Unlimiting Corporate Liability

I read a really interesting article this morning regarding corporate liability that got me thinking. The premise of this article, and others I have read making the same argument, is that a free society makes everyone responsible for the consequences of their own conduct, and that should include corporations and their shareholders. In other words, you personally could not escape liability for dumping toxic waste in your neighbor's swimming pool, so why should you be permitted to legally do so through a corporation.

As is stands currently, corporations have the big government protection of limited liability. This means that if a corporation puts a dangerous product on the market and someone gets hurt, the victims have recourse against the corporation itself and corporate assets. The shareholders of the corporation, however, are shielded from liability behind what is commonly referred to as the "corporate veil." There are instances where the veil can be pierced, but I will not bore you with legal mumbo jumbo here.

Conceptually, it is hard to imagine holding the thousands of shareholders of a huge public company liable for wrongs committed by the company, so let's discuss the point in the context of a smaller private corporation. I make great widgets and decide to make it a business venture. I start a company and choose the corporate form (as opposed to a partnership) for my business structure. The corporation starts with my money and, ultimately, I get money from some friends and the business takes off. Along the way, we discover that there is a flaw in the widget design and every 100th user of the widget is going to lose a hand. There are so many widgets out there, however, that we would go out of business trying to recall them so we decide not to disturb the status quo and we hope for the best.

Here is where the legal considerations kick in. Under current law, I am not personally liable to the people who will lose a hand. Indeed, if there are enough lawsuits and the company's financial health is threatened, we can file bankruptcy and start over. There is no legal incentive for me to fix the problems since the law allows me to file bankruptcy, walk away with my bonuses, etc. and start a new corporation tomorrow that goes on manufacturing widgets.

What if the law was different? What if I was personally liable to the people who lost a hand? As between the one-handed person and me, fairness seems to dictate that I should accept the liability since it was my company and the accident was caused by an error in the product I created or funded. If someone drives my car and gets in an accident, I can be held liable even if I wasn't there. So that is an incentive to make sure you don't let your drunk friend take your car. If I had personal liability, wouldn't there be greater incentive to run to the top of the mountain to tell people to stop using the widgets? To correct the design flaw and replace the old ones?

Now extrapolate this scenario to the big, publicly held corporation. Everyone voluntarily chooses to invest their money in a corporation with the faith that the leaders of that corporation know what they are doing and will make the shareholder some money. The laziness begins with that faith. Because of limited liability laws, shareholders aren't concerned if you cut costs by paying female employees a fraction of what male employees are paid; they aren't concerned if you dumped mercury in the pond as the cheaper alternative to legal disposal; and they aren't concerned if the success of your business necessarily depends on war and strife throughout the world. Most sane people want peace, but if a person is invested in defense stocks, they certainly aren't rushing to see the Iraqi resistance defeated. The longer the fight, the more money they make.

My account looks great, so why should I care if there are increased cases of cancer from my investment? My portfolio doubled last year, so it's not my problem if the company is hiring drunk captains for ships. This is America today. I don't care, I don't want to know, I don't want to think and damn you for trying to make me. I will look the other way with no sense of responsibility to see what a company is doing with my money because I don't have to answer for it. Donors to Islamic charities are supposed to research where every penny of their donations go to make sure they don't end up in the hands of "terrorists" and face the threat of prosecution for not doing so. Why not the same individual responsibility for shareholders?

Republicans constantly complain about people not taking responsibility for their actions. This would be a pretty good start. What do you think?