Too bad no one noticed this. It seems that a lot of people here must be getting their business news from the Podunk Examiner. Except for those few who buy big stakes in companies, shareholders, while legally owners, act nothing like owners. Most shareholders know little or nothing about the internal workings of a company. Most shareholders have little or no interest in the long term prospects in a company. And nearly every shareholder can become a non-owner with a single phone call. Lots of “owners” - those who own mutual funds - may not even know they are owners. Conflating a shareholder with a real owner is poppycock. If an “owner” complains, no one gives a crap. (See minority shareholder proposals.) If an analyst - a non-owner by definition - complains, it is big news.
How would you view a person assuming a debt to pay for an education? When I buy a car, I take an economic loss the moment I sign my name and put my entire life on the line the moment I drive off the lot (risk of accident) yet people still buy cars all the time as an investment in their future (it increases their opportunities). When I buy a $20 power strip I risk losing my entire house.
I think you misunderstand my point. The person would sue the corporation, which would be a real a stand-in for all these people. The corporation is responsible for damages. If the corporation cannot pay it, because it hasn’t the assets to sell, or the cash, or whatever, then restitution must be taken from the owners. In a class-action lawsuit, for example, each party gets some small portion of the overall assessment. I think when one of my credit card companies was put on the hook for an amazing sum of money, of which I was entitled about $11. One could imagine a similar scenario in reverse here.
Perhaps. But this doesn’t mean it’s a benefit overall. I don’t believe we’ve even begun to account for the costs of pollution, for example, though it could be we have and it is just that the wrong people paid for or are paying for it. I don’t object to you making profit from an investment; I don’t object to my bearing risk; I object to my bearing risk while you make the profit from that risk. If we cancel your investment with your risk exactly, what we have leftover are externalities that society at large bears (or, in the case of benefits, consumes). It may end up, after all, that shareholders are actually not compensated enough for their risk, but I believe the evidence suggests otherwise.
That said, it is worth pointing out that your statement actually supports the notion that shareholders really aren’t bearing all the risk. When they are, you suggest they wouldn’t invest! But I don’t believe that’s true. Investment may go down, but likely it will be channeled into other forms like the government. (Then the wealthy bear more costs than the poor… oh when will it all end?! 
)
Heh, I agree it says a lot, but I think we’d disagree about what that says.
It’s a good question, but I was just trying to focus on one aspect. A bank should certainly be responsible for its loans for exactly the same reason.
I’m not even concerned about out-and-out wrongdoing. I’ve tried to avoid phrases that suggest criminality, or even criminal negligence, though my example was extreme and towards that end for illustrative purposes. If Ford closes a factory-town’s factory down, I could hardly suggest wrongdoing in the typical meaning of the word, yet it is clear that it is not just Ford and Ford’s shareholders that have paid the price. (Nor was it just them who had reaped benefits.)
We shouldn’t limit it… that’s the point. The whole structure fails to capture incentives correctly. If society bears some of the risks, society needs to bear some of the costs, and society needs to reap some of the benefits. But a corporation’s mere existence is not quite payment for the risks we’re bearing here as non-investors in the cases that approach economic ideals (like perfect competition). Let’s take a commodity like oil which has plenty of fairly identical suppliers/distributors, and then one day some tanker’s captain accidentally (somehow it is an accident, not negligence) slams the tanker into some rock which dumps oil all over the state of Alaska’s coastline. How, exactly, is the shareholders’ loss of their initial investment have anything to do with the costs of this that will be borne by their competitors, the state of Alaska, the people who will help clean it up, and so on?
But if nothing compels them to find this information, like say being responsible, why would they look for it? I’m not trying to make a moral point, my use of words like “should” notwithstanding. Corporations are distortions. I want to correct those distortions.
If I am right, we’re damaging ourselves a lot more than we think we are.
