1.
From the early days of the Western legal tradition, the classical
notions of distributive and corrective justice played a foundational role. The
Christian synthesis of distributive and corrective justice was grounded and
explicated in terms of natural law, a web of interlocking rights and duties grounded in humanity's social nature and directed toward the end of fellowship with God.
The place of distributive justice in understanding law began to
wane, however, in the early 17th century with the writings of Hugo Grotius (here) culminating, in the Anglo-American tradition anyway, with John Locke's purely
contractarian vision of public life (here). Protection of life, liberty, and
property--and no (or little) more--was the floor and ceiling of
the law. Natural rights came to the fore while natural law found itself shunted
into an antiquarian academic closet (here).
The contractarian view of social and political life came to
dominate during the Enlightenment. Only in the nineteenth century was political
life readjusted but by creating ever more "rights" out of thin air
instead of a return to a tradition in which both duties and rights had their place
in a well-ordered society. Ever more interests have found recognition as social
and political rights, and appeals to distributive justice are at most a
smokescreen for contemporary rights advocates. (You can read my full argument in Looking for Bedrock: Accounting for Human Rights in Classical Liberalism, Modern Secularism, and the Christian Tradition here.)
But the 19th century saw another very important tweak to the Lockean
trilogy: the rise of the general purpose business corporation. Until the middle
of the 1800s, the power to create an artificial person was reserved to state
legislatures, who would vote to charter a corporation only if it was to serve
some public good. Or at least that was the theory. In grimy politics of the
day, legislators were persuaded to vote to issue a charter for more venal
reasons, most of them pecuniary.
And what was the most distinctive feature of the business
corporation? The creation of a wall of separation between claims that could be
asserted against it and its property and the assets of its shareholders. In
brief, limited liability.
Sophisticated parties who contracted with a corporation would take
this phenomenon into account. They can adjust the price charged for goods or
services commensurate with the risk that the corporation's assets might be
insufficient to pay all its debts. Or, they might ask individual shareholders
to guarantee their corporation's debts. Unsophisticated or involuntary
creditors--for example, employees or those injured by a corporation's
acts--did not or could not adjust the "price" of their potential
claims. An example of structural distributive injustice? Perhaps,
but such a concern had long since fallen from public consideration.
Yet--and here's the rub--even with the creation of many new
artificial persons the purpose of the law was still the same: protection of
life, liberty, and property. One the one hand, the plentitude of general
purpose corporations increased the number of natural-rights bearers. On the
other hand, the fact that corporations might deprive some natural persons of
life and property without compensation was perceived as a small bug that did
not send the system back to its roots.
2.
You can read Adam Levitin's post Private Equity's Abuse of
Limited Liability here. I recommend that you read it in full to
understand his argument in favor of Elizabeth Warren's proposed solution to a
contemporary problem:
The premise of the bill is that private equity firms have abused limited liability to engage in excessive risk-taking at the expense of American workers and communities, as limited liability creates a lopsided investment risk: all of the upside, but only limited downside.
Now, that is the case whenever one buys corporate stock ..., but private equity firms have taken this to a new level by combining limited liability with extreme leverage. First, there is the leverage in the acquisition of the target company—the private equity fund might put in only 20-40% of the acquisition price, with the rest borrowed by the target company itself and secured by the target company’s assets. But then there is additional leverage in the structure of the private equity fund. The private equity firm itself contributes only a small amount of the capital to the fund, but gets a much larger slice of the return. This extreme leverage, when combined with (1) limited liability and (2) corporate control produces an incentive for private equity firms to saddle target companies with extremely high and often unsustainable debt burdens.
Nothing Levitin writes is untrue. As I've argued above, limited
liability is a legal subsidy that can facilitate injustice, and extremely
high-leverage corporate acquisitions are the tip of the spear of potential distributive
injustice. But why eliminate the benefit of the corporate shield only for
some investors? What moral standard accounts for sticking it to the principals
of private equity firms and not, say, me (who owns shares of corporate stock
through mutual fund investments)?
