1. Whose liability is? Corporate Limited Liability and Accountability S. Blankenburg 19 November 2010, LCCGE Seminar, Birkbeck College

2. Whats corporate limited liability got to do with it? Intimately linked with rise and dominance of finance over industry Rise of joint stock companies is the most striking change that has taken place since the Industrial Revolution (e.g. Sraffa) SustainAbility Report Changing the Landscape of Liability: Business is vulnerable to new forms of legal activism (rather than CSR)

3. The focus: Modern limited liability corporations Shareholder liabilities limited to their initial investment, rights to profits and power to appoint management CEO limited liabilities by implication (agents of shareholders), but also agent of the corporation Separate corporate personality/ separate entity (title to assets) Perpetuity Group liabilities and tort claims US business corporation, UK plc, French société anonyme, German AG, etc.

4. The focus: Modern limited liability corporations Not included in the analysis: Companies not subject to shareholder value norms Trade unions, co-operatives, mutuals (restricted object clauses) Limited liabilities of banks and bond-holders Border cases: limited liability partnerships, GmbH, etc.

5. Historical Background The medieval commenda: An early form of limited liability partnership to facilitate the finance of risky investments. Differentiates between a general (or travelling) partner who has managerial control of the enterprise and fully assumes all risks, and a passive (or sleeping) partner who provides a share of the capital required for the enterprise and is liable only to the extent of this financial investment. Originally used mainly to finance high-risk sea trade, the commenda fast spread throughout medieval Continental Europe and beyond maritime trade (though only marginally to the UK).

6. Rise of companies endowed with privileges bestowed by rulers on semi-public entities Historical roots not in the commenda as a purely private arrangement between partners in business, but in royal privileges bestowed on monasteries and trade guilds operating on the basis of commonly-held property, and regarded as serving a common/public purpose. As late as 1906, the UK Trade Disputes Act granted a number of immunities to trade unions. This included the provision that they could not be sued for damages incurred during a strike, thus rooting the right of workers to organize and strike in the concept of limited liability as a privilege granted by rulers to semi-public organizations. Main examples are the joint-stock companies of the 16th and 17th centuries: The Hudsons Bay Company, the Dutch and the British East India Companies, and the Royal Africa Company, for instance. Historical Background

7. Main privileges: Limited liability (joint-stock company), trading and regional monopoly rights Simultaneously, these companies operate as an extended arm of states with colonial ambitions, risking criminal prosecution for violating or contravening the national interest, as perceived by the royal authorities. Merging of private and public interests: Dominance of mercantilist (trading) sources of private profit Beginnings of foreign direct investment (establishment of manufacturing plants, agricultural plantations and farm organisation abroad, some private investment in physical infrastructure) Core role in colonial administration and military control (private armies) Historical Background

8. Example 1 : British East India Company (1600 – 1858) vs. Adam Smith Monopoly on all seaborne trade with the East Indies (really all of Asia) Main source of private profits remains linked to trade (costal ports), but expands into establishing manufacturing factories in the control and processing of agricultural production Eventual shift from focus on trading to operation as a profit- making administrator in India on behalf of the British Crown Company share price begins to take centre stage in both the economic and political fortunes of the British Empire 1697 Spitalfields weavers Battle of Plassey, June 1757 Boston Tea Party 1773 Historical Background

9. Adam Smith: To establish a joint stock company, however, for any undertaking, merely because such a company might be capable of managing it successfully; or to exempt a particular set of dealers from some of the general laws which take place with regard to all their neighbours, merely because they might be capable of thriving if they had such an exemption, would certainly not be reasonable. To render such an establishment perfectly reasonable... it ought to appear with the clearest evidence that the undertaking is of greater and more general utility than the greater part of common trades.... The joint stock companies, which are established for the public-spirited purpose of promoting some particular manufacture, over and above managing their own affairs ill, to the diminution of the general stock of the society, can in other respects scarce ever fail to do more harm than good. (Smith 1776 [1981]: Book V, Pt III, Art 1, para. 36: 757) Karl Marx: Company managed by obstinate old clerks and like odd fellows (New York Daily Tribune 1858) Historical Background

10. Example 2: British Broadcasting Corporation (1922) In exchange for monopoly rights (or near monopoly rights) and limited liability status, through awarding of charters, service for public purposes expected Crown/Parliament retains right to revoke the charter Periodical renewal of charter Historical Background

11. The rise of modern corporate limited liability Functionalist account of orthodox business history (e.g Easterbrook and Fishel 1985 and 1991) Nexus-of-Contract and Collection of Asset Approaches Legal and political impediments to economic efficiency and technological requirements gradually removed in order to Facilitate the mobilisation and concentration of savings for investment (modern investment markets) Broaden and encourage the supply of business skills Lower and control risks and uncertainty Make investment projects independent from individual life-time of entrepreneur

12. The rise of corporate limited liability Liberal/Liberitarian critique (van Eeghen, Rothbard): Accepts many of the economic arguments Entity status inherently applies to state institutions and is linked to presumed common/collective/public interest Granting right to incorporation to private individuals for pursuit of own interests violates principles of liberty and the rule of law: Separates rights from responsibilities for shareholders and management Private Ownership rights for impersonal entities (individualism) Fear of promotion of speculation and concentration

