing business will go way down when the market takes over setting guidelines for how businesses will reduce risk.
False dichotomy, Perry. That statement is like saying the opposite of communism is fascism. One abomination does not justify another one.
And we are talking about non-contractual relations. Nobody here, at least not me, believes that contracts should be ignored.
er… it was a left turn.
No, I disagree. Communism and fascism are really just different ways of doing the same thing. Limited liability and joint-and-several liability (in the US legal sense) are diametric opposites.
If you allow liability to follow the trail all the way with no sense of proportion (i.e. no limit on liability regardless of quantitative and qualitative differences: treating a non-executive shareholder the same as a decision making director), then you are indeed following the logic of that much beloved artifice of the Trial Lawyers of America.
I have no problem with liability based on the degree to which a person is responsible for a decision that causes non-contractual loss, but to treat liability as completely fungible and independent in quality to degree of culpability is not just a mistake, it seems an affront to common sense.
MW, isn’t there a problem with your solution, who would invest in insurance companies ? If the owners have unlimited liability (and you have disallowed any limitation), a single serious misjudgement of risk and there goes your personal assets.
No, incorporation or limited liability is fine. The brake case is a poor example, in many jurisdictions you would be personally liable anyway for your actions especially if negligent. The point being, as pointed out before, if you know you are dealing with a limited entity, modify your behaviour.
“Limited liability and joint-and-several liability” are both ways of redistributing the negative consequences of (business) decisions onto people who do not profit from the positive consequences. Isn’t that the process that we oppose here more than any other?
The owner, not the possessor, is the be-all and end-all in a system based on life liberty and property.
You are making a fundamental error in your case when you separate control from ownership. Your case is based on the idea that the owner does NOT have control over his property. If this is true, and the owners do not in fact have control of the company, then you are addressing the wrong problem.
What you are doing is interposing yourself (as a lawmaker) between the owner(s) and his employees. You are making a law that the employee may take actions on behalf of the owner that the owner is not responsible for. But if one truly believes in property rights, then if the employee was acting within the owner’s general directions, the owner is accountable. If the employee was violating the owner’s general directions, then a property crime has occured.
Owners always must have control over their property and how their employees use it. I imagine the form this control would take in super huge companies is similar to bond ratings. A company’s behavior would be rated and that rating would guide the cost insurance companies charge stockholders.
I want to see government risk management removed from business. Separating business owners from the consequences of their actions is not the way to do it. And if you truly believe that owners do not have control in proportion to their ownership, then you are addressing the wrong problem.
Just another question for you. Based on this statement
you presumably have no problem with holding a single owner corporation fully accountable. What mechanism do you propose for determining how much control an owner(s) has over his(their) company?
Ed, your statement denies the existience of many centuries of the insurance industry. I think you need to try a little harder to argue in real terms.
You (and many others) are utterly denying the reality that a geniune loss has to be born by somebody. There is a cheap trick you guys are using by hitching onto the coattails of preposterous, John Edwards style awards to claim that geniune losses do not exist.
Why is everybody here so averse to allowing the market to put a price on risk? Why is this one of the things that requires collective protection and redistribution?
Ok, I buy a single share in BP. Do you think I have ‘control’ over my property beyond deciding to hold or sell my single solitary share? If a BP tanker runs aground, dumps oil on a Panda Bear sanctuary and the company goes bankrupt, would you prefer it if I was potentially liable for the clean up costs myself because of my one measly share?
No problem at all.
Are you a director? Then you are liable for your decisions even if you are not also an owner. Are you in the decision loop in any meaningful way (regardless of the formal company structure)? If you are then you are liable for what you decide (i.e. a major shareholder pushing the board into some action).
None of that should effect the validity of limiting your liability by just investing per se. That may well mean some people will shoulder the risk whilst other just get a degree of benefit at little risk beyond that of their actual investment becoming worthless. That’s life and it is also why directors should get the big bucks if their arse is more on the line if it all goes horribly pear-shaped. I really do not have that much of a problem with that (which is not to say I think liability limiting systems are perfect).
It is a shame that the likes of Will Hutton focus on completely the wrong topic. If you want to find fault with the ‘capitalist’ system, then the issue of mediocre CEOs taking home excessive pay is far more troubling.
