Ritchie on limited liability
Posted by Christie Malry on January 11, 2012 at 10:48 pm
On the subject of removing limited liability:
We should be much more straightforward in saying that limited liability is a privilege to be used for the benefit of society, and with care, and that if obligations to society are not respect then it should simply be withdrawn with the shareholders and not society at large then having the duty to remedy the defect. When should that happen? Let me suggest the following occasions for a start:
1) When excess pay is allowed, as noted above.
2) When accounts are not filed on time, for any reason.
3) When corporation tax returns are not filed, for any reason. Of course these are not public documents now: they soon would be if this was the case.
4) Three months after any set of accounts is filed showing the company to be insolvent unless action to remedy the defect has been taken in the meantime.
Now, shareholders are generally considered to be absent owners. They've plonked down their money in a company and then they basically let managers get on with it. The system of corporate governance has evolved in order to ensure that managers don't simply run off with the money or spend it all on booze and fast women.
The idea of limited liability is to encourage investment. When shareholders aren't worried that they may face future capital calls, they'll be prepared to invest more.
So the idea that shareholders should lose their limited liability because they wanted to pay a superstar director (or other employee) what they think they're worth is totally ludicrous.
The next three are even more idiotic. Shareholders are, as we said, absent. They've delegated the responsibility of running the company to managers. So why should shareholders be penalised if managers screw up by not filing accounts or tax returns or by trading while insolvent? Ritchie's got this totally wrong. Directors are responsible for ensuring a company isn't trading insolvently, and they suffer if they fail in that responsibility. Not shareholders.
And by 'shareholders' we mean ordinary people like you and me, in our pension funds. It's you and me, Ritchie wants to clobber when directors screw up. Doesn't sound so good now, does it?
I can think of alternative and very good reasons why limited liability should be removed from PUBLIC, not PRIVATE, limited companies. The largest reason is that these companies are now too large and powerful and work against the public interest (eg electricity companies, the drinks conglomerates, the banks, etc) all of which now operate in highly concentrated sectors. Removing limited liability from public limited companies will encourage shareholder engagement and produce a tendency for said companies to downsize and fragment. New firms will then be able to enter the market. A more competitive economy will produce more jobs and opportunities and a fairer society, not least because the diminished former giants will lose their influence over Parliament and their ability to usurp democracy through their lobbying activities. The economy will produce a much more efficient and fairer allocation of scarce resources if there are a large number of buyers and sellers and barriers to entry can be minimised. I know this viewpoint is unconventional and unpopular and I am always interested to hear reasons why it is idiotic. Pension funds can always invest their funds elsewhere.