13. The rise of corporate limited liability Political economy account (e.g. Ireland 2003 and 2010): Predominant role of rise of rentier interest (post industrial revolution) Early legislation (free incorporation) driven by protection of rentier shareholder interest from fraud (1844 – 1856/62): Search for good returns by rentiers Resistence to jettison law of partnership Avoidance of and resistance to competition

14. The history: The rise of corporate limited liability Political economy account: From literal share to right to profit From limited liability for passive partner to general limited liability From partly paid up shares to no liability and separation from management (right to revenue, external to production processes) Separate personality (Salomon Case): extension of incorporation to sole traders, shareholder liability secondary From Salomon v Salomon & Co Ltd to parent companies as separate entities

15. The role of legal changes: Shift to general limited liability and free incorporation since mid 19 th century 1720: Bubble Act (UK) declares common law companies with transferable shares a common nuisance and prohibits trading in shares of unincorporated (un-chartered) joint stock companies 1886: US Supreme Court decision to grant corporate personhood 1897: Salomon vs Salomon in the UK De-mystifying corporate limited liability

16. 1816-1849: Different forms of LL for corporations introduced in most US states 1844: Companies Act, UK, still emphasises unlimited liability 1855 - 58: Introduction of LL for UK companies 1862: Companies Act: Extends LL to all companies of seven or more members with virtually no other conditions attached. 1866/67: Financial crisis in UK attributed to LL and irresponsible company foundations, leads to 1867 Select Committee on investigation into LL. 1886: Santa Clara County v. Southern Pac. R. Co 118 U.S. 394: US corporations elevated to persons under the law with the same rights as human beings. 1897: Salomon v. Salomon AC 22 (H.L.) : The company is at law a different person altogether from the [shareholders]..., and, though it may be that after incorporation the business is precisely the same as before, and the same persons are managers, and the same hands receive the profits, and the company is not in law the agent of the [shareholders] or trustee for them. Nor are the [shareholders], as members, liable in any shape or form, except to the extent and in the manner provided for by the Act [Companies Act of 1862]. 1892: Gesellschaft mit beschränkter Haftung (GmbH) introduced in Germany, gradually adopted in Austria, Eastern Europe, France in the first half of the 20th century. 1931: LL introduced for the first time in California, US. De-mystifying corporate limited liability

17. 1886 US SC: Santa Clara County v. Southern Pac. R. Co 118 U.S. 394 (dispute re: railroad taxation) Private corporations are natural persons under the US constitution with all the rights and protection granted to human beings by the Bill of Rights. Invoking the Fourteenth Amendment of 1868 to protect the rights of freed slaves, in effect extending the legal recognition of freed slaves as free human beings to private corporations. Court Justice Morrison Justice Morrison Remick Waite: The court does not wish to hear argument on the question whether the provision of the Fourteenth Amendment to the Constitution, which forbids a State to deny to any person within its jurisdiction the equal protection of the laws, applies to these corporations. We are all of the opinion that it does. Subsequently used to lobby for extension of right to free speech and to privacy to corporations, and for additional – non-human- rights, such as perpetual existence and the right to own others of their own kind. De-mystifying corporate limited liability

18. 1897: Salmon vs Salomon (UK), (1897, A.C. 22 H.L.) Liquidation of Salomon & Co (Boot manufacturer): 7 shareholders (legal minimum requirement) : Mr Salomon (20,001 shares) his five children, his wife (each one share). Was Mr Salomon mainly the managing director, main owner- shareholder or a creditor of Salomon& Co (holder of debentures and shares)? Trial judge decision against Salomon (for fraudulent abuse of principal of free incorporation and general limited liability) and in favour of creditors Overturned by House of Lords on grounds of Company Act of 1862 Lord Macnaghten, one of the three Law lords in charge of the case, noted: For such a catastrophe as has occurred in this case some would blame the law that allows the creation of a floating charge. But a floating charge is too convenient a form of security to be lightly abolished. I have long thought, and I believe some of our Lordships also think, that the ordinary trade creditors of a trading company ought to have a preferential claim on the assets in liquidation in respect of debts incurred within a certain limited time before the winding-up. But that is not the law at present. Everybody knows that when there is a winding-up debenture- holders generally step in and sweep off everything; and a great scandal it is. De-mystifying corporate limited liability

19. Popular opposition to general limited liability into 20 th century Fears of encouraging excessive speculation, rendering credit provision more difficult and promoting fraudulent investment schemes By 1885, only around 10 % of important British firms had taken advantage of incorporation with limited liability, and by 1900 fewer than 100,000 UK Ltd companies had been formed. After 1985, fast proliferation to over 2 million registered limited liability companies in the UK Western Europe even slower in adopting and generalizing free incorporation and limited liability In the US, where limited liability spread earlier and more rapidly, important exceptions from this rule have remained in place to this day. De-mystifying corporate limited liability

20. Rise of corporate power According to the World Federation of Exchanges (WFE), total domestic market capitalization (a measure of corporate size based on share price times number of shares outstanding of publicly traded companies) was US$ 61 trillion at the end of 2007. According to World Bank estimates World GDP in 2007 amounted to US $ 54.3 trillion. In other words, holders of shares (directly or indirectly through insurance companies, pension funds, open-ended mutual funds, etc.) owned 1.12 times the value of world production in 2007.

