Says who? The workers in a company are affected more by decisions the company makes. The workers in a company are affected more by lawsuits the company has to defend against. The workers certainly KNOW more about the company than the guy investing through a stockbroker does. The workers have an infinitely greater influence over whether the company succeeds or fails. Company policy affects workers more than stockholders.
Isn’t the whole legal concept of a corporation built around the idea that companies are SEPARATE from the people who own them?
So this is about corporate finance? You’re opposed to secondary public offerings? You realize it’s just a means of raising capital for whatever financing needs the company has, right? Just like the initial public offering is? Why do you feel one set of owners’ financial interests are less important than the other? They’re not even separate classes of stock - so thanks to our secondary stock market you’d have no convenient way to tell who bought shares at the IPO vs. some other time.
What I’m still not clear about is- are you suggesting that morally they aren’t owners or proposing a plan where legally companies can only issue equity ownership interests in it one time and, after that, they can only sell worthless securities to people dumb enough to buy them? If you’re specifically trying to kill secondary public offerings, all you’ll do is cut off an efficient means for raising capital. I wonder how you feel about private equity placements by private companies. What if a private company has a year long period where they raise $5mm from a number of investors. Can they not do another round of financing without the new investors being classed as non-owners?
It’s certainly separate entity for purposes of legal liability. It’s also separate entity for purposes of taxation.
However, the very existence of the company is based on its owners. No owners, no company.
Try this mental experiment: imagine some “employees” get together to create a company. They file the paperwork/charter with the govt to create the company entity. Well by definition, those “employees” are now “owners” of that company. Please look at the filing paperwork (download the PDF from any govt website) and see if they are asking for names of owners or names of employees. Like I said, no owner means no company.
I’ll clarify my original statement so that it includes shares purchased as a Public Offering by the company, but not shares purchased by third parties from the original purchasers. So, John Smith buys 100 shares as part of the IPO and can claim to “own” whatever percentage of the company those shares represents. Three years later, John sells those shares to Jane. Jane should not, IMHO be able to claim she “owns” that percentage of the company. She owns shares which might be worth $X now and will hopefully be worth $Y in the future, but the company itself gains no advantage from her having those shares; why should she be telling them how to run things when she’s not the one who put the money up to get them started in the first place?
Insurance accounts for the expected cost of owning a car. It does not make it more expensive. It means you’re not accounting for the additional risk properly if you think insurance makes a car more expensive.
The company does gain an advantage - or rather they gain the advantage from the shares being in existance and readily tradeable.
Company use secondary stock offerings to raise capital. If the stock isn’t readily tradable, then its much harder to convince people to by that stock.
Companies use stock as part of merger and acquisition strategies. You might buy a company by doing a stock swap - their owners get shares in you while you get them…
They also use stock options, grants and ESOPs to reward employees or as part of a total compensation package. In many companies this goes down to the lowest level through the ESOP. Once again, if my company offers me an ESOP, it doesn’t do me any good to take advantage of being able to buy the stock at a discount if I can’t turn around and sell it.
If the company gained no benefit from Jane owning the stock, they wouldn’t give a damn when their stock price went into the toilet. The fact that companies run around like chickens with their heads cut off trying to please analysts and keep their stock price high tells you that they are getting a benefit…and it just isn’t the executive options (though that is one of the motivators - and probably a poor one).
No. The owner is responsible, the same way shareholders own a stake in the company and therefore have a stake in culpability. The interesting question in the car example is what this would do to banks, who own a car on in a loan, but then, that’s why banks require insurance on the vehicle.
Correct, though I am not perfectly inflexible about the “without limit” criterion.
Well this is just life. Shit does happen. We set up systems to try to compensate for that risk, but it happens. People default on loans, so I pay interest to compensate the credit card company for that risk. People sometimes cause a lot of damage with their vehicles, so insurance rates are set accordingly across the board.
I do, it was meant to be an example of how the costs are not wholly being borne by those assuming the benefits. It is making this alignment sensible (to me) that is my proposal.
