Corporate limited liability (CLL) has been an important theme since the inception of modern political economy. Economist Adam Smith was concerned about the privileges granted to the joint stock companies of his time as demonstrated by his quote below on limited liability of joint stock companies.
'To exempt a particular set of dealers from some of the general laws merely because they might be capable of thriving if they had such an exemption, would certainly not be reasonable.'
Throughout the 19th century, CLL continued to attract the attention of leading economists and campaigners alike, including J.S. Mill, A. Marshall and J. Peele. Ironically, the scientific, intellectual, and political debate surrounding CLL only faded into near oblivion at exactly the moment at which it became central to the operation of large capitalist corporations, towards the end of the 19th and the early 20th centuries. This shift in the significance of CLL from a highly controversial socio-political topic to a seemingly uncontroversial dogma is at least partly explained by the fact that socialism raised more fundamental objections to capitalist property rights, and that, where capitalism was not superseded by socialism, the dominant assumption was that it would operate within the framework of a mixed economy. More recently, the rapid rise of corporate power under the auspices of a neoliberal policy-agenda with global reach has, once again, moved critical questions and discontent with corporate privileges and their lack of legal and social accountability to the forefront of social debates. The role of corporate power in a fast changing global world is today one of the key issues of international diplomacy as well as of the academic study of international law, politics and economics. In particular, the dominant ideology of shareholder primacy in corporate affairs has met with opposition, not least in the wake of spectacular corporate scandals, such as Enron and World.com, but more broadly in response to the increasingly apparent destructive impact of unfettered corporate power on the growth prospects of many developing economies, on the natural environment and on mass social welfare in advanced economies. For some time, the opponents of contemporary corporate power have focused on two main strategies: The growth of local initiatives to strengthen networks of non-corporate organisation and production, e.g. cooperatives, and the promotion of voluntary reforms directed at an enhanced 'corporate social responsibility' (CSR) of large corporations. The latter movement has, in turn, suggested two core approaches to the control of corporate power: The first calls on corporate decision-makers to adopt a practice of 'good corporate governance' aimed at fairness, transparency and accountability. The second centres on the idea of increasing the power of owner-shareholders. Neither of these strategies have proven very successful. While in particular the CSR movement remains popular, doubts about its effectiveness are fast gaining a growing audience (e.g. Christian Aid (2004), Behind the Mask: The real face of CSR, Save the Children and the CORE coalition (2007) Why Corporate Social Responsibility is Failing Children). One reason is that the inherent vagueness of the 'good corporate governance' concept has made it easy for corporate business to turn it from a rallying cry to curb its powers into a convenient marketing tool. Another reason is that the call for increased powers for owner-shareholders, presumably as a means to make large corporations more accountable for the social consequences of their activities, completely ignores a central device on which corporate power is built, namely corporate limited liability (CLL). CLL explicitly exempts owner-shareholders from responsibility for the actions of the companies in which they have a share. That is, CLL establishes a unique legal case for the separation of ownership rights from obligations for a select special interest group. This suggests that, rather than 'good corporate governance' or CSR, it is a critical take on CLL that is key to an effective strategy to reign in unfettered corporate power. Two lines of reasoning underlie this argument:
- CLL constitutes a flagrant and arbitrary violation of the most basic formal principle of legitimacy on which capitalist societies pride themselves – equality of all before the law. It also makes a mockery of the dominant opposition to regulatory intervention into free markets: If regulation distorts free market outcomes and is, thus, harmful to economic prosperity, on which grounds can CLL be exempted from this logic? From this broader perspective of the self-legitimisation of capitalism, CLL represents an unjustifiable exception from basic principles.
- The significance of CLL in contemporary capitalism must be seen in conjunction with the well-known separation of ownership from control in large corporations. Together, these two features of corporate organisation ensure an almost total insulation of a small group of private decision-makers from social control: The manager-directors in control of the use made of assets are accountable only to a special interest group (the owner-shareholders) that, by legal definition, is exempt from any responsibility for the social consequences of the manager-directors' decisions.
Against these background considerations, the programme theme 'Corporate Accountability and Limited Liability' aims at promoting debate and research in three main areas:
- 'Enterprise Analysis': Traditional approaches of treating each corporation as a separate entity, limited only by the cumbersome and unpredictable doctrines of 'piercing the veil', have become increasingly unworkable for legal rules concerning modern business enterprises operating in a global economy. 'Enterprise Analysis' builds on insights from diverse applications of country-specific legal developments and applications to promote a more general concept of enterprise and of its analysis, one that takes account of issues such as effective control and decision-making processes, as well as economic, financial and employee interdependencies and integration. Questions addressed include: Should, as is currently the case, corporations be treated, in law, as persons? How can the parent companies of wholly owned subsidiaries engaged in a part of one and the same business be held accountable for the actions of their subsidiaries? What about partially owned subsidiaries, and those that are engaged in non-core or totally different business activities from those of parent companies? (see, in particular, Prof Kurt Strasser and Prof Phillip Blumberg, Replacing Misused Limited Liability With Enterprise Analysis In Corporate Groups, Paper presented to the Conference "Corporate Accountability, Limited Liability and the Future of Globalization", SOAS, London, 20 July 2007)
- CLL and Social Justice: This sub-theme links existing efforts to improve CSR (see above) to the role and significance of CLL in and for corporate behaviours in the context of their increasingly un-fettered powers at a global scale. If sub-theme (1) fundamentally raises questions about the (legal) definition of ownership and the (socio-economic) definition of accountability and responsibilities, this theme focuses on the impact of limited liability on issues of social and political concern, such as the violation of the principle of equality before the law, the destruction of the natural environment, the limitation of effective employee and trade union representation, and a wide range of potentially harmful social and humanitarian effects, both in advanced as well as in developing countries. Questions raised under this topic include: How central is limited liability to the erosion of an effective representation of non-shareholder interests? How do different national legal regimes of corporate limited liability affect company responsibility and accountability? What changes in these regimes would be required to impose more effective company accountability and responsible investment behaviour?
- CLL and economic development: A standard age-old defence of limited liability holds that CLL is indispensable to economic growth, private investment and innovative activities in market-based economies. Yet, ever since the 19th century economists have also raised essential concerns about the economic viability of CLL. It was argued that limited liability was likely to facilitate sluggish management in a context of the separation of control from ownership, to encourage irresponsible risk-taking and speculation at the expense of society as a whole, and to deter creditors by making equity less risky at the expense of increasing the risk of debt. The questions addressed under this sub-theme include: To what extent has the extension of limited liability legislation to legal company forms other than shareholder companies been beneficial or detrimental to overall economic growth and stability? How relevant is CLL to the financial strategies of global modern business? How central is the primacy of shareholder interest itself to economic prosperity for all? How does CLL affect efforts of catching-up development?
See the 'Downloads' section for research material related to this project, including selected articles from a 2008 special edition of the Cambridge Journal of Economics dedicated to Corporate Accountability and Limited Liability.