The peerless Izabella Kaminska (@izakaminska) of the FT linked this morning to this Andy Haldane speech, which I’d only skimmed when he made it. The speech discusses the consequences for corporate governance of the way the limited liability corporation has evolved, giving primacy to a narrow view of shareholder value. It cites en passant some terrific books both recent – Anat Admati and Martin Hellwig in [amazon_link id=”0691162387″ target=”_blank” ]The Bankers’ New Clothes[/amazon_link], Colin Mayer’s [amazon_link id=”0198714807″ target=”_blank” ]Firm Commitment[/amazon_link] – and less recent – Berle and Means’ [amazon_link id=”0887388876″ target=”_blank” ]The Modern Corporation and Private Property[/amazon_link] and Schumpeter’s [amazon_link id=”B00DQHN0MY” target=”_blank” ]Capitalism, Socialism and Democracy[/amazon_link].
The speech looks at the historical context of the emergence of limited liability, especially in banking. The need to which it responded was of course the increased capital requirements of the time, the Industrial Revolution getting well under way. With either partnerships of unlimited liability, banks in particular were unable to respond to crises by raising new capital. (Not that it proved straightforward in 2008-9 even with limited liability.) The speech ends with a discussion of potential corporate governance reforms, including clawing back bonuses, and modifying company law to reflect wider stakeholder interests, in addition to shareholders’ interests.
The history made me ponder, however, whether the limited liability public company largely ought to go the way of the megalosaurus? Already the growth of private equity suggests there are other financing channels chipping away at the monoculture. Perhaps when legislators ever get around to doing something, one of the corporate governance reforms needed is to reduce the role of limited liability public companies in the economy.
Meanwhile, I’m reading John Kay’s latest, [amazon_link id=”B00UJD8AS2″ target=”_blank” ]Other People’s Money[/amazon_link], an excellent read which follows up on his short-termism review, to which the Andy Haldane speech refers. A review to follow.
[amazon_image id=”B00UJD8AS2″ link=”true” target=”_blank” size=”medium” ]Other People’s Money: Masters of the Universe or Servants of the People?[/amazon_image]
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These look like great reading.
I just wanted to add a recent excellent book from this western side of the pond ….
The Shareholder Value Myth by Lynn Stout who teaches law at Cornell.
Here’s a summary/interview from the New York Times.
http://dealbook.nytimes.com/2012/06/27/challenging-the-long-held-belief-in-shareholder-value/?_r=0
Are there many industries today as capital hungry as the railways and factories of the industrial revolution?
My guess is capital requirements must be much less, although building aircraft, or investing at scale in marketing like Uber, is obviously capital-hungry. But VCs provide much of the latter and use a listing to get their payoff quickly.
I had a quick flick through Bob Shiller’s ‘The New Financial Order’ (p.234-5).
He speaks of the 1811 general act of incorporation in New York state, which didn’t just allow, but required all investors have strictly limited liability. It actually reduced freedom of contract.
But psychologically it was so important, as people put such weight on (maybe small) probabilities of losses.
But just goes to show how laws formed the monoculture.
Legislating for diversity pretty tricky….
No, I agree. It was just a case of laws privileging a certain kind of structure – which no doubt went on to be trememdously successful – which because of path-dependence may outlive its usefulness.
For a little time now I have thought that Limited Liability has had its day. It is now more honoured in the breach than in the observance. There are some features that might be retained but has become a vehicle of choice for chancers and fraudsters. It needs a radical overhaul to meet modern conditions.
Thanks for this. I’ve long been interested in how 19th century liberals – e.g. JS Mill – could have justified limited liability, given that the assymetry of payoffs in the event of corporate failure seems such an invitation to cheat investors – and this was a matter of wide popular discussion, e.g Trollope’s best seller, “The Way We Live Now”. Remember Mill was pretty down on bankrupts, feeling that the law might have gone a bit soft on them. On looking in his Principles of Political Economy, (Book 5, ch 9 ยง6) I find the argument for limited liability turns on the better quality of published information about them, compared with partnerships
“The class of persons with whom such associations have dealings are in general perfectly capable of taking care of themselves, and there seems no reason that the law should be more careful of their interests than they will themselves be; provided no false representation is held out, and they are aware from the first what they have to trust to. The law is warranted in requiring from all joint-stock associations with limited responsibility, not only that the amount of capital on which they profess to carry on business should either be actually paid up or security given for it (if, indeed, with complete publicity, such a requirement would be necessary), but also that such accounts should be kept, accessible to individuals, and if needful, published to the world, as shall render it possible to ascertain at any time the existing state of the company’s affairs, and to learn whether the capital which is the sole security for the engagements into which they enter, still subsists unimpaired: the fidelity of such accounts being guarded by sufficient penalties.”
That’s very interesting – thank you for the quotation.
“Sufficient penalties” – I remember a New Yorker cartoon of a chap addressing the boardroom: “So there you have it gentlemen. The upside potential is enormous. The downside risk is jail.”