It’s impossible for me to assess exactly how much risk I am taking when I get on an icy road; or what it amounts to by living in the north instead of the south, and so on, but people assume these risks all the time. I have massive amounts of faith in markets that can function correctly, and while mathematical treatments assume things like perfect information, our real-world approximations based on experience and intuition are enough to satisfy me. So investments work regardless of whether any particular investor can accurately gauge or obtain all the information available. But investment behind responsibility shields cannot function correctly without a countervailing force, and if we find out what it is, we may realize that it would be better to just eliminate the corporation after all. (I doubt it for reasons not worth getting into, but eliminating corporations is a convenient shorthand.)
Of course! But this is true for all kinds of stuff you do everyday. I don’t know why investing in some corporation should somehow be immune from responsibility.
Really, the entire economy is made up of things that come with risks above and beyond their price.
Let’s assume you buy a car, but don’t have $300,000 sitting around in case you hurt someone with it. Let’s assume you purchase a gun, but don’t have a spare child waiting in case yours shoots itself accidentally. Honestly, what is so damn special about investment risk that you must be insulated when no one else is?
I have insurance, and it varies based on the type of car I drive. This means that a Mustang Cobra is more expensive than a Honda MiniVan, even if the price at the lot is identical. Insurance raises the cost of the car.
If you insist on making me personally liable for anything that a corporation does that I own stock in, then you will need to write the regulations allowing for an investor risk policy. In addition, you will need to determine how the liability will work. Will I be charged a percentage of the liability based on how much stock I own, or will it be like the courts today where they go after the deepest pockets?
Finally, because I am force to carry insurance for my investments, you have just reduced the return on my investment. This makes it more expensive for the corporations to get investment capital. That means that you have just slowed down the growth of companies, reduced the job creation rate, etc.
All of this happens, yet the only real result will be some new types of insurance companies being created to collect premiums. Exxon was sued, they make payments (and still fight over others). The company still exists and investors returns were impacted by the judgement against Exxon. Your need for personal liability above and beyond that of the assets of the company would have never come into play with Exxon.
cor·por·a·tion (noun) — A collective organization in which profits, risks, and accountability are shared. When business is good, the CEOs collect the profits; when business is bad, the laborers are laid off; and when the economy collapses, the taxpayers pick up the tab.
this is very interesting, and I hope I’ve responded to most of your points-I’m a little in haste, so I apologize if I missed something.
I think your car example can be used to understand a lot–and, unless I misunderstand you, it’s an example of somewhere where you will bear the risk of loss even though other people who may “cause” it in a technical sense don’t contribute. For example:
Let’s say you’re a no-good driver after 4.30 PM. You buy a car (say, on credit based on your job, and you need a car to get to work-so the dealer is in some way “investing” in your use of the car), drive off the lot at 4.28, and crash into somebody else, kill yourself, and put him in a coma.
Should the car dealer be responsible? You acted perfectly sensible, you had a driver’s license, you had a clean record.
He certainly “caused” death and injury by selling you the car. He may even have known that car accidents hurt people every once in a while, and that by selling cars, he increases that risk.
But I assume we agree he shouldn’t be responsible (assuming there was nothing wrong with the car, nothing wrong with you such that a reasonable (or even an unreasonably thorough) investigation would have shown. You ought to bear that risk.
Thanks for the clarification-So using that framework, you’re really arguing that it should come out of shareholder assets without limit when the corp is bankrupt.
But then why should I bear the risk of you going bankrupt? Forget about the corporation–you hit me with your car, go broke and can’t pay the judgment in court. Why should you personally be able to cause harm that’s uncompensated?
Well, I note that pollution takes us away from the OP, which was on the obligation to support employees-and I hope you understand how harm the corporation causes to third parties is a different question from the allocation of return between investors and employees.
But the pollution question is, to my mind, more interesting.
Firstly, as I hope you understand, I don’t argue that a cap on liability is the only reason limited liability allows investment. I think reduction of monitoring and management costs, and especially transferability of interests (and relatedly, ability to diversify) are equally important to allowing investment-and they’re both consequences of limited liability.