Limited liability is important in a lot of ways, especially to manufacturuers. Manufacturers must make a product that has forseen normal and expectedly abnormal use to limit their liability, even though ownership has transferred. Limiting liability in cases of ownership also has its place in practice. If I loan you my car for a trip to the store and you get in an accident, you have some liability there. (My liability depends on my insurance policy.) So while ownership is a bright-line example, it is clear that in practice it is not a particuarly good one. That said, the arguments you are making revolve around all the costs that come from liability. Putting a shield up in front of an investor does not eliminate liability, it just means someone else is liable. It is my position that this does not properly allow risk to be accounted for. The risk is real and being borne by real individuals, but their stake in the profits are not so apparent.
Oh, it was a bit of a sidestep. I suggest it will lead us astray and that we drop it.
I agree. In practice, investor liability will likely have some limit. As a quick second-estimate, say, it is limited to be proportional to their share of ownership. If I own one one-millionth of a corp, and it goes belly up and still has outstanding judgments/debts/etc of five million, then I am on the hook for $5.
Also, I think you overestimate the costs here. To some extent, this information is already incorporated into market behavior. If a company is doing something risky, or is doing poorly, or etc, this is already reflected in its share price. But that reflection is, I argue, not accurate because of the liability shield.
Sometimes this is just the way things are. A captain of a ship is responsible for his crew. A mother is responsible for her child. True, my mom didn’t tell me to go vandalize XYZ’s shop windows, but she’s on the hook for it anyway. It’s “impossible” to assess the risk of bearing a child, but people bear children all the time. In fact, they probably don’t bear enough of them because society reaps a lot of benefits parents cannot realize, but that’s another thread.
I’m not sure if you’re misunderstanding me or trying to aim at a specific point. If I win some judgment against XYZ, Inc., then XYZ, Inc. is on the hook. You happen to be a part of XYZ, Inc., so you bear some of that financial burden. I do not come at you, personally.
This is my fault… some of my examples were meant to illustrate how shareholders are pushing risk onto others, but not that my proposal would exactly rectify just these risks. A company closes when a company closes. I’m not sure how an employee would have cause to receive damages when a company closes except in cases of extreme negligence, but that is probably not what you’re considering here. It’s one thing to say that employees are compensated for the risk that a company fails in their salaries, but another to say that this will still happen when a corp’s officers’ primary duty is to serve shareholders who are insulated from risk! I am confident that the market can function properly, if it is allowed to function properly.
Again, this is already incorporated into share price to the extent that people are liable for share prices. There would need to be more transparency. This is not costless. But neither is ignoring this for the sake of shareholders. Just because we haven’t accounted for the cost doesn’t mean people aren’t paying it.
If you were the only driver on the road, I would agree with you. But you are not, so I do not.
You’re right. But someone is paying for these costs. If your argument is that it is distortive for the owners to pay, who should pay? Let’s take the Coase Theorem position, that when externalities can be costlessly traded, assignment of liability is arbitrary, and assume for the sake of convenience that externalities can be costlessly traded, and that we’re not going to assign liability to owners. Whom do we assign it to? How do they bargain? A shareholder bargains for liabilities in the stock market. I mean, the mechanism is right there. Where do you suppose it should go, if not the shareholders? (Again, “should” is not meant to be a moral position. Assignment of liability in the first approximation I’ve suggested here really is arbitrary. I just happen to think shareholders are in the best position to assume this.)
Come on, if this were true no one would ever do anything. My position is not so extreme. Life insurance gets sold even though I may have started smoking without my agent knowing. Car insurance gets sold to me even though the agent doesn’t know whether or not I’m going to leave my car unlocked with a sign on it that says “please steal this car,” or that I’m going to flip one day because of people cutting in at the last minute and ram a “Baby on Board” SUV, killing the occupants.
The market is scaled by proportion of ownership. I am not suggesting that someone rolls a zillion-sided die and then sues that individual for the total amount.
