But… liability! Litigation! Frivolous! Investment!
I’ll get to those objections in a minute. But first, a definition:
A corporation is a fictitious entity granted some of the same rights as human beings by some governments.
The justifications generally given for granting fictitious entities rights are precisely those I mentioned above. People should be able to start businesses without risking losing their homes. There is excessive litigation in our society, and people need to be able to protect themselves. Nobody would invest if they risked losing more than their initial investment.
The last of these objections is the most obviously false: courts used to be able to go after bank shareholders for up to the amount of their initial investment even after they’d lost the full value of their investment, yet banks still got plenty of investment. The situation changed, not because people wouldn’t invest in banks, but because banks became politically powerful.
In fact, all of the objections to getting rid of corporations can be answered the same way: ask yourself who’s protected the most by corporations and who the victims of corporations are. By and large, it is the politically well-connected who are protected by corporations, and it is the politically disenfranchised who are victimized by them.
But government doesn’t, or at least shouldn’t, exist to protect the powerful. It exists to protect the weak. So, beyond the issue of whether corporations protect people from liability to which they should be exposed, we also have the problem of unequal protection: corporations protect those who can afford to incorporate.
“But,” you say, “those are the people who have enough assets that people are willing to sue them!”
Really? Nobody sues grannies on fixed incomes and twelve year old girls?
Bullshit. Corporations sue grannies on fixed incomes and twelve year old girls.
“But those people don’t have assets to lose!”
Bullshit. Granny doesn’t have a house? The cleaning lady doesn’t have a car?
“But people wouldn’t buy stocks!”
Boo hoo. There is no social benefit from having a business with thousands or even dozens of owners. There is benefit to the government, of course, because then people support pro-business policies (which is exactly the reason we got the flavor of limited liability we have in the first place), but the benefit to society is in fact negative, because the same incentives apply to protected shareholders that apply to voting. The costs of keeping track of what a firm is up to outweigh the benefit to the average shareholder, while all shareholders get the benefit if someone discovers wrongdoing. So each shareholder just lets the others take on the burden.
In fact, people do occasionally seek out and find wrongdoing in corporations. But it’s rarely the shareholders. In most cases it’s people on the other end: short sellers. People who own negative amounts of the company’s stock. It was short sellers, not shareholders, and sure as fuck not regulators, who took down Enron.
This is not to say our society isn’t excessively litigious or wouldn’t have too much liability without corporations. But we need to solve these problems with solutions that protect everybody, not just those who can afford to move their assets into corporations. Two changes would solve enough of the problem that insurance could take care of the rest: liability limits and the English rule.
Juries aren’t perfect. The jury system is one of the best institutions ever created, but that doesn’t mean it doesn’t have its flaws. But we can limit the damage juries can do by simply putting an absolute limit on how much a jury can award for various kinds of harm. In particular, we must place a price on a human life. We already do in most cases, or nobody would ever leave the house. We just need to put some value down in the law so we don’t get ridiculous awards like the $250M awarded to a victim of an arrhythmia against Merck, despite the fact that the drug involved had never been shown to have any connection with arrhythmia.
Fortunately for Merck in this case, the case had been brought in Texas, which actually does have liability limits, bringing the total to $26M. There was no “human life” limit involved in this case, though; Texas simply limits punitive damages to “treble damages,” or twice the amount of economic damages awarded. But this goes to show why we need an absolute limit: had the victim had a much higher income, the total damages would have been greater, so there needs to be an absolute cap as well. Any absolute cap would likely be in the tens of millions, so it would not affect the poor at all in a system that limits awards to treble damages.
Across-the-board absolute and relative liability limits might fix things enough to make the second change unnecessary, but I’m still a fan of the English rule. The English rule simply states that the loser in a civil case should pay the winner’s attorney fees, up to the amount that the loser paid for their own attorney fees. Under the American rule, each party pays their own attorney fees unless one party can prove that the other sued them maliciously, something that is exceedingly difficult to prove in the US. Switching to the British rule would limit frivolous suits that never had a chance of hitting the liability limits, because it would encourage someone who knew they could win to go all the way and avoid battles of attrition.
These changes would provide enough predictability that insurance would start to make sense. And insurance would allow shareholders of a corporation to bear the cost of their own protection in proportion to the value of the assets being protected. A small business owner, for example, would only have to cover enough to avoid losing their house, perhaps doubling the cost of their homeowner’s insurance. A banker, on the other hand, might choose to self-insure, giving them a huge incentive to make sure their bank remained solvent.
Charlie Stross lists a bunch more ways the modern American style of corporation harms society in his essay Invaders from Mars. In fact, he blames them for most of the ills of society, and I’m not sure I disagree. It’s definitely worth a read, as are his books.