Not sure what you mean by this-do you mean then investment will be handled through taxing/spending? that’s even worse… because you can’t sue the government for damages either (sovereign immunity). So you’re just replacing one investor who you can’t sue with another.
This is a pretty extreme position, which I wanted to highlight. Look at the car example I started with–if you really mean to say we ought to hold everyone responsible for all harms they have a part in causing, that’s a consistent, if outlandish position. I’d argue that it would be in effect impossible to adjudicate every wrong-or at least far more expensive than the injury presented.
Further, there’s a fairness issue-as I highlight in my example-as we sometimes see a situation where one person is a clear wrongdoer, and the other is blameless but involved–and you’d in effect divide responsibility by ability to pay, not responsibility for the act that causes harm.
do you think the employees here should be able to sue the shareholders? what about if Ford fires an employee for cause? He’s equally out of a job.
If so, then in effect, there’s no incentive to close a plant–even if that plant is horrendously inefficient-as the shareholders would have to pay for the salaries of the workers (to pick one part) either way-either directly, if the plant is open, or in recoveries to the fired workers. We’d still have oil lamp factories–as even though it’s more efficient to close them down, the lightbulb plants would probably not employ the same workers .
But you miss my point. What if the cost of getting that information, and monitoring is much greater than the harm prevented? I’m almost certain that’s true if we look to compensate on the level you seem to want to.
But it’s possible to assess these risks far better than for a corporation. I know about how good a driver I am-I don’t know what the roads are like, but know I can look at them as I go along and figure out what speed to go. It may not be exact, but it’ll be close.
I can’t possibly figure out how much of a risk there is Microsoft will be sued for a trillion dollars, what risk there is that it’ll go bankrupt after a lawsuit, or decide to close a plant, or have been using toxic chemicals in a factory twenty years before I bought stock that I’ll own when the damage is discovered.
Well, but again I contend that there’s no way you or I can get a real-world approximation of the risk you argue we ought to be responsible for.
And a market doesn’t work if it doesn’t allow intelligent action. If I can become liable for harm you cause after “investing” by renting you my car, because no reasonable or even unreasonable amount of research into your life can figure out if you’ll go blind tomorrow and hit five pedestrians, I won’t take that risk.
Ironically, there, scale matters. If I rented ten million cars, I’d have a good sense of, on average, how much harm doing so would cause.
But I don’t know much about you, and I only have one car. I can’t hedge the risk-and hence, I’m not going to rent you my car, when the efficient answer may well be the opposite (presumably, most people rent cars to do something that creates more benefit than the cost of renting, and few people will suddenly go blind).
Well, the general rule is that I am not responsible to pay for your acts. So your argument is really the one that violates the general rule-as you’re asking me, as a shareholder, to be potentially liable in full for the acts of a board of directors I don’t know.
we deal with risk allocations every day. If I sell a car to you, and you’re a maniac who runs people over, we don’t hold me responsible for your accidents if I don’t know about it. Another example would be insurance.
And if you’re really arguing that the economy runs on unprotected risks, that’s true. That’s because in many such cases, we believe the risk is reciprocal. In fact, this could be argued here-a corporate bad act causes X harm uncompensated by assets. But overall, shareholders are also protected from X loss. As many people own shares, on the whole, one might argue that people are protected from loss to about the same extent that they suffer losses due to others protection.
I think you underestimate immensely the damage caused if we don’t have a stock market or a way to transfer capital around to where it’ll do the best good. I think the fact that limited liability makes shares easy to sell/transfer is enough on its own.
And I think that’s what makes it special, were it to be special. I also think this kind of limitation isn’t special-you may want it to be, but my bank isn’t responsible if I hit someone with the car they have a loan on.
To your specific examples, it’s your risk of loss if you crash your car. You may have to worry about the solvency of your insurance company-but that’s one entity.
