The Corporate Flaw

Corporations have a few advantages, and one of those advantages – limited liability – has slowly but inexorably also become the greatest flaw of the corporate culture. This means that shareholders may take part in the profits through dividends and stock appreciation but are not personally liable for the company’s debts… or for any crime or action taken in the interest of the shareholders. Generally, the law has also held that a corporate official cannot be held personally liable for an action taken in the best interests of the corporation.

In practice, that means that if a corporate official decides that a cheaper part is in the corporate interest because it will reduce costs and increase profits, so long as the part is not known to be defective, that official cannot be held personally liable if the part fails and causes multiple deaths. This is what happened in the Ford Pinto gas tank scandal or more recently in the 2009-11 Toyota “sticky” accelerator problems.

Over the years, as I noted in an earlier blog, California’s electric utility, PG&E, engaged in numerous unsafe and unethical practices which led to massive environmental problems and practices as a result of groundwater contamination with chromium six, and affected at least 2,000 residents with carcinogenic effects, effectively resulting in the almost total depopulation of Hinkley California, and costing PG&E over a billion dollars. In 2018, shoddy PG&E practices led to the Camp Fire, which destroyed 18,000 structures and killed 85 people, and required an $11 billion settlement with insurers. Yet in more than 20 years of environmental and technical problems, not a single official or executive has been held personally responsible, and now PG&E has filed for bankruptcy because it fears it cannot pay what it owes in damages. Even if it can, none of those executives will be held responsible, and the shareholders, not the executives, will pay.

Drug companies can raise prices to astronomical levels in the name of profits, effectively depriving uninsured or underinsured or poor patients of live-saving medications, and not even the corporation can be held responsible for the resulting deaths.

Financial firms can take incredible risks and nearly destroy the financial structure of the U.S., if not the world, cost tens of thousands of people their homes, and tens of thousands their jobs, and the government bails them out – and not a single executive was personally held responsible.

Talk about risk free! A poor man shoots someone over a few dollars and spends years, if not his life, in prison, while executives make decisions that kill scores of people, and they get rewarded.

Or am I the only one who thinks this is a bit unbalanced?

13 thoughts on “The Corporate Flaw”

  1. R. Hamilton says:

    The duty to the shareholder must exceed any duty to the greater good, lest businesses be saddled with a never-ending list of political correctness requirements (not that the effort to convert businesses into instruments of social planning doesn’t exist anyway).

    If gross negligence or worse directly (not merely by deprivation) resulting in fatalities can be demonstrated, I have no problem with a good old fashioned (after proper due process of course) public hanging of those actually found to have taken the critical acts leading to that outcome. But the tens of thousands of shareholders (doubtless including pension funds and the like, i.e. definitely not just rich people) are NOT coconspirators, and punishing them serves no purpose – unless you really expect all investors to bear the burden of determining which businesses are likely to behave in a manner minimizing their exposure to lawsuits, rather than to provide best return on investment.

    PS not sure where to report website issues, but as of this morning, on desktop Safari (macOS) browser, the mobile version is coming up rather than the desktop version. Using Chrome right now (it still works right). No recent Safari update on my end, so it may be something to do with how the web server decides which to serve out to a particular browser. Not seeing this on another website that I’ve seen alternate desktop/mobile presentations for; cleared cache and cookies for your site, didn’t help.

    1. R. Hamilton says:

      Looks like it’s my browser after all, although nothing I’ve tried fixes it. Another Mac running the same OS and browser version is fine. Even the “Safari Technology Preview” version is fine; and the 13.0.2 update didn’t help either (nor hurt on the Mac that was ok). Stumped for now, but my problem, not yours. 🙂

      1. R. Hamilton says:

        In case anyone else sees the problem, I found the issue: if the Safari window is narrow relative to the content and zoom in use, it may switch to mobile format. A wider window, or less zoom, puts it back to normal.

