Limited Liability Is Causing Unlimited Harm The original purpose of limited-liability protection was to encourage investment in—and risk-taking by—corporations, whose resulting innovations would benefit society. Yet by allowing shareholders to profit from the harms caused by corporations, limited liability has evolved into a source of systemic market failure. Katharina Pistor Published on February 13, 2020 SHARE Photo courtesy of Getty Images NEW YORK – In a recenttweet,Olivier Blanchard, a former chief economist of the International Monetary Fund, wondered how we can “have so much political and geopolitical uncertainty and so little economic uncertainty.” 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. The same goes for corporations that openly enrich shareholders, directors, and officers at the expense of their employees, many of whom are struggling to make a living and protect their pension plans. Are markets wrong, or are the red flags about climate change, social tensions, and political discontent actually red herrings? Closer inspection reveals that the problem lies with markets. Under current conditions, markets simplycannotprice risk adequately, because market participants are shielded from the harms that corporations inflict on others. This pathology goes by the name of “limited liability,” but when it comes to the risk borne by shareholders, it would be more accurate to call it “no liability.” RELATEDGiving is Changing as Philanthropy Faces More Scrutiny Under the prevailing legal dispensation, shareholders are protected from liability when the corporations whose shares they own harm consumers, workers, and the environment. Shareholders can lose money on their holdings, but they also profit when (or even because) companies have caused untold damage by polluting oceans and aquifers, hiding the harms of the products they sell, or pumping greenhouse-gas emissions into the atmosphere. The corporate entity itself might face liability, perhaps even bankruptcy, but the shareholders can walk away from the wreckage, profits in hand. Shareholders have been let off the hook in case after case—from the 1984gas leakat a Union Carbide plant in Bhopal, India, which killed thousands, to Big Tobacco, asbestos manufacturers, and British Petroleum following theDeepwater Horizondisaster. Since then, shareholders of Boeing, the company responsible for two airplane crashes that killed346 people, made$43 billionthrough share repurchases between 2013 and 2019—precisely the period during which the firm ignored safety standards in the interest of cutting costs. Meanwhile, the families of those who died must make do with a $50 million disaster fund, which amounts to just $144,500 per victim. Elsewhere, a lawsuit against members of theSacklerfamily, which owns Purdue Pharma, one of the companies at the heart of the opioid epidemic, is trying once more to hold the beneficiaries of corporate misconduct accountable. Fearing liability, some family members have reportedlysoldtheir properties in New York and moved their money to Switzerland. But they probably need not worry. As John H. Matheson of the University of Minnesota Law Schoolshows, courts rarely allow victims of harmful corporate conduct to “pierce the corporate veil” that protects shareholders from liability. RELATEDThe 10 Most Toxic Philanthropists The stated justification for limited liability is that it encourages investment in—and risk-taking by—corporations, leading to economically beneficial innovations. But we should recognize that sparing owners from the harms their companies cause amounts to a hefty legal subsidy. As with all subsidies, the costs and benefits should be reassessed from time to time. And in the case of limited liability, the fact that markets fail to price the risk of activities that are known to cause substantial harm should give us pause. Worse, this particular subsidy makes little economic sense. Property rights, every economist knows, are meant to increase efficiency byensuringthat owners internalize the costs associated with the assets they own. But limited liability insulates investors from the externalities created by the companies they own: heads, they win—and tails, they win too. So long as shareholders can gain from these externalities, they will defend them. They will fight every attempt to force an internalization of costs, including the carbon tax that the European Union is currently promoting. Top-down regulation, they argue, is inefficient, because governments cannot possibly identify the optimal tax rate. But if that is the case, why not enable markets to price risk correctly, by removing the distortion that is currently preventing them from doing so? The liability rules cannot be changed overnight. But changes could be phased in after a transition period that puts everyone on notice. No new multilateral treaty or complicated harmonization efforts are needed. If just a handful of countries adopted “piercing statutes” and ensured that claimants would have standing in their courts, markets would respond accordingly. RELATEDThe Rise, Fall and Rise Again of Businesses Serving More Than Just Their Shareholders No doubt, shareholders would try to avoid liability by shifting assets to safe-haven jurisdictions, and by lobbying their own governments to protect them with the threat of trade sanctions against countries that do adopt piercing statutes. But the greater the number of countries adopting such statutes, the less successful these strong-arm tactics will be. In the end, a subsidy that distorts markets and gives investors a license to harm is not only inefficient. It is a threat to both the market system and the natural environment upon which we all depend for our survival. https://www.worth.com/limited-liability-is-causing-unlimited-harm/ Katharina Pistor, professor of comparative law at Columbia Law School, is the author of The Code of Capital: How the Law Creates Wealth and Inequality.
That is the point. In the course of business a person who did business with your company and wants to sue you (in America - for literally any reason) can come after your house, retirements, etc. How is increasing liability for company owners in the case of the obvious scarebait (bhopal, etc), not going to result in my consultancy being sued and my house and retirement taken because Big Corp. found out I wrote exactly two lines of code that are similar to what they did (despite being independently developed) and because I'm a small fry their team of lawyers will tie me up in court until I am broke and on the street? Increasing the liability passthrough in one extreme case will almost certainly lead to complete loss of protection in 3-5 election cycles. I am reminded of gun laws as a very pertinent example of just how good the government is at widdling away your rights over the course of a century once they're given a chance to do so. How about not allowing company lawyers to negotiate a pittance per victim in a tragedy? Why does a decision probably caused by a chain of events stemming from middle management MBAs doing spreadsheet cost cutting have to effect the company shareholders in the event it causes a tragedy?
If minority shareholders are personally liable for the action of corporation why not lenders? In a way, minority shareholders in a modern corporation is just like lenders who loan the corporation money, the difference is the payout formula. If we then hold lenders responsible, then what about the shareholders of lenders...
Liability in cited article is meant to be understood as financial liability right? E.g. it would not make sense to put someone or something in jail for buying a stock. (Not a native English speaker.)
Laws in the US are not common sense. In America prison is always a possibility, There are near infinite laws, As former police commissioner of ny, who went to jail for fraud, once said at a conference everybody in this room is guilty of some criminal action he doesn't even know about.
This isn't unusual anywhere else either. It's neither uniquely American, nor uniquely Western, and countries have been writing laws to justify jobs/lock away special groups/etc since time immemorial. Efforts to simplify the code of law into a consistent set of rules would find so many logical contradictions you'd have to start over from the beginning. Let's not forget all of the lawyers who's jobs are staked on the fact modern law is virtually uninterpretable. Where did America hurt you? Can you show us on the map? "If you give me six lines written by the hand of the most honest of men, I will find something in them which will hang him." - Cardinal Richelieu
Paranormal liability on both sides, these days, first from the employee perspective as @gaussian wrote, then from whoever is CEO or founder, based on French court stories, after few noobs jump through windows. Like, both sides might suffer, but at least it's not that bad, as it used to be hundred years ago, where you would be paying for the sins of your child/brother/father etc.