As ever, Warren Buffet nails the issue,
Too often, executive compensation in the U.S. is ridiculously out of line with performance. That won’t change, moreover, because the deck is stacked against investors when it comes to the CEO’s pay.
The upshot is that a mediocre-or-worse CEO – aided by his handpicked VP of human relations and a consultant from the ever-accommodating firm of Ratchet, Ratchet and Bingo – all too often receives gobs of money from an ill-designed compensation arrangement.
Getting fired can produce a particularly bountiful payday for a CEO. Indeed, he can “earn” more in that single day, while cleaning out his desk, than an American worker earns in a lifetime of cleaning toilets. Forget the old maxim about nothing succeeding like success: Today, in the executive suite, the all-too-prevalent rule is that nothing succeeds like failure.
If I read this correctly, there are 3,250,000,000 shares of BP outstanding. Is that possible or am I reading it wrong? Because if that is correct, then I have no trouble whatsoever with you being held responsible for 1/ 3,250,000,000th of the clean up costs. Got a mop?
But you wouldn’t even need that mop if you had bothered to buy liability insurance. Add up all of my policys and I probably have several million dollars of liability insurance. Why should you recieve a risk subsidy just because you don’t bother to mind your own business? Seriously! Stock holders have this deranged idea that they can vote and vote (or let others do it) for profits at the expense of caution, and not be held accountable for consequences of their votes (or non-votes).
If you don’t like the way the company is run, SELL IT! You are a consenting participant! If you can’t take the heat, you shouldn’t be in the kitchen.
So let me get this right. You do not support limited liability. (I clearly used the word ‘corporation’) But you believe that if a big enough group of people get together, they are entitled to special treatment. I’m still having trouble reconsiling this with the rest of your opinions.
What people contractually consent to is governed by the terms of the contract. But you are granting absolution to people for harming third parties. You can keep your hands out of my pockets thank you very much.
If what you want to do is so irresponsible that you can’t get any insurance then it is immoral to use that as an excuse to screw people.
Mid, I’m more sympathetic to your position than it may sound. I was a General Contractor for several years, and am currently a Project Manager for a very large Corporation. However, I do think you’re looking at the problem of limited liability from a very proscribed position.
Much of the original 19th century legislation authorizing formation of limited liability companies arose from concerns not so much about protecting owners from liability for negligent damage to third parties, but to protect individual investors, who have very limited control over corporate decisions, from potential debt burdens acquired by the company.
Think Enron – All those folks who lost their life savings and pensions when the stock price went to “zippo”. Without limited liability, the creditors of Enron could still be pursuing those same folks to collect unpaid Corporate debt.
Yes, there is also risk to be evaluated where debt is concerned. But where does responsibility for that risk assessment lie? With the lending institution. Low risk, low interest. High risk, high interest. Do your job, make money. Screw up, go broke. Sounds pretty free-market to me.
For real negligence, hold the decision makers responsible. It already happens quite a bit. Prosecutions for negligence, or malpractice, and civil lawsuits have cleaned out more than just the occasional worker with bad brakes.
Also, the very existence of “joint and several liability” and “Deep Pockets” provisions, along with results such as the tobacco “settlements” and the McDonalds hot coffee suit, demonstrate that brushing the John Edwards issues aside, as you did above, isn’t very realistic. The tobacco settlement alone was probably larger than all the rest of the liability cases in several combined states during the same time frame. Exposing investors to that sort of risk will result in only one thing: No investment.
The purpose of limited liability, as a legal concept and adjunct to economic policy, is to allow commerce, entrepreneurship, and economic growth to occur in the first place. A new and productive enterprise would never get off the ground if the necessary capital could not be accumulated. And anyone with a grain of sense isn’t going to contribute to that capital accumulation if their liability is, to all intents and purposes, unlimited.
Look, I’m all for personal responsibility for bad decisions. Vendors who want me to sign a contract have to carry lots of insurance, post bonds, give performance guarantees, and a lot more. In fact, managing risks, ensuring enough insurance is available, and holding those vendors responsible for their performance is my job. But – I wouldn’t be able to impose those requirements on an organization, if that organization was never formed in the first place.
