Limiting limited liability
Via Lawrence Solum, I found this interesting post from Professor Bainbridge arguing that corporations should not be compelled to pay reparations for past wrongdoing (in this case, complicity in slavery). He says
Punish the wrongdoers, you say? Sorry, but the corporation’s legal personhood is a mere legal fiction. A corporation is not a moral actor. Edward, First Baron Thurlow, put it best: “Did you ever expect a corporation to have a conscience, when it has no soul to be damned, and nobody to be kicked?” The corporation is simply a nexus of contracts between factors of production. As such, there is no moral basis for applying retributive justice to a corporation – there is nothing there to be punished.
So who do we punish when we force the corporation to pay reparations? Since the payment comes out of the corporation’s treasury, it reduces the value of the residual claim on the corporation’s assets and earnings. In other words, the shareholders pay. Not the directors and officers who actually committed the alleged wrongdoing (who in most of these cases are long dead anyway), but modern shareholders who did nothing wrong.
This seems plausible. On the other hand, the obvious implication (one that was clearly implicit in Thurlow’s original point) is that the principle of limited liability is untenable, at least in relation to civil and criminal penalties for corporate wrongdoing. The wrongdoers are, as Bainbridge says, the officers and shareholders at the time the wrong is committed, and they should be held personally liable. The law has moved a bit in this direction in recent years, but Bainbridge’s argument implies that it should go a long way further, restricting the principle of limited liability to the case of voluntarily contracted debts.
I doubt that the Professor would want to go that far, but I think it’s hard to make his general case without doing so (there are, of course, more specific defences that might be used in relation to reparations for slavery).
There are a number of counterarguments that might be offered. If you accept strong versions of the efficient markets hypothesis, the share price should discount the expected penalty associated with wrongdoing when it takes place, so that the penalty falls on contemporary shareholders. Since I don’t accept the efficient markets hypothesis (except in the very weak form that information about the past history of share prices alone can’t be used to predict future prices) I won’t push this any further.
A second, more practical, argument is that the collective nature of corporate activity makes it hard to prove individual wrongdoing even when the fact of corporate malfeasance is clear – the current crop of corporate trials is making this point pretty clearly. The options for punishing such malfeasance are therefore rather unattractive. They include extending the law of conspiracy (which has frequently been misused) and expanding the scope of special-purpose provisions such as the US RICO laws (ditto). If there’s no easy way of punishing guilty individuals, it seems preferable to hit the corporation in the only place it hurts – the bottom line.
It’s good that we seem to be getting away from the silly idea that limited liability and the corporate veil represent some sort of fundamental human (or maybe legal-fictional-human) rights. They are 19th century pieces of government intervention, widely disputed at the time by economic liberals, and justified (to the extent they are justified) on the same kinds of pragmatic grounds as social security systems. But it’s still probably best, except in cases of egregious personal wrongdoing to treat corporations as if they were individuals, responsible for their own actions, past and present.