Do you have any idea how many GE shareholders there are? In order to make an informed decision, you’d at least have to study their general risk profile (and how it changes after they sell stock to other people. That’s not possible to anywhere near the same level of accuracy-which would lead to more market failures.
Who needs the shareholders anyway ? Why don’t we just set up government corporations to serve our needs and we all can elect the officers of the corporations, and all employees can be part of one powerful civil service union.
Sorry if I wasn’t clear, but right = works. Set up you company, and if it works, then great. If it doesn’t work, then you need to re-evaluate your business plan.
:dubious: I just sold stock today in a company I was an “owner” of - a very small owner - sold enough to write off my $3000 in losses against ordinary income and offset gains from earlier this year. The company has not yet laid off a single employee - despite their stock being worth 20% of what it was a year ago…
Decent company - management is really trying to do right by their employees and pull through this with minimum job loss - but their investors have already taken it in the shorts - and investors don’t see a severance check or unemployment (though I guess I do get to write off some of my loss…)
There’s a lot of excellent points raised in this thread, and I apologise for being absent for most of it (time differences and all that).
There was no Employee Share Purchase programme in place at my previous job until shortly before I resigned; not that anyone who worked there could afford shares in the company anyway. Basically, as staff, we didn’t have the opportunity to buy shares unless we had multi-thousands of dollars of spare money available (which none of the people I knew at any of the stores in the area did).
And even if we had managed to get the money together for some shares, we’d still be “minority shareholders” on the same level (as far as the Board of Directors was concerned) as the Crazy Cat Lady in that Futurama episode who wants to pass a resolution to the effect that her kitty smells nice and is good.
I’m not an Economist (Dammit Jim, I’m an Historian, not an Economist! ;)) but I understand the purpose of raising a share float when a company starts; the company issues shares in itself for money, the company gets cash, the investors get part ownership (ie the power to vote on how the company should be run, who’s in charge, etc) and everyone’s happy provided the loot keeps flowing.
The problem I think arises with Really Big Companies that have been around for a long time (Coles-Myer/Wesfarmers, Woolworths, BHP Billiton, Qantas, Optus, and so on) who make vast sums of money (for the most part) and would continue to make vast sums of money from their everyday operations if every single shareholder in the company vanished tomorrow.
I mean, shares in some of these companies can run to $30 or $50 each, and yet they were probably released at $1 or $2 or $5 each some years ago.
In effect, the shares have become an expensive version of any other collectible item, albeit one that annually pays a certain number of cents per unit owned. The company itself doesn’t benefit from the fact their shares are $30 each, and if anything, that makes it harder for the company to buy back existing shares in the future.
Those sorts of companies are basically encouraging short-term investment of the kind which, in my professional experience, negatively impacts on business operations and staff- the people who buy the shares in the hopes they will increase in value so they can sell them for a profit are not “owners” of the company, IMHO. They don’t care if the company is still there in 20 years, or if the staff are well-treated, or if the Board of Directors plays tennis with puppies for balls, as long as they, the investor, have made more than they bought the shares for and can flick them off to someone else before the value drops (as the market cycle changes).
Before anyone thinks I’m some kind of Tyler Durden-esque neo-anarchist Anticapitalist, I don’t have a problem with the idea of companies or shareholders; I just think the system should be rejigged so that shareholders can’t jump up and down and demand even more obscene profits when the company is already making plenty of money; and certainly not when meeting profit forecasts to please the shareholders negatively impacts the people who are doing the actual work in the company itself.
I’m quite happy with the idea that a shareholder’s liability in the company is limited to whatever their shares are worth (ie, if the company goes belly-up, you lose all your shares, thanks for playing) and don’t think that side of things needs to be changed- after all, start-ups need to get their money from somewhere. But it’s (say) 10 years down the track when said corporation is making lots and lots of money and the shareholders are demanding it make even more money (I’m reminded of that episode of Duckman with Baron Von Dilweed’s TV Shopping Empire; its motto and governing principle was "Making More To Make More") that I think it’s time for a focus shift away from the investors (who have made their money back) and towards the people who actually work for the company, to ensure its continued prosperity. That doesn’t mean the end of dividends or share trading, just that the shareholders understand that the people who actually work for the company come first with regards to getting pay rises and investments in new stores or technologies etc, and then whatever is left over after that can be used for community works and shareholder dividends etc.