CFM,
It’s good to hear from someone who is in the corporate side of risk, rather than the investor side. And has also been (presumably) a business owner. I’ll try to address your points.
I think that protecting the stockholders from debts assumed by the directors can very easily be handled by contracts. That stipulation can be in a company’s charter.
A (the?) big problem with Enron was that the company pension fund people apparently set it up so that the company was voting those shares, not the employees. I may be wrong about this. Owners have to run companies. When they do not, very bad things happen.
I believe that Enron, UC, Marconi, virtually all major corporate conflagrations can be tracked to one thing. Detachment of risk from consequence. Consequence must be attached to whoever is profitting from an action, not just the hired hitmen who carry it out. The managers of these companies are in most cases hitmen who profit regardless. Guys like Simpson. The very few who go to jail is good, but the problem that creates them is structural.
We have a choice, we can have these hideous attempts to write good regulations to make flawed systems work. This is how we get OSHA rules that issue fines for things that are perfectly safe in one company but dangerous in another. OSHA can’t discriminate. This is how we get laws like SorbOx which undeniably has good intentions (don’t they all).
Joint and several/Deep pockets can be defeated far more easily if we take away the condition that lead to its misguided good intentions. I have had to pay the insurance on subs who did not have coverage of there own. This is directly because my insurer knows that they will be hit in deep pockets claims.
Side bar, if we are hiking in the woods, get lost, and come out at the top of a cliff. And, looking down, see our car, it is one thing to say that’s where we need to be, and another thing entirely to step off of the cliff to get there. I use this example a lot. It means that if it is our intention to bring about change and not just whine, we need a tactical plan for doing it.
Deep pockets are the enemy of insurance companies, insured companies and all of us who believe in personal accountability. It should be one of the first things we move to defeat. Defeating it is doable. But getting rid of corporately bankrupt millionaires is an important first step. How many people can you name who have bankrupted a company but profitted from the act?
To use Perry’s example, if you can’t get insurance for 1-3&1/4 billionth of BP risks, the company is seriously in the risk transference business. The key here is that you are held responsible. I challange you to name any reputable company where this makes ANY detectable difference. It won’t, it doesn’t. Reputable companies are already covered by adequate insurance so your secondary insurance will be a pittance.
Where it WILL make a difference is the very small fraction of companies that cause almost all of the problems. Because you as an investor are liable, you will look at their risk/insurance rating of a company and if you still buy a company when it is clearly assuming uncovered risks, then it’s like byying futures, don’t take risks you can’t afford. And don’t expect others to pay for it when things go boom.
I truly am astonished. Really surprised. Utterly amazed at the distrust of markets on this topic. Guys! Risk markets have been around for ever! They are very good! They are better than you and certainly better than the government at telling which companies are sound and which aren’t. Trust them. If you can’t get stockholder liability insurance on a stock, don’t buy it!
Since it clearly is not being understood, I’ll try to state just the essentials of the free market way of doing things. First, limiting liability is definitely not something a truly free market does. It creates a market and buys and sells it. As a farmer, I could look at futures markets and decide if I wanted to sell somebody else the risk of a down market for corn. You CAN buy and sell risk.
I propose something very simple. Stockholder liability insurance. Just like homeowners or automobile liability. I am insured for far far more than the value of what I own. Each car carries hundreds of thousands of dollars of insurance. You can insure a 30,000 dollar car for 500,000 dollars liability without giving it a second thought.
BPs 200 day moving average is $66 so 450 shares would give approximately the price of a $30,000 car, about 1/ 7,222,222 of the company. So if you insured your stock at the same rate you insure your car, BP stock would be covered by over $3,500,000,000,000 (3 1/2 trillion) dollars of insurance. Clearly BP would be alot cheaper to insure than your car because your car can do much more damage per dollar of asset value than BP can. Insuring your stock is cheap and reasonable. And it results in an individualist, personal responsibility based, free market provided solution, not the collectivised risk of ‘limited liability’.