The person driving the car gets the benefits and assumes the liability risks. I’m fine with that, even if it fails my bright-line “ownership” test. Your argument seems to be that the persons “driving” the company should bear the risk, not the shareholders. That’s fine by me. Then the shareholders don’t get the benefits, either. Simple! Otherwise, this analogy doesn’t quite work out for you.
Not at all. I’m asking to be as responsible for the liabilities as you will be benefiting from profits. Are your profits limited?
Interesting. I will think about this. My initial reaction says this cannot be true as people who are bearing the risks I’m mentioning have no bargaining power that would correspond to the market for shares, but it’s a quick response and I’d like to consider it more.
No, they’re not. And that’s because the ownership criterion, while simple for me to argue, is not a practical solution because it doesn’t really serve to align the interests I’m talking about. I do feel the bank should wonder where their funds are going. But if anything, banks are exactly who would have a simple liability shield because their benefits are limited. I mean, you and I are making a lot of analogies to get our point across and these analogies break when we examine them too closely. We’ve decided that the best person to understand and bear the risks of driving a car is the driver. I think that’s a fine position. I like to be consistent, but not foolishly so. If the ownership criterion is not stellar, we can find another, so long as it is clear who is bearing the costs, and that this person also stands to reap the benefits.
If John invests $5mm in the company in 2000, the company gets the benefit of his $5mm and uses it to grow. In 2005, John sells his ownership of the company to Jane for $7.5mm. Your position is that the company should not be beholden to Jane because they don’t see her $7.5mm, correct?
But John has made his money back and then some by selling it to Jane. So morally, the company shouldn’t be beholden to John anymore. (I don’t think you’re suggesting it should, for the record). John invested his money and got his return, he doesn’t owe the company anything and vice versa. So under your scenario is the company beholden to no one? It seems obvious to me that the company should owe Jane a profit now. John was owed a profit by the company. He sold that obligation to Jane. End of story, in my book. Why would the obligation go away? If John held his ownership would there have been a point where he shouldn’t have been considered an owner anymore or does his ownership last in perpetuity? If it’s perpetual, why doesn’t he have the right to sell it?
First of all, under your scenario those 100 shares would not bear the market value that they would have under the present regime. Why would John invest in creating ownership if he can’t sell the ownership later? Its not fair to John, and Jane most likely would take her chances at growing her money elsewhere.
I’ve typed out the begginning of three different replies and decided that each was inadequate. It is hard to respond to you Martini when you have managed to misunderstand so much about how people work and how the economy works (which are of course deeply related concepts). This thread reminds me of the GQ thread where the OP kept insisting that the space shuttle could circle the earth very fast and turn back time or the many threads where several people didn’t understand that a plane foesn’t care if it is on a treadmill (barring certain interpretations of the question).
Let’s try this: Martini, I think the community would be better off if you gave me 100 bucks. Please explain why you have decided to be a bad person by not complying with my request.
When I purchase things I calculate the Total Cost of Ownership, not just the initial purchase price. For autos that means mileage, insurance, repairs and eventual resale value based on depreciation.
If you force me to own insurance to protect my family from liability lawsuits based on my invesments, that is going to be a cost that lowers the value of the investment.
Unfortunately, you can search the past threads started on this Board and find serious OP ‘questions’ that are remarkably simlar to your satirical comment above. Stuff like
‘Convince me conservative economics can work’
‘Convince me why lower taxes are a good thing’
‘Convince me why oil companies shouldn’t have a windfall profits tax’
etc., etc. I’m sitting here in a bar in an airport in Florida next to a young guy (who says he is enlisted in the military) trying to convince the bartender that Blackwater and Halliburton were behind the 9/11 attacks, and that our over half of our income taxes go to support Air Force One. I’m going to see if he’s plugged into the Wi-Fi somewhere posting on the SDMB.
A lot of them, yes. IPO no. I was offered shares from an IPO (which I luckily turned down) and if I bought them I’d have no more ownership then if I had bought them later.
Theoretically all shareholders are owners, but practically speaking you are right that they don’t act like the owner of a small company would. Consider a loon who thinks he’s Napoleon. If that guy was an employee he could do damage, but if he was a small shareholder no one would know or care. (Unless he had enough shares to have significant input.)
