
Limited Liability Is Causing Unlimited Harm - hhs
https://www.project-syndicate.org/commentary/limited-liability-corporate-shares-by-katharina-pistor-2020-02
======
baryphonic
I was not surprised at the low quality of this piece, but was shocked that the
author is a law professor, and at Columbia no less. The professor should know
better.

Limited legal liability is not the essential aspect of incorporation, legal
personhood is. The ability to sue and be sued as its own entity is the one
unique aspect of the corporation that distinguishes it from what came before.

Limited liability, on the other hand, is commonly used in contract law. The
entire insurance industry is based on this idea. It even has a respectable,
legalese name: indemnity.

In a world of shareholders having unlimited liability, shareholders would buy
insurance against any loss beyond the cost bases of their investments, or
they'd require the corporate entity - again, still a legal person - to
indemnify them for any losses beyond the investment, or maybe the clever
lawyers - including the professor's own students - would use indemnity to make
even more innovative agreements and tools.

By creating out of whole cloth a market for insurance that heretofore has not
existed, we'd probably see even more of a culture of haves vs have nots in the
investment world. Those with more money and prestige would be able to buy
better protection; ordinary people would be less well-protected.

In the end, we'd have a less equal system, more uncertainty and no change in
the behavior of corporations with respect to liabilities of their
shareholders.

~~~
marnett
> [...] we'd probably see even more of a culture of haves vs have nots in the
> investment world.

There are no have nots in the investment world. The investment world,
intuitively, is made up of have and have mores.

~~~
Arnt
The have-nots are people who buy a few shares in an index fund. That doesn't
require significant time or thought, so you can do it even if all you can
spare is €1k and very little time.

~~~
leetcrew
as someone with a tech job, I don't consider myself a "have-not" but I
basically just buy index funds with whatever surplus income I have every few
months. if my losses weren't limited to the cost basis of my shares, it would
basically be too risky for me to invest at all. this would drastically change
my retirement prospects.

------
pjc50
The shareholders are not usually the ones making the decisions, the _managers_
are. Rather than going after Joe Average's pension when he put $100 in an
index fund that turned out to own Dow Chemical, go after the managers.

Perhaps a rule that anyone in a decisionmaking position who earned over $1m
total comp last year is partially liable for fines against the company?

In the UK a few decades ago there was a huge fiasco when Lloyds, one of the
few remaining places whose investors have unlimited liability because the
company dates from 1686, dumped liabilities relating to asbestos onto them.
[https://www.theguardian.com/money/2000/nov/04/business.perso...](https://www.theguardian.com/money/2000/nov/04/business.personalfinancenews1)

Was Sir William Jaffray responsible, in the 1980s, for the actions of those
marketing and installing asbestos in the 1970s? He ended up _liable_ for it
anyway.

~~~
AnthonyMouse
> Perhaps a rule that anyone in a decisionmaking position who earned over $1m
> total comp last year is partially liable for fines against the company?

Limited liability is almost always irrelevant to megacorps, because they're
large enough that any given liability doesn't actually bankrupt them. Which
also means that managers in a company that size would still expect it to never
happen and it wouldn't impact their behavior, and they would just carry
insurance against it anyway.

On top of that, it doesn't even really help the victims, because if you have a
claim which can bankrupt a $100B corporation, the few million in additional
assets you could get from the managers is a rounding error.

If you're really trying to affect behavior, criminal penalties for the
managers would tend to be more effective, but they also tend to already exist
in cases of malice rather than negligence. Negligence tends to be punished
with financial penalties rather than prison, and then we're back to the money
getting paid by the corporation itself or insurance.

~~~
admax88q
> they would just carry insurance against it anyway.

A lot of people in this thread keep citing insurance, as if you can _just
carry_ insurance for anything. This completely ignores the actual insurance
companies in the equation.

Insurance companies are not limitless pits of funds, they won't just give
insurance to anyone for anything. If a manager has a track record of damaging
behaviour or works in an industry that does obvious harm, why would somebody
give them insurance?

People are talking like the results are useless unless it personally bankrupts
the managers responsible, the goal is not to hurt the person responsible as
much as possible, its to actually provide compensation for victims, and
provide a market force to reduce harmful behaviour.

You can't just "get insurance" for anything. If you were legally liable for
harms, and you had a track record of harmful decisions or work in a obviously
harmful industries, then the insurance companies are unlikely to provide you
insurance or will charge you high enough premiums that those who are more
responsible or do safer work are economically advantaged.

~~~
AnthonyMouse
> If a manager has a track record of damaging behaviour or works in an
> industry that does obvious harm, why would somebody give them insurance?

