Corporate Reform

Contrary to Republican idolatry, corporations are not human beings endowed by their Creator with certain unalienable rights but legal structures designed to let people pool their labor and investments. That is, corporations are things created by law supposedly for the benefit of society. Under US/UK law, the assets and liabilities of the corporation are kept separate from the assets and liabilities of the managers and owners (shareholders). For example, when Lehman collapsed Lehman's debts were owed by the corporation not the people who either owned the corporation (the shareholders) or those who managed it. We are so accustomed to this way of doing things that we don't even notice it, but companies didn't always work like this and even now, in many parts of the world the directors of a company are personally responsible for its debts. There is a case to be made that people who bought Lehman shares hoping to profit from how it did business should have had to share in the losses. And I can't think of any reason that the managers and directors who took the company into collapse should have been able to walk away with millions or hundreds of millions.

In theory limiting the risks of of managers and shareholders encourages enterprise and innovation but over the last 40 years or so US law has been changed by Congress and activist right wing judges to encourage abuse while at the same time destroying the original purpose. In fact, Mitt Romney as well as Pete Peterson (the Nixon Cabinet member who hates Social Security) and his partner Steve Schwarzman (the guy who said Obama's tax proposal was like Hitler invading Poland) became fabulously wealthy through exploiting the loopholes that the right has made in corporate law.

The justification for limiting liability is to encourage people to take legitimate risks and start enterprises. Suppose Jill the carpenter raises some money from her friends and family and puts that money into a company to make furniture. If the company fails, people who the company owes money to (or the tax man) should be able to take what they can from bankruptcy but not go after Jill's Aunt Francine who put in $100 from her savings or throw Jill from her house or seize the salary of Jill's husband, Jack, or so on. America as a society wants to encourage Jill to take a risk to start a business so it offers her a legal vehicle for limiting the risk. The creditors, in theory, had a choice of whether to trust the corporation for repayment and they cannot then go after the people who worked there. That's the theory, but in practice, the right wing has made this protection weaker and weaker for people who actually start businesses and stronger and stronger for people who loot businesses.

The potential for abuse of corporations is obvious and so there are laws against abuse. For example, if Jill the President of Jill's Furniture goes on a tool buying spree on company credit and gives Jill the person all the tools, she can't just then fold the company and tell the tool vendors to take a hike. The law is not so dumb and Jill will have been found to have tried to hide personal transactions behind the company so her personal assets will be put "in reach". But starting in the 1970s Judges and Congress decided that these considerations didn't apply to wealthy investors. For example, it's common practice now for companies to borrow money to pay dividends to investors - and bonuses to company managers.

Suppose Jill builds up her company, sells shares and the company now has professional managers. Then a group of investors, let's call them Bane Investors, borrows $100 million from Jim's Bank to buy Jill's Furniture with the agreement of the current management. Jack's management decides to sell $200 million in bonds (borrow $200 million) and pay a dividend of $185 million to the shareholders and $10million in bonus to the company managers who have done such a good job. Strangely enough, they pick Jim's Bank to manage the bond sale and pay them $5million for helping out. Bane investors pays Jim's Bank back with interest and pockets $80 million minus some fees and interest, the managers pocket $10 million and the company is $200 million more in debt. If the company goes into bankruptcy, Bane sadly walks away and the managers go on to new jobs where their connections with big investors like Bane and Jim's Bank are positives. Everyone is happy except for the suckers who were owed money by Jack's - like their workers, pensioners and maybe the companies that sold them wood and tools and hadn't been paid yet and customers who paid for furniture that never got delivered. What about the bond investors? Most likely the bonds were bought by mutual funds and other investors whose managers were - you'll be surprised by this - risking someone else's money (your 401K maybe). If Jill's delays bankruptcy for a couple of years, those mutual fund managers will collect bonuses for their investment skills and maybe move on to other jobs and when Jill's fails it will be someone else's problem.

All of this can be fixed quite simply. For example we could change the law to say the managers and controlling owners of a company can protect only $1million of their personal assets. That is, if Jill's fails the creditors could get Bane to repay all but the protected $1million. This would make Bane less likely to load Jill's Furniture up with dangerous levels of debt and more likely to want to run it as a long term profitable company (or sell it to someone else). The managers would see their bonus money at risk too and maybe think twice about involving the company that was in their care in such risky business. In fact, any bonus or payment of any sort beyond minimal salary for management that enriches them at the risk of the company should be required to be put in a trust account for 5 years or more. We could also, and we should, make pension obligations and salary obligations to non-managerial staff go to the head of the line in any bankruptcy. Investors should be at the end of the line as should any contract and pension obligations to management. But that's what we'd do if we wanted a vibrant, innovative market economy and not crony capitalism where the rich use their political and financial power to extract more wealth from everyone else.



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