Ever since Romney said to an audience, “Corporations are people, my friend,” it seems to have bee a hot topic. All corporations have a right to limited liability. This means that all individuals inside the business, executives and shareholders alike, are exempt from personal liability. They also have a right to free speech, are given due process, enter into contracts, and own property. Corporations are entities, not people, but still have the right to all of this.
Now there are two basic defenses of this: 1) People makeup corporations. Because the Constitution protects all people, it must also protect voluntary organizations of people. 2) Giving shareholders exemption from liability gives incentive for people to invest and build domestic industry; keeping the people who make businesses safe from lawsuits will keep the economy on a full employment path.
While I do believe these are legitimate arguments, they are flawed in their cause.
Reasons why this must be changed:
The fact that corporations are the only liable entity is a corruption of the natural state of business. It provides incentive for executives and bankers to be reckless and possibly cause destruction. This recklessness is due to the idea that the corporation is the one that answers to the law, and not the affirmative-voting shareholders or decisive men on a board of directors. This cannot be the case any longer. It leads to atrocities like the BP Oil Spill.
Also, providing investors with safety nets may not be the best of ideas. It allows simple speculation into markets, and enables people to just throw money anywhere. Making shareholders a liable entity would require people to have some form of knowledge on the industry in which they are invested. Discouraging investors, and executives, from pursuing risky business ventures would be overall beneficial for the consumers.
What must be changed:
I discussed this briefly in a response to a comment made by logicallypositive. Justin noted that only some companies have the right to limited liability, and an even more select group have a right to person-hood.
The first thing that must change is one component of limited liability. It must have a practical repeal.
I say “practical” because we should have a system of dual-liabilities. Meaning executives must be liable to lawsuits. Meaning voting shareholders must be liable to lawsuits. But it also means that the company itself, instead of individuals, may be liable to a lawsuit. We are led to believe that we can only have one or the other, when in fact it is very constitutional and utilitarian to be able to have both the individuals and entities subject to liability.It would give class-action suits and individual suits the ability, more so, to hold responsible parties accountable.
The next step, after the aforementioned and major flaw in the system is fixed, would be to reform the whole idea of Corporate Personhood. This was the part I discussed in the link above. Right now, only a select group of companies have the rights of people (own property, enter into contracts, etc.) giving them market advantages. But the solution is rather simple. It involves leveling the playing field. Remove the title and chartering of corporations, and make it so ALL organizations of people may own property as a single entity, enter into contracts, sue others, possess freedom of speech, etc.
Organizations will gain person-hood as they are composed of people, but not give the individuals involved immunity. It also does not make it mandatory for a company to turn to a corporate structure for this person-hood or even use this person-hood. Individuals would still be at liberty to own the property of a business or engage in contracts on behalf of a business. Then, instead of the components person-hood being bundled into one title, they would then be independent and interchangeable components of a business.
This system would be most free, most efficient, and most desirable. Not our current state of “capitalism”. The current system leaves too much leeway for Corporatism, and these are very necessary changes in order to achieve a freer marketplace.