No, you don’t want to start a company where the shareholders don’t jump around wanting extra profit. You want to use force to compel them not to want extra profit (which they have every right to demand, being the freaking *owners *of the company). If you think companies in which the shareholders demanded a smaller share of the profits would be more successful (or more whatever), then you can either start a company in which that is the policy or encourage them to do the same. You, in my opinion, do not have the right to force them to do so. If this is not what you want, then what do you mean by “rejigged”?
Remember that no one is forcing these corporations to sell shares to just anybody. There are plenty of corporations that are not traded on the open market, but limited to a certain selection of people.
Valete,
Vox Imperatoris
You have divorced the concept of shares from the very nature of what shares exist for. They don’t just exist for the Initial Public Offering (or “raise share float” as you call it.) They represent the ongoing ownership of the company. I believe you understand the individual words of that statement but you don’t truly understand the core idea behind it. If you did, you would not make nonsensical statements about shares being collectible items. No sane investor thinks of shares as a “collectible item.”
Do you own a home? The “title” to your property is your “share” or “stock certificate”. Or if you have a mortgage then you will have a piece of paper saying your ownership “share” is principle minus the outstanding loan amount. Same concept either way.
It’s incorrect to say that if the company’s share price goes higher to $30 that it doesn’t benefit. It does benefit because the owners benefit. The owners can resell their shares at a higher price. It’s exactly the same as you selling the title to your house for a higher price. Also, if the company is targeted for a acquisition, then its sales price is higher for the buyer (think Microsoft acquiring Yahoo). Again the company benefits because the owners benefit.
By definition, it’s possible to form a company with owners and zero employees. But the reverse is not true – it’s not possible to form a company with employees and zero owners. Owners are not better than employees because of any moral judgment nonsense — owners are the company.
If you want to convince people that the importance of ownership/shares is unfair, please provide logic that’s consistent with both company ownership and home ownership.
You said you don’t like talking economics, but this is not economics jargon. These are everyday concepts that you yourself experience on the “ownership” side as well (your house).
I don’t own a house. Can’t afford one. 
When I was referring to shares as a “Collectible Item”, I was thinking of them in terms of things like Baseball Cards that people hang onto until they’re worth a lot more than they paid, then sell them for profit. Not something that you keep forever and ever and ever even though it’s worth a lot of money.
Home ownership is an entirely different kettle of fish to share ownership, IMHO.
The shareholders aren’t the company, IMHO. The company is the people who work for it. No staff- no company. There are, however, plenty of companies with no shareholders but plenty of staff (Vodafone, for example, is a Proprietary Company in Australia).
When I think of “owning” things, I tend to think of that meaning I can use the item. I can’t use 1 share in Wesfarmers for anything constructive or meaningful in regards to the company itself. I certainly wouldn’t consider myself a part owner of the company because I have 1 share.
No, what I have is something that I might be able to sell later to someone else for more money. So I own the right to sell 1 share of Wesfarmers to someone else. That’s not owning part of a company, and I might as well own 1 Krugerrand since that basically has the same usefulness as 1 share in a huge corporation (more, actually, since I could use a Krugerrand to buy things with based on its gold content).
Getting back toward my original point, I as a potential investor, would rather have less profits but happier, properly paid, not over-worked staff. And if that means that I only get a 24c/share dividend instead of 35c/share, then I’m fine with that. I just wish more people thought that way, but evidently they don’t.
I’m not familiar with Proprietary Company structure.
This wiki page says it requires a shareholder: Proprietary company - Wikipedia
Is the wiki page incorrect?
