www.dailymaverick.co.za/opinionista/2020-02-06-limited-liability-is-causing-unlimited-harm/ Opinionista • Katharina Pistor • 6 February 2020 Limited liability is causing unlimited harm The stated justification for limited liability is that it encourages investment in — and risk-taking by — corporations, leading to economically beneficial innovations. But we should recognise that sparing owners from the harm their companies cause amounts to a hefty legal subsidy. As with all subsidies, the costs and benefits should be reassessed from time to time. Follow
In a recent tweet
Closer inspection reveals that the problem lies with markets. Under current conditions, markets simply *cannot* price risk adequately, because market participants are shielded from the harm that corporations inflict on others. This pathology goes by the name of “limited liability,” but when it comes to the risk borne by shareholders, it would be more accurate to call it “no liability”.
Under the prevailing legal dispensation, shareholders are protected from liability when the corporations whose shares they own harm consumers, workers, and the environment. Shareholders can lose money on their holdings, but they also profit when (or even because) companies have caused untold damage by polluting oceans and aquifers, hiding the harms of the products they sell or pumping greenhouse-gas emissions into the atmosphere. The corporate entity itself might face liability, perhaps even bankruptcy, but the shareholders can walk away from the wreckage, profits in hand.
Shareholders have been let off the hook in case after case – from the 1984 gas leak
Elsewhere, a lawsuit against members of the Sackler family, which owns Purdue Pharma, one of the companies at the heart of the opioid epidemic, is trying once more to hold the beneficiaries of corporate misconduct accountable. Fearing liability, some family members have reportedly sold
The stated justification for limited liability is that it encourages investment in – and risk-taking by – corporations, leading to economically beneficial innovations. But we should recognise that sparing owners from the harm their companies cause amounts to a hefty legal subsidy. As with all subsidies, the costs and benefits should be reassessed from time to time. And in the case of limited liability, the fact that markets fail to price the risk of activities that are known to cause substantial harm should give us pause.
Worse, this particular subsidy makes little economic sense. Property rights, every economist knows, are meant to increase efficiency by ensuring
So long as shareholders can gain from these externalities, they will defend them. They will fight every attempt to force an internalisation of costs, including the carbon tax that the European Union is currently promoting. Top-down regulation, they argue, is inefficient, because governments cannot possibly identify the optimal tax rate. But if that is the case, why not enable markets to price risk correctly, by removing the distortion that is currently preventing them from doing so?
The liability rules cannot be changed overnight. But changes could be phased in after a transition period that puts everyone on notice. No new multilateral treaty or complicated harmonisation efforts are needed. If just a handful of countries adopted “piercing statutes” and ensured that claimants would have standing in their courts, markets would respond accordingly.
No doubt, shareholders would try to avoid liability by shifting assets to safe-haven jurisdictions, and by lobbying their own governments to protect them with the threat of trade sanctions against countries that do adopt piercing statutes. But the greater the number of countries adopting such statutes, the less successful these strong-arm tactics will be.
In the end, a subsidy that distorts markets and gives investors a licence to harm is not only inefficient. It is a threat to both the market system and the natural environment upon which we all depend for our survival