21. Rise of corporate power Just short of half of this stock market wealth is concentrated in the US. Around 25% of this stock market wealth is held in the EU 15, where between 20 – 25% of households (or around 100 million people) own company shares. Another 15% is held in Japan, and the majority of the remainder in Australia, Canada and Switzerland. Roughly speaking, altogether around 350 million people, or just over 5 % of world population, own almost all of stock market wealth.

22. Rise of corporate power ….. against a background of rising inequalities In all economies for which data is available, between 1-3% of households own close to half of stock market wealth. For example, in France, this percentage was 1% in 2002. In the US, already in 1989 the super rich (with a net worth of more than US$ 2.35) owned over 46% of stock, and the rich (with a net worth between US$ 2.35 and US$ 346.000) the next 44%, with the remaining 12% owned by everyone else (Wolff 1995).

23. Rise of Corporate Power The myth of universal ownership Forced capitalist class (Strine 2007): Employees who are deprived of access to defined benefit pension plans and other public benefits with little choice but to invest in the market and who have to do so primarily through intermediaries. It is these intermediaries, and not the forced capitalists who determine how the latters capital is put to work and how the mountain of shares owned for their benefit it used to influence the management of public corporations.

24. Rise of corporate power ….. against a background of rising inequalities World Wealth Report 2007 (Merrill Lynch and Cap Gemini): 10.1 million individuals worldwide held at least US$ 1 million in financial assets (the so-called high net worth individuals or HNWI), with global HNWI amounting to US$ 40.7 trillion and average HNWI surpassing US$ 4 million for the first time. The ultra-HNWI wealth band experienced the strongest growth (8.8% in population and 14.5% in accumulated wealth). Put differently, 10.1 million individuals (or 0.15% of world population) own the equivalent of around 35% of the worlds capital stock (assuming a capital coefficient of around 3 and $55 bn World GPD for 2007)

25. Rise of corporate power ….. against a background of rising inequalities World of Work Report ( 2008): Continuous decline of the wage share relative the profit share across most regions of the world, including a 9 percentage points fall between 1985-2005 in advanced economies. The income of the 10% richest households grew faster than that of the 10% poorest during that period, meaning that high-income groups benefited by far the most from expansionary growth episodes since the early 1990s. For example, in the US alone, 1% of American citizens in 2006 received the highest share of adjusted gross income for two decades, and probably since records began in 1929 (Wall Street Journal, 23 July 2008, IRS annual report 2008 ).

26. Rise of corporate power ….. against a background of rising inequalities Widening gap between firms executive pay and average employee pay is a driving factor of rising inequality. In 2007, CEOs earned, on average, between 71 and 183 times more than the average employee, with the highest paid CEOs in the US. And while CEOs in Hong Kong (China) and South Africa, for example, are paid much less than their US counterparts, their compensation still represents between 160 and 104 times the wage of the average worker in these countries. Even average executives earn between 43 and 112 times as much as average employees. (WWP 2008: 17)

27. Over the last ten years, the ownership of an increasing number of nuclear plants has been transferred to a relatively small number of very large corporations. These large corporations have adopted business structures that create separate limited liability subsidiaries for each nuclear plant, and in a number of instances, separate operating and ownership entities that provide additional liability buffers between the nuclear plant and its ultimate owners. The limited liability structures being utilized are effective mechanisms for transferring profits to the parent/owner while avoiding tax payments. They also provide a financial shield for the parent/owner if an accident, equipment failure, safety upgrade, or unusual maintenance need at one particular plant creates a large, unanticipated cost. The parent/owner can walk away, by declaring bankruptcy for that separate unit, without jeopardizing its other nuclear and non-nuclear investments.. ( Report prepared for Synapse Energy Economics by STAR Foundation Riverkeepers, August 2002 ) Corporate Group Liability

28. Rise of corporate power ….. against a background of slowing growth A near halving of the growth rates of world output from an annual average of 4.8% in 1960-1980 to 2.9% in 1980-2005 A reduction of the growth rates of labour productivity from 2.5% to 0.8% for the same periods, respectively. …not to mention the global financial crisis

29. What can be done? Whose liability is? Unlimited Shareholder Liability? Restoration of the free market? Ineffective Formal equality Enterprise Analysis (economic reality of control, integrated management) and presumption of Control (statutory approach) for group liability issues Corporations = social institutions Less rights for shareholders Take separate entity more rather than less serious

30. What can be done? Whose liability is? Sectoral approach to risk management: Who shares the losses? Self-regulation of the rentiers versus Balance of Rights Regulation of international production and finance chains: New forms of surplus appropriation Banking and Finance Mining ICT Biotech Retail