If a manager has a track record of damaging behaviour or works in an industry
that does obvious harm, why would somebody hire them? The liability to the
corporation as things are now is the same as what it would be to the insurance
company.

And that's assuming that actuarially the people who have made mistakes in the
past are more likely to make them in the future. Maybe the people who have
made mistakes in the past are the people who have learned what not to do and
are a safer choice than someone with less experience, or at least are not
sufficiently more risky that the difference in insurance premiums would be
prohibitively large.

> People are talking like the results are useless unless it personally
> bankrupts the managers responsible, the goal is not to hurt the person
> responsible as much as possible, its to actually provide compensation for
> victims, and provide a market force to reduce harmful behaviour.

Making the managers responsible for corporate liability doesn't do much for
victims because the managers typically have far less money than the
corporation itself. All it can really do is try to motivate the managers to
avoid the liability, but it doesn't even do that when it's the insurance
company and not the manager that pays in the event of liability anyway.

~~~
admax88q
You're ignoring the fact that shell corporations used as liability shields are
widespread. Look at all those abandoned oil wells that nobody will pay to
clean up because the corporations that owned them don't exist anymore.

Managers have assets, insurance companies have assets, shell corporations
designed to shield other corporations and managers do not have any assets.

> And that's assuming that actuarially the people who have made mistakes in
> the past are more likely to make them in the future.

Moreso I'm assuming that the actual actuaries will be incentivized to assess
this correctly when somebody actual has to pay when things go bad.

------
LatteLazy
The article conflates a lot of things that are not connected to limited
liability (unsafe airplanes and pollution!?). And it misunderstands limited
and zero liability, pretending the former is the later? Then it fails to
understand liability all together.

I understand why there is a human need to hold someone accountable for
everything. But that's not realistically possible. Trying or pretending it is
leads to very weird results (like the article)

There are so many failures here, I'd go as far as to call it "not even wrong".
It's just a mess of accusations and (incorrect) assertions. The cynic in me
wonders if its intended to just appeal to people's prejudices. But maybe I'm
just cynical...

~~~
pmiller2
You are misreading or misrepresenting what the article says. It is arguing
that “limited liability” for shareholders _de facto_ means “zero liability”
for anything the company does. While that’s not strictly true, a shareholder
in a public company indeed suffers no consequences for said company’s actions
other than potential loss of their initial investment. The author is saying
this is insufficient, as it leads to companies taking legal risks like
building unsafe airplanes and causing pollution.

Does this not reflect the world outside your window? When I can put money into
a company, then sit on it over a period of years and just watch it grow,
what’s my incentive to prevent the company from doing bad things? When I can
do that for hundreds of companies at a time, in the form of an index fund or
ETF, and be virtually assured my money will grow over the long term, why
_would_ I do anything to prevent the company from taking risks?

TL;DR: “Zero liability” is not zero, it’s just so small it doesn’t discourage
bad behavior.

~~~
pjc50
Counterpoint: as a Boeing investor, exactly how much foreknowledge of and
ability to prevent the 737 MAX disaster would you have had?

~~~
tpm
You probably wouldn't want to invest into something unknown if you then were
liable for damages caused by it. Which is, I think, the point of the article.

~~~
bpt3
As a passive investor, every investment option is an unknown, and therefore no
investments could be made where the investor doesn't have direct control over
the decision making process at the firm.

~~~
tpm
Exactly. Capitalism would be completely transformed.

~~~
pmiller2
Sounds good to me.

------
vorpalhex
I fully support this. Next time an Exxon spill leaks oil into the ocean, we
should gather up our teachers and mail carriers whose pensions are invested in
oil and put them in jail. That'll really show those polluters!

Sarcasm aside, this strikes me as the kind of vague solution waving that
sounds great on paper and has no connection to reality.

~~~
pmiller2
The correct implementation of this is to apply more personal liability to
executives and directors making the decisions that lead to oil getting dumped
in the ocean. When decision makers go to prison as a result of negligently bad
decisions, they will not be as negligent as often.

Is that specific enough?

~~~
pjc50
Yes. But that's nothing to do with the normal meaning of limited liability.

~~~
pmiller2
Yes, it does. Limited liability protects directors of a company as well as
shareholders.

------
pavon
> Markets are supposed to measure and allocate risk, yet shares in companies
> that pollute, peddle addictive pain killers, and build unsafe airplanes are
> doing just fine.

This has nothing to with limited liability shielding investors, and everything
to do with the companies themselves not being adequately punished for their
wrong-doing. The market _is_ accurately measuring the risk of these activities
and determining they are low risk, because their consequences are lower than
their gains. If you fix that, I guarantee you that the stock prices will
follow.

Now investors will still end up making some profit of off harmful behavior of
companies before that behavior comes to light, and thus the market reacts to
it, but I don't know that investors should be punished in that situation. It
is at most negligence, but it is hard to blame them for lack of due-diligence
when regulators and law enforcement, whose job it is find wrongdoing, hadn't
yet discovered it either. Leave the liability on those who performed, agreed
to, or at least had knowledge of the wrongdoing.

~~~
unishark
I think it has more to do with one's definition of "doing fine". Boeing lost
money. They can continue as a going concern since their 150k employees have a
ton of other things going on that investors expect to make money, aside from
one particular flawed product.

It seems wrong to me to require punishment to scale with the size of the
company, as opposed to the size of the "wrong doing". If Boeing has ten other
subsidiaries doing defense contracts, satellites and whatever else, that
should require them to be fined ten times more?

------
mnm1
I'd rather see criminal penalties for execs who commit such actions. A good
example is Boeing's CEO. He's the one whose policies led to the unnecessary
death of 300+. He knew what he was doing and instead of a golden parachute,
should be spending life in jail or even getting the death penalty as the
number of people he murdered is enormous, eclipsing most serial killers. Have
real accountability and real consequences and what happened will not happen
again. Instead, he gets millions and a nice retirement for murdering hundreds.
He's living the American dream: making profit off other people's misery. The
same can be applied to other disasters that could have been avoided if the
executives weren't negligent, uncaring, greedy assholes. But let's face it.
Justice like this is a fantasy that will never happen because as a society we
believe corporations can do nothing wrong. Or maybe it's just Washington that
makes it seem that way. The distinction is almost irrelevant since Washington
is supposed to represent our people.

------
bpt3
The lack of regulation and enforcement by government agencies and a
disinterested or powerless consumer base seems to be the root cause of almost
all her issues, not limited liability.

Because the repercussions of catastrophic events aren't enough to bankrupt
companies like Exxon, Dow, and BP, limited liability is irrelevant in those
cases.

In my opinion, a more coherent argument for her position (which I don't agree
with at all to be clear) would be to find examples of companies that did go
bankrupt after some negative event they caused and highlight how the limited
liability of the corporation shielded bad actors from punishment they arguably
deserved.

------
kube-system
When a pharmaceutical company makes some opioids that kill people, it's my mom
and her 401(k) account that should be liable? And this will reduce inequality?

Not sure I'm buying that one.

~~~
Geeek
I mean, she profited when the company sold all the opioids that caused the
stock to go up, why should she be off the hook on the negative end?

~~~
kube-system
She didn't realize any profit if she still holds the stock. But that
technicality aside, we already do hold her liable, but only to the amount of
her investment. The point of my comment is, why would increasing her liability
(from the amount of her investment, to everything she owns) decrease
inequality?

~~~
flyingfences
> we already do hold her liable, but only to the amount of her investment

That's the thing, though - we don't. Her liability is limited to effectively
zero. Her investment may lose value, but that is another risk entirely. If the
company in which she is invested goes bankrupt with a billion dollar debt, she
isn't on the hook for a penny of it.

------
lanternslight
We need a corporate death penalty: when a corporation has been convicted of
murder out other acts, the corporation should be dissolved, the assets sold
off, and the proceeds distributed to the victims families. As it stands now,
the execs get their gold, the corporations get a slap in the wrist, and then
it's business as usual.

~~~
AnthonyMouse
A corporation's assets are typically worth more as an operating business than
as a disjoint collection of vehicles and land, so the buyer would tend to be
someone who wants to continue operating the business and would buy the whole
thing. In many cases the value of the business would also exceed the
liability, in which case the difference should presumably go to the original
shareholders. They might then want to use that money to invest in the new
business.

That is effectively what already happens. You're basically just asking for the
amount of liability for particular behavior to be larger than it is, and then
in more cases it would cause the corporation to go bankrupt and have to raise
new capital in order to continue operating, because the result would be the
same.

------
dieselerator
It occurs to me I should consider the following.

The author is a lawyer arguing to expand the field of defendants in a lawsuit.
Most of those defendants would be likely to settle rather than be dragged into
court. Who would be the beneficiary in that scenario?

(I am not a lawyer.)

------
kraigie
If companies are persons. Should we arrest them? Tax them like individuals?

~~~
tathougies
Corporations are taxed like individuals. The individual tax is the tax borne
by the entirety of shareholders of the corporation as individuals.
Corporations are then taxed again. They are doubly taxed entities unlike a
passthrough LLC or sole proprietorship