Here is the big pay-off. By eliminating the opportunity for stiff-the-victim strategies, and returning responsibility to those who take the risk, it becomes possible to get government interference lifted. We cannot do that now because all hell would break loose.
Johnathan Marks sails, I don’t know if you race Johnathan, but if you do, you’ll know what a ‘peal’ is. Although you may have a different name for it in the UK. It is when you want to change from one sail to a larger or smaller one without taking the one you are flying down. (you would give up a lot of distance if you did) So most racing boats have two tracks for the headsail (jib, the front sail on a sloop) to do a ‘peal’ you raise the new sail in the wind shadow of the old one. After it is up and ready to take the load, you then lower the old sail. This way you make a major change of sail without any significant interruptions to your speed.
We need to, as activists, plan to do ‘peals’ if we are to bring about changes in our regulatory structure. We have to put individualist/life liberty and property based structures in place so that we can take down the old ones without total chaos and a rejection of everything we are trying to do. Getting rid of limited liability and replacing it with something simple like stockholders insurance is an important step. Would you rather be paying a few more actuaries in the private sector or continue paying for more and more regulators in government?
CFM, I am particularly interested in your take on this. If Johnathan is okay with it, I would like to follow up on this. I think it actually is very much on topic but that is Johnathan’s call.
I also see the need to make yet another point. If you guys are thinking of limited liability corporations as a defense against gazillion dollar awards for spilled coffee, wrong tactic. There is a simple place for limits to liability in sales contracts. The huge vast majority of tort claims are product liability claims. Our tort system is broken, limited liability is not a repair, it’s a facilitator. I oppose settlement caps and prefer rules for how settlements are calculated. We seem to be making progress in that direction, I don’t know.
Sorry Midesterner but it was not B.S.
People are not going to buy “inusance” every time they make an investment.
The whole idea of “you invested in this company so your are personally liable for any mistakes its employees make” is silly. People may lose the money they put into a business (that is the risk they choose to take – and it is not really an “insurable” risk), but for them to also lose money they did NOT invest in the business is (well) silly.
I say again that there were many ways to avoid this before the limited liability statutes (so they were not really needed), but to say one should have unlimited liability for all investors is (again) silly.
It is like saying that putting taxes or other restrictions on imports is a good way to save American manufacturing. It is just a basic lack of knowledge of fundemental economic principles.
Of course someone can be a very good businessman without knowing anything about economics (Henry Ford is a good example of this – a genius businessman, who fell for every economic fallacy going).
And one can have a good basic understanding of economics whilst be crap at business. I have never managed a business in my life – and would, most likely, be useless.
Confusing political economy and business is one of the great errors. Perhaps it come from the Greek root of the word “economics” – household management.
Paul, you are repeating your opinions without bringing anything substantive to this debate. While your facts when you provide them are interesting, your opinions need to be substantiated just like anybody elses.
Legitimate losses, when caused, must be born by someone. And limiting the liability of the persons that caused them by forcing the cost onto non-consenting persons is indefensible by any standard of individualism.
Paul, you wrote: “People are not going to buy “inusance” every time they make an investment.” Why not? It does not mean that you have to go to an agent and buy a policy every time you buy stock. There could be a relatively simple mechanism whereby you can purchase an insured stock, with the insurance cost already included in the price. I am sure that every cup of coffee at MC has a liability insurance cost figured into its price, just like it has advertising costs, and other costs figured into it.
I meant “McD”, not “MC”…
Why are people not going to buy insurance (sorry for my typing mistake) every time they make an investment, to cover any liability the organization they were investing in got hit with?
Because to try to do so would be insane.
And that is a fact – not an opinion.
Paul, I am afraid Mid is right: you keep repeating your opinion without substantiating it. Saying “that is a fact – not an opinion” has no substance.
The notion is simple. I give someone $10 to invest in their company and they, unbeknown to me, hire a hit man to kill a competitor of the company. They are discovered, put in jail and the company goes bust. By Midwesterner’s logic it is nit enough I lose my money (the risk I agreed to take by investing), I should be liable for the company director’s crime.
That is nuts.
Unless I am aware of what the company director is planning, I am not a party to the conspiracy. The fact I invested and my money was used to commit a crime should not make me liable for more than my investment.