    2. I never even suggested that the shareholders were the problem. My point is that, in the name of the corporate good, too many executives are essentially committing crimes and there doesn’t seem to be any way to hold them accountable… and, as you’re pointing out, holding the corporation accountable punishes shareholders and not the executives.

    3. Grey says:

      Actually, yes, I do – and it is fair – to “expect all investors to bear the burden of determining which businesses are likely to behave in a manner minimizing their exposure to lawsuits” and if the company fails they deserve to have their shares wiped out. This will cause them to seek more controls on the activities of the companies in which they invest, or not do so at their peril. I’m admittedly surprised it is you of all commenters here in favor of giving a free pass for irresponsible behavior.

      1. But, by the same token, dumping all the responsibility on the shareholders gives executives a free pass for bad behavior. It’s all well and good to talk about “shareholder responsibility,” but when a company has millions, if not tens of millions of shares outstanding, only a huge investment bank or hedge fund can muster enough shares to change management. The New York Stock Exchange alone lists 2,800 companies and averages about 1.5 billion trades a day. Amazon has roughly half a billion shares outstanding, and Walmart has roughly 3 billion. A single share of Amazon stock costs over $1,700; so to gain control of Amazon to change its policies would require roughly $450 billion. For Walmart, just a mere $180 billion. Even to try to gather enough stockholders to do the same thing would cost millions. Shareholder responsibility in large corporations is merely a convenient fiction.

      2. R. Hamilton says:

        While people have a right to consider such things if they wish, changing the system to make it in everyone’s interests to consider such things is IMO unworkable or of far lesser benefit than one might suppose (given the overhead and politicization and corruption and incompetence).

        The devil is in the details, and I think in most cases the least harm is done by leaving it up to individuals to pick how much conscience and awareness they wish to apply to their choices. That means that the overall level of care depends strictly on the level of voluntary participation, and the selection of concerns is diverse and individually driven, and not subject to centralized or collectivist control. It also means that there’s no practical way of knowing what’s in someone’s head, or therefore deciding whether or not to grant them limited protection from liability.

        That’s not to say that there couldn’t be various other sorts of increased enforcement against the worst corporate abusers; but don’t expect to compel the investor to be a good planetary citizen as part of their investment strategy.

        Anyway, the necessary mechanisms probably exist already. Shareholders can sue company officers for failing to exercise their fiduciary duties; and one could probably argue that those include most reasonable examples of responsible behavior.

        You want activism? Be an activist, by all means, but don’t expect to require everyone else to be one, too.

        1. Grey says:

          (re: replies from LEM and RH)

          RH: You say we needn’t “chang[e] the system to make it in everyone’s interests to consider such things” except that is the system that we have right now – no changes needed – you do need to be an activist investor.

          RH and LEM: About 50% of Americans own stocks. I couldn’t find the numbers, but I suspect the vast majority of that 50% consists only of investments through 401k contributions. Those tend to be invested into broad funds, rather than self-directed into individual stocks. Thus, Joe Average likely won’t take much of a hit from the tanking of one stock that may happen to be buried in their portfolio. (NB: A Joe Average who picks stocks is the idiot at the poker table.)

          The rest of the shareholders are LEM’s investment banks and hedge funds (and sadly, pension funds), or put another way, those who exist at the higher end of the range where the “overall level of care depends strictly on the level of voluntary participation” in RH’s post. They get little sympathy from me. If they want to invest heavily into companies where they are unwilling to exert control, then they can sew the wind and reap the whirlwind…

          1. R. Hamilton says:

            I think you misread me. I’m saying I’d rather leave something badly broken than risk the unintended (or in the case of anti-western socialists like the “Squad”, intended) consequences of trying to fix it, except by the simple method of holding individual persons responsible for individual _direct_ acts (not indirect ones like failing to exercise some standard of care with where they put their $$). Or like something as simple as increased transparency (all data for profit margins by product, defective products, other potential risks and liabilities, etc online ASAP…and doubtless folks creating online communities to apply pressure where they think it’s appropriate); the latter would probably do as much to prove that statistics are prone to abuse as it would to remedy anything, but it’d be interesting. (I think that level of transparency, with some adjustments to take into account those who did a more challenging level of work vs those with high success rates at easy cases, would also do much to improve health care.)

            Besides, the hedge fund managers, while they may lose future income if they show themselves to be incompetent, may never take an immediate hit themselves; in general, rich people and businesses always have the means to shift costs to someone else, and trying to prevent that will only backfire badly.

            Conscience should always be an individual attribute; except for gathering for a single event (like a class-action suit), it should never be attempted to instill it into an entire system or society; it has never really worked. Everything that large is corruptible, since a sufficient portion of individuals are corruptible. And principles shift; a system that was once about limiting the power of central government to interfere in individual lives or local government’s domain, seems now to be about equalizing outcomes, notwithstanding that people differ in abilities, drive, integrity, etc.

            Large numbers acting out of their own individual interests are the statistical defense of liberty. Transparency supports that happening in a rational manner. Taking out of circulation only the most egregious abusers takes care of what else can be done by the application of power, with less risk of corruption than more grandiose schemes would have.

  2. Dave says:

    The solution is simple; the top executives of a corporation MUST be held Legally responsible for the decisions that corporation makes. Passing such a Law may be difficult, but I agree with LEM that it is necessary.

  3. Tom says:

    … the law has also held that a corporate official cannot be held personally liable for an action taken in the best interests of the corporation.

    So I rob a bank to support my family (an action taken in the best interest thereof) and I go to jail but businesses (i.e. corporations) can be charged with such actions which are clearly criminal yet the boards and investors cannot be personally liable? The PGA energy supplier going bankrupt does not effect the investors? Do they not loose their investment?

    The financial crash of 2008 seemed to affect a lot of my friends and associates who had retired at the magical ages of 60 and 65 and then found they needed to go back to work to fund their 2008 losses. That is appropriate.

    I was not sympathetic because they were still trying to make excess profit and taking risks … losses are heavier the greater the risk just as gains are higher the greater the risk. In the same way, while I cannot stand paying an expert who turns out to be a dud, if their track record showed they were an iffy choice then you get what you chose not what you paid for: so investors and their boards should not complain.

    Bottom line: I do not care what income someone else gets as long as it is legal and is not at some bystanders (my) expense. When the businesses (investors) are refunded by the nation, then that indicates substandard government and that I do care about, because it affects me and all other citizens who by products and pay taxes to support the nation.

    So I can theoretically get rid of bad government at time of election; but I have to support failed financial corporations and their CEOs who have misused their investments even though I did not personally invest in their scams? The system (law) needs work!

  4. Hanneke says:

    One law that should certainly be changed is the one that says that maximizing shareholder profit should be pursued at all costs, by any publicly traded company.
    Making it impossible by law for companies to pursue a strategy based on anything but short-term shareholder profit is crippling to any company that wants to pursue a moral or ethical course, and take into account the other stakeholders. It also unfairly limits the free marketplace for shares: there are a lot of people who would like to invest in environmentally and socially responsible companies and divest themselves of the more damaging companies, so not allowing companies to freely compete on those metrics as well as shareholder payouts is hindering the free marketplace for shareholders.

    1. R. Hamilton says:

      To do that, I think they should have to disclose up front the premises of their variation from maximizing shareholder profit, and along with results, how those premises were implemented and fulfilled. That way, if an investor had interests other than short-term profit, they’d be aware of what was being offered; and if they didn’t (perhaps because they were looking for short-term trades rather than holding a stock for a long time in hopes it kept going up – nothing wrong with that in principle, even if unpleasant side-effects often follow), they’d know that too.

      I certainly wouldn’t rule out that some flavor (hopefully not too politicized) of responsible conduct might improve longer-term profits. But the concern should always be that if an entity seeks support or investment, it should be non-deceptive about its objectives, methods, and results.

      More information and transparency gives more options, WITHOUT having any central authority dictate how those might be used.

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