Some people have done exactly this - like Bill Gates and the founders of almost any high tech company. These typically don’t pay dividends, so shareholders don’t get extra profits, but reinvest profits in the company. I don’t know if the shareholders of Intel want extra profit or not, but they don’t get it. They do get the benefit of rises in share prices, but that is only indirectly related to profits.
Because by buying the stocks, she bought a bit of the company from the previous owner. If you buy a shop, you’re the new owner of the shop, even if you didn’t put money the money up to get the business started. Same thing.
However, I would point out at an obvious and gigantic difference that is generally completely overlooked because we’re so accustomed to it : shareholders aren’t liable. If the company goes under, they just lose what they invested, and the creditors can’t go after their personnel assets. It gives the owner of a publicly traded company a giganormous privilege over owners of other kinds of property.
Even though the reason why this privilege exists is quite obvious, it still could be very logically argued that it shouldn’t. It is most certainly at odds with the common concept that the money owners get from a company is a just reward for the risks they took. And one could certainly make the argument that in exchange for this exorbitant privilege, shareholders could be held to equally exorbitant obligations.
You do not have to be publicly traded to enjoy the protection of incorporation. I am not liable for the actions of my company, and we are far from an IPO. We are properly incorporated so that if anything goes wrong with our software, the absolute worst that can happen is that the company ceases to exist. I would not want to risk the home of my family to the plaintiff’s bar.
The corporate shield is just fine. How about a few concrete examples of publicly traded companies who have done great evil where the shareholders should be made liable? You will need to find one that went bankrupt and was unable to pay the judgements against it.
By this doesn’t applies to all businesses. For instance if in order to open a small shop, I need to borrow money, you bet that the bank will want my assets as a collateral, and I’m risking the home of my family to the plaintiff’s bar if something goes wrong.
But anyway, it doesn’t matter. What you said just support my point IMO. You, as a business owner, are presumably willing to take the benefits and also presumably, you’re unwilling to be told how you should run your company. But you aren’t, by your own admission, willing to take the associated risks.
You definitely benefit from a privilege granted by the law that an individual doesn’t benefit from. If you mismanage your company, you won’t lose your house. If I, as an individual, mismanage my assets, I will lose my house. So, when, like it has been done in this thread, one compares owning shares with privately owning a house, or when, as it has been done in other threads, one mentions that the income of a business owner is the just reward for the risk, a critical element has been, deliberately or not, omitted.
No publicly traded company ever went under? Did the stockholders have to sell their houses to reimburse the debts? That’s what I thought. There’s no need to do “great evil” to be liable. No level of goodness on my part will protect me from repossession if I have debts.
I’m sure you think that the corporate shield is just fine. But it still is an exorbitant privilege, even if you’re so accustomed to the concept that you take it for granted.
Wrong. If you are incorporated, your personal assets are safe from the plaintiff’s bar unless they can tie your personal assets to your business.
Yes, it IS true that the bank might require personal assets in exchange for the loan. They are saying that the business entity that you have created is not trustworthy, so they make you as an indidual co-sign for the loan. This is no different from parents co-signing for their kids.
Wrong again. I risk the money I have put into the company. That is a significant risk to me. You seem to ignore the value of my shares. If I lost them, it would certainly hurt.
You only lose your house if you don’t pay for it. In fact, in many jurisdictions your house is safe from bankruptcy court (Texas and Florida for example). These are known as homestead exemptions.
If you screw up your personal life, you lose your personal assets.
If you screw up your business life, you lose your business assets.
If you screw up your investment life, you lose your investment assets.
I did not say that no public company ever went bankrupt - I asked for some real world examples so that we could test your system on them. For example, should we be going after the personal assets of the investors in Chrysler if they go under? Do we send the police to the house of the investor and say, “Hello, you bought 100 shares last year and the company went under. We are here to collect your share of the debt. Please pay us $1000.”
Do that, and you will destroy the economy overnight. The dumping of shares would be huge as everybody tries to get out from under the potential liability.