Large corporations do not emerge naturally, because the accumulation of
risk is too scary for anyone to contemplate. They were made possible when
the governments established limited liability laws to protect business
Limited liability laws have allowed corporations to operate on an
enormous scale, because individual shareholders are not accountable for
the corporation’s debts or losses. Although these laws have fostered
business, they are immoral, because they transfer risk of bad decisions
from those responsible to the innocent. Unlimited profit with limited
losses sounds great, but is morally flawed.
When governments pass limited liability laws, they are attempting to do
something they do not have the power to do. Liability can only be removed
when someone pays the price. Jesus was able to wipe out the liability for
sin, because he paid the penalty on the cross. Governments attempt to wipe
out liability by simply decreeing that it will be limited. They do not
have that power, because they are unwilling to pay the price.
Government laws do not eliminate the liability for business losses,
they just shift it to other people. When a limited liability company goes
broke, the owners walk away with limited losses. The rest of the losses do
not disappear. They are borne by the creditors of the failed company. The
clients and employees of the failed company have to bear the cost, even
though they acted in good faith.
Limited liability laws foster bad decision making by encouraging
excessive risk taking and short-term profit making. Businesses that run
large risks can earn big profits without worrying about the risks.
Shareholders can earn enormous dividends from a company that takes
excessive risks, but limit their losses during the bad years that usually
follow. Unfortunately, the losses are not eliminated. The losses are just
passed to other businesses that bring real benefits to society. Everyone
God holds us accountable for our actions. Jesus died on the cross to
eliminate our liability for our sin. He could not wipe that liability by
amending a law, but had to carry the full cost. In the Kingdom economy,
businesses owners and company shareholder will carry full liability for
their losses and liabilities.
Without limited liability laws, businesses would have to be more
careful about the way that they operate. Boards of directors would have to
be more careful in scrutinising the actions of company management. Better
stewardship would result.
Suppose one of you wants to build a tower. Won’t you
first sit down and estimate the cost to see if you have enough money to
complete it? 29 For if you lay the foundation and are not able to finish
it, everyone who sees it will ridicule you(Luke 14:28-29)
If investors bare the full costs
of any failure, they will estimate the costs and assess the risks very
carefully and make better business decisions.
The “Too Big to Fail” banks were created by a combination of
limited liability and government financial regulation. The rot set in when
they switched from being partnerships risking their own wealth, to limited
liability companies risking other people's wealth. The shareholders of the
investment banks and hedge funds who have taken enormous dividends would
have put far greater constraints on their mangers, if they knew they were
liable for all possible losses of their companies. The profits that they
took in the good times would no longer be sheltered in the bad times.