Anticipating such a question Levitin goes on to explain that
This is a totally different situation from when I invest in IBM. First, I usually have to pay full freight for my IBM stock. I don’t get it at 20-40¢ on the dollar. Even if I buy on margin, I’m still going to pay at least 50¢ on the dollar, and likely far more. Second, when I buy the IBM stock, I don’t get the extra leverage that exists from the private equity GP structure.Third, my acquisition of IBM stock is not inherently connected with IBM taking on massive debt itself. And fourth, I don’t have control over IBM, such that I’m not able to loot the company or starve it of R&D resources or reinvestment to pay the LBO debt, etc.
Okay, I'm not as bad as "the other" who multiplies her
profits through multiple corporate leverages, but is that enough to make me
innocent of the benefits that accrue to me as an investor in forms of
structural distributive injustice? I may not be as evil as Hitler but I'm sure
not blameless.
3.
In other words, is there a moral justification for a form of legal
existence that--by virtue of the legal attributes of that form--creates the
potential for structural injustice? If so, what might that justification be?
A couple of thoughts. First, no one should expect that the law
will conform to perfect justice. That injustice goes unredressed by the legal
system is to be expected in a fallen world. Even so, one might respond, the law
should not create a legal form that enhances the likelihood of
distributive injustice. Moving on ...
Second: rule utilitarianism. The standard account proffered to
justify corporate limited liability is that it increases net social utility.
Sure, some creditors cannot adjust prices to corporate parties to account for
limited liability but many of us can and collectively the rest of us get much
more in return. Individuals are generally risk-averse but the corporate form
increases risk-taking and thus contributes to the social good by subsidizing
business activity. Business activity, in turn, creates employment for some and
goods for all. Levitin doesn't buy this argument:
Limited liability is a relic of the underdeveloped financial markets of the Gilded Age and operates as an implicit form of leverage provided by law. But it’s hardly either economically efficient or necessary for modern business activity. It's a fairly recent development in the western world, there are numerous exceptions to it, and a number of notable firms have prospered without it.
For what's it worth, I can't buy Levitin's rejection of the
utilitarian argument for limited liability if only because there's no way to
test it. When it comes to the costs of distributive injustice vs. the benefits
of limited liability, one hunch is as good as another.
Third: limited liability is part and parcel of late-modern
political life. Business activity provides all of us with an endless
stream of tchotchkes to distract us from considering the
Goods of life. In other words, non-teleological political liberalism
depends on maintaining a non-teleological economy. Political post-liberalism
and some pre-liberal religious approaches to political life find themselves
allied against the liberal order but it's not going away soon.
Last: it doesn't much matter. As one who did commercial collections
in the early days of my practice, I can say with some confidence that it is
very difficult to compel payment from a recalcitrant judgment debtor. With
tools such as tenancies by the entireties, exemptions for pensions and
retirement accounts, "protection" provided by friendly secured
creditors, the ability to self-settle spendthrift trusts, and the use of
off-shore private banking, any smart (and rich) individual who hires a good
lawyer can shield his most of assets from most of his creditors.
4.
As for me, call me morally lazy but I am willing to tolerate the
distributive injustice enabled by corporate liability. In other words, I
oppose Senator Warren's proposed solution to the problems created by hyper-leverage. The injustices practiced by some private equity firms are real
but the proposed cure both under-reaches the fundamental structural
problem of limited liability, and exposes even good-faith shareholders to the
risk of eventually losing their corporate shields for political reasons. An example of the latter concern: many already would argue that shareholders of a corporation that, say,
practices any form of private discrimination (bakers and photographers come to mind) or one that sells guns should not be
"subsidized" by the corporate form. Those who earnestly believe they
are on the right side of history may be willing to eliminate the benefit of limited liability for those who
are blind to the truth. Frankly, I'm willing to tolerate the lesser injustices created by private equity to the potential of pervasively greater injustices to the politically vulnerable.
5.
Of course, I need to remember this warning:
Do not lay up for yourselves treasures on earth, where moth and rust destroy and where thieves break in and steal, but lay up for yourselves treasures in heaven, where neither moth nor rