Limiting Limited Liability

March 10, 2018
No comments
248 views

What if organisations would pursue value instead of money?

Not only value towards customers and investors but also, and especially, towards its employees, suppliers, the public at large and our environment?

One can debate whether or not that wouldn’t result in an economy that is more in sync with what we look for in life. The accounting system for this approach exists, it is called triple accounting.

There are other recipes though to incentivise organisations to act more responsibly.  One of them is limiting limited liability.

The fiction of legal personality

The legal system underpinning our current economic system is built upon a tremendous fiction. Legal entities like companies are separated from the people owning and working in the organisation.

There are many reasons why this construction came to life.  Probably the most important one though is to stimulate action and compensate for the fear of venturing into something new.

Human beings like you and me are built to avoid too much of a risk. Our limbic brain injects fear when we want to do something that would go against our survival and well-being.

In a way venturing in a new business also goes against this feeling of safety.

What if things go wrong?

To avoid inaction out of fear, limited liability was added to a set of legal entities to stimulate risk. If things go south, one doesn’t need to worry people can take away your house. Investors lose their investment but there it stops.

If people in the organisation make mistakes, only the assets of the organisation can be used to pay for the damages.

Admittedly there are some exceptions in place such as board member liabilities which transcend that principle. Of course, we humans are so creative that we invented a type of insurance for these people to insure for these mistakes as well, basically resulting in the same outcome: you are not personally liable for the mistakes your organisation makes.

There is a lot to be said in favour of this principle. Sometimes though, the principle works against its original reason of existence and becomes an excuse for a lack of morality and decency.

People and businesses behaving unethically to earn a quick buck, shouldn’t they be incentivised more to behave in line with what we all look for?

Wouldn’t that bring more joy and peace of mind to themselves as well?

Can we implement reduced limited liability?

Although the idea may sound appealing in principle, implementation would be no easy feat as the devil as always is in the details.  Two key issues require an answer: what behaviour would trigger exposing people to increased liability?

And as important, how much of your personal assets would be exposed? All of them?

In a humane society we obviously would not want ‘sinners’ to starve or be homeless.

Seizing all other assets like stock, personal savings, second residences and other investments might be a good place to start.

As for the behaviour, defining some practically applicable rules could provide a workable framework:

  1.     Actions that are acts covered by the penal code.
  2.     Acts that infringe trade & labour laws of the markets you sell in.
  3.     Acts that infringe environmental laws of the markets you sell in.

 

By forcing companies to adhere to the laws of the markets they operate in (and not where they are registered), companies will have commercial incentives to stay in sync with the values that underpin these societies.

To put it bluntly: if your company accepts child labour to produce their goods, you can only sell in markets where child labour is accepted as well.

One may argue this kind of framework will have an impact on prices. This may be true but is not necessarily carved in stone: in many industries labour costs are just a fraction of the total production cost, meaning the absolute impact on cost may be limited.

Secondly, a company can also chose to open up its pockets and reduce its profit margins. Societal value over financial profit.

There are some strong supporters of the idea of reducing limited liability. How about Adam Smith, the founder of modern day capitalism?

If one would want to reset the position economy holds in our societies from a goal to a means, limiting limited liability may be a recipe to stimulate ethical business.


Want more?

There is another possibility if you want to start a value-driven business. Use our Happonomy Value Canvas and build your company on the values you cherish the most. Go check it out!


Categories:   Our economy today
Bruno Delepierre

Socially inspired entrepreneur, organizer of TEDx in Leuven, friend of M.I.T. Happonomy alchemist.

Leave a reply