The idea behind a Proprietary Company, AIUI (from my time at University), is that there’s one (or a very limited) number of Shareholders. Basically, whoever owns (is the proprietor of) the company can pretty much do whatever they like with regards to running the company, with fairly minimal interference from the other shareholders (if there are any).
So, if I started Random Stuff P/L, I could make myself the sole shareholder (to limit my liability in the event of the business failing), or I could say have 5 other shareholders and issue 20 shares. I get 15 shares, they get one each. I can still do pretty much whatever I like to run the business without the other shareholders having a whinge if the business isn’t making as much profit as they like. Well, they can whinge, but since I’d be the majority shareholder I can ignore them if I choose.
Coopers Brewery is a sort of Proprietary Company- the only way to own shares is to be a member of the Cooper Family, and it’s almost impossible for shareholders to sell their shares to non-family members (this is to stop one of the Big Breweries taking them over).
So if a company’s first duty should be to the Staff & Community, not the Shareholders, how are you going to get any shareholders? Because it seems to me they would just take their money elsewhere and then you would have no company, no shareholders and no problem about who gets first dibs on the inexistent pie.
In an ideal world that would just be how the system worked so there wouldn’t be any point taking their money elsewhere because it’d be the same there too.
Of course, we don’t live in an ideal world so I can only suggest that “Ethical Investors” who still want a respectable return on their investment but without the human or environmental cost might be attracted to such a company.
Small firms in America employ over half the private sector workforce. More than 99% of U.S. businesses are “small”. Why would anyone want to own a business if they weren’t allowed to put their own interests first? I sure as hell wouldn’t. I’d close down immediately and get a job somewhere where my interests come ahead of the people who invested hundreds of thousands of dollars into getting their business profitable.
I don’t see why we’re limiting the new rule to employees either. Maybe owners of profitable businesses should be obligated to give refunds to customers when they’re profitable. Or we could start paying automatic bonuses to our suppliers, since we made money off of the stuff we bought from them. Also, tax rates should be based on how profitable our companies are, so the government can get a higher share when times are good.
Seriously though, why would employees get any higher priority than a company’s customers or vendors or the government? The reason business owners’ financial interests come first is because we own the company and our employees, customers, and suppliers do not.
The point I’m making is that I don’t really think most shareholders actually “own” (or should be considered to “own”) the business they have shares in, IMHO, unless they bought shares as part of the IPO or have a lot of them.
Why not? They certainly don’t have a controlling interest in the corporation, but they certain “own” it - and if the population of small and medium shareholders get together, they can force change - this happened to Disney a few years ago (the small and medium shareholders did loose the vote to out Eisner, but the amount of pressure they created caused the same end - a little slower).
Moreover, I own my twelve shares of Microsoft - and while I’m not going to use those twelve shares to convince Ballmer that Vista sucks (I think he’s figured that out by now) - they are mine. I can sell them. I can keep them. I’m entitled to the dividends on them. I get to file my proxy vote each year.
I’ve had the fortune to work for a medium sized employee owned corporation before. And that isn’t exactly roses either. The employees are more concerned about protecting their own jobs today than the long term viability of the company - and they refused to automate. Eventually, they were losing money and forced to sell the capital to a management group - when all their competition had automated and could lower prices, they had to match. Management company came in, automated, and laid off half the workforce and sold them to one of their competitors. With the number of cow-orker stories we see around here, I’m not thinking a employee run company is going to be an automatic success story.
Generally, once you hit that point and there is much smaller risk - the growth is out of the stock. People who purchase the stock hold onto it because it will meet market, pay some dividends. When you own stock like that, you are owning because it provides a base portfolio of fairly normal returns - no one is seeing great returns on shares of Coke - and no one has seen great returns on Coke in years.
Right now we are in a strange situation - there are some nice dividend paying stocks - pharmaceuticals come to mind - that if you buy them now, and they keep paying their traditional dividend (and companies try to not lower their dividend), you’ll make 4 or 5% in dividends alone. That’s actually a pretty good deal.