[IER] Making Corporations Accountable

[Carolyn Jones]

A think tank for the labour movement

  


How to Make Corporations Accountable

Society needs successful businesses, but today business is taking over
society. It’s as if an over-indulged child had taken more and more liberties
until it is entirely out of control. Everyone wants the child to do well, no
boundaries are set, and before you know it the family is under the thumb of
a teenager gone wild.

So say the authors of a new IER publication, Dr Dan Plesch and Dr Stephanie
Blankenburg of the Centre for International Studies and Diplomacy, School of
Oriental and African Studies. 

How did today’s corporations become so powerful and unaccountable? In this
timely report, coinciding with a financial crisis on both sides of the
Atlantic, with companies collapsing under the consequences of earlier
profit-driven decisions and the taxpayer being asked to bail them out, the
authors place the rise of limited liability at the heart of the current
economic problems. 

While thousands of workers face losing their livelihoods and homes as a
result of the financial meltdown, those at the helm hide behind a complex
framework of law at the heart of which lies limited liability, a concept
giving them in the “corporate person” all of the power and none of the
responsibility.

As the authors note: 
While the mantra of ‘no rights without responsibilities’ is used to regulate
the behaviour of poor people who benefit from social security payments –
from single mothers to the unemployed, from the homeless to the
‘self-inflicted’ sick – ‘The Unaccountable Few’ – shareholders, managers and
directors of corporations - enjoy feudal privileges. 

Limited Liability and the Corporate Person

The report explains both limited liability and the concept of the “corporate
person”. Under the laws of limited liability, if a company fails or causes
damage, the shareholders lose the money they invested but are not liable for
any loss or damage caused by their actions. Under the concept of the
“corporate person”, the company is seen as a separate personality –
independent of its founders, investors, directors and managers. This allows
those who gain most from profits to avoid any liability for the costs
associated with the actions of the “corporate person” – the company! 

Tracing the history of limited liability back to its nineteenth century
roots, Plesch and Blankenburg reveal that the concept of the company as a
person became enshrined in law less through considered policy-making than by
judge made laws. Until then, companies risked criminal prosecution for
violating or contravening the national interest. 

What today is the perhaps most important cornerstone of US corporate law –
the doctrine of corporate personality – was simply announced by a Supreme
Court Judge as a matter of opinion without discussion or legal validity.
Similarly, in the UK the transformation from commercial company to corporate
person was finalised through case law rather than legislation by Parliament

They note that even Adam Smith, in The Wealth of Nations, identified the
problems of limited liability when he wrote: 

total exemption from trouble and from risk, beyond a limited sum, encourages
many people to become adventurers in joint stock companies, who would, upon
no account, hazard their fortunes in any private copartnery

As the authors note, Smith’s concerns were omitted from the praise heaped on
him by free-marketeers with no worries about corporate power. The end result
is that limited liability now threatens the very economic system it embodies
– free-market capitalism. 

According to the authors:
The concerns about limited liability raised in the nineteenth century debate
remain valid – not only have they not been refuted by argument but they have
been confirmed by reality

The harmful impact of limited liability

1. It violates the doctrine of equality for all before the law: Limited
liability raises the interests of a particular group – the rich and powerful
- above the interests of others. It offers unequal protection for the
powerful and their sources of finance on the basis that exemption from the
law may help their business to thrive. By granting the “corporate
personality” the same status and free speech as the individual, it
institutionalises the fictitious notion that individuals and giant
corporations are equal before the law and allows corporate wealth and
influence to “drown out” the voice of ordinary persons. 

2. It promotes speculation and corruption, not economic growth and
innovation: Since the 1980’s when the shareholder mentality really took off
in the UK and USA, world growth rates have fallen from an annual average of
4.8% in 1969-1980 to 2.9% in 1980-200. In the same period, there has been a
slowdown in the growth of labour productivity from an annual 2.5% to 0.8%.
On the other hand, according to figures provided by the authors, there has
been an unprecedented and explosive increase in speculative financial
exchanges and corporate scandals have hardly left the headlines. Such
scandals are facilitated by the complex corporate veil which, as the authors
note, produce Russian-doll-like limited liability companies with one hiding
inside another making it impossible to hold companies accountable for their
actions. 

3. It enriches few but harms many: As the authors point out, limited
liability encourages fraudulent behaviour not only at the scale of ENRON but
in small-scale business too, where the losers are not only creditors, but
first and foremost the employees. When Farepak collapsed, leaving around
120,000 mostly low income people, without their Christmas savings, three of
the owners and directors walked away with at least £882,000 in salary,
consultancy fees and bonuses. The fact that the Directors had used the
Christmas savings as a “piggybank” for the purchase of an ultimately
unsuccessful venture, did not help the savers as the corporate veil and
limited liability is entirely legal. As the authors note, Lord Andrew
Philips, highlighted the immoral nature of such practices in the House of
Lords when he said: “People are ripped off, day in day out by the easy
availability of limited liability for off the shelf companies and the
protections provided for them, and with no real remedies”. 

The result of these harmful practices are highlighted by the authors:
“Despite the enormous wealth in society, there is a sense of corruption,
increased inequalities and social tension, of declining life expectancy and
health in the new “under classes” around the world, of pending environmental
disasters, of insecurity, war and terrorism”. 

International regulation

According to Plesch and Blankenburg, legal accountability through statutory
regulation has to be introduced if economic stability is to be restored.
Appeals to the conscience of the “corporate person” or calls for self
governed “corporate social responsibility” are not working. They have had
their day and have been ineffective and are clearly, as the authors say,
“unfit for purpose” 

Moreover, to avoid capital flight, with companies relocating to less
regulated economies, regulating for legal accountability has to be agreed at
the international level. One solution raised is the introduction of a system
of pro-rata liability, under which shareholders would not only risk their
investment, but would also be responsible for the debts of the company in
proportion to the amount of the company they own. 

Carolyn Jones, Director of IER said: IER has been arguing for better
regulation of company law and workplace practices for many years. This
powerful and very timely report provides contemporary examples of how the
current system protects those at the top while devastating the lives of the
innocent. The range of policy proposals contained in this report aim not to
bail out failing companies, but to bring economic stability based on
fairness, justice and equality.

Neoliberalism and labour law: Challenging the concepts

These ideas will be discussed in more detail at an IER conference in
November – Neoliberalism and labour law: Challenging the concept where an
expert platform of speakers including lawyers, academics and trade unionists
will challenge the legal, political and economic concepts underpinning the
failing neoliberal, free market agenda. 

For more information on this and other IER events and publications visit
www.ier.org.uk <http://www.ier.org.uk/> 

 

 

Carolyn Jones
Director
Institute of Employment Rights
The People's Centre
50-54 Mount Pleasant
Liverpool, L3 5SD
p 0151 702 6925
f 0151 702 6935
m 07941 076245
cad at ier.org.uk

Visit our website where you can buy books, register for seminars and  join
the growing list of Trade Union Freedom Bill Sponsors.

 

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