Posts Tagged ‘Corporate Regulation’

The limited criminal liability corporation

September 21, 2015

The modern corporation is a structure that allows investors to maximize profit while limiting their individual losses.  The Volkswagen emissions scandal shows that it also is a structure that enables lawbreakers to limit their individual accountability for their crimes.

Because the corporation is treated by law as a person separate from its owners, the individual investors can’t lose anything more than what they put in.  Any debts over and above that are swallowed by the creditor or absorbed by somebody else.

vwWhen executives of a corporation break the law, it usually is the corporation, most of whose employees and owners may be completely innocent, that is penalized and not the individuals actually responsible.

Volkswagen since 2009 installed software in 482,000 diesel vehicles to turn on emissions control systems when approaching an inspection station, but leave them off the rest of the time, which improved fuel economy and engine performance.

Dirty-burning fuel sickened many people and made already-sick people worse.  By one estimate, it caused the deaths of from 5 to 26 people in southern California alone.

Installing such software is no easy task.  Corporate executives would have had to sign off on it.

News stories say that Volkswagen could be liable for up to $37,500 per vehicle, which would mean a penalty of $18 billion.  That would be a big fine.  Last year Volkswagen reported a net profit of $12 billion on $226 billion in revenue.  I would be surprised if VW wound up paying this amount.

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Corporations behaving badly

October 24, 2012

Corporations Are Sociopaths

Corporations aren’t really people, of course.  They are organizational structures which people can use for good or ill. Corporate structures serve the necessary function of accumulating capital.  It is through capital investment that the total wealth of a society is increased.  Both experience and economic theory show that this works better when capital is in private hands than in the hands of central planners.  Even though corporations represent a dangerous concentration of wealth and power, it is a danger that has to be risked if we want to enjoy the blessings of a growing industrial economy.

Corporate investors have the privilege of limited financial liability.  That is, unlike individuals who own businesses, they only risk what they have invested.  If the corporation fails, any additional debts and liabilities have to be absorbed by someone else.  If it weren’t for this privilege, if the investors were individually responsible for the corporation’s actions, there would be few investors.  I would not buy corporate stock or invest in mutual funds if I were on the hook for everything a company might do.

Under current law, the executives of corporations have a fiduciary responsibility to maximize return to shareholders.  Period.  Whatever obligations they assume beyond this is a matter of law, regulation and of individual ethics.  But if there no laws and regulations concerning labor, health and safety, environmental, consumer protection, monopoly power or fraud, or the laws and regulations are not enforced, there is not necessarily any material reason for corporate executives to care about such things.

And if you believe in an economic theory that says that the corporation maximizing profit always results in what is best for society, and that the unfettered individual pursuing his or her self-interest always results in what is best for society, then there is no ethical reason to do so either.  The result is the behavior described in the chart.

Hat tip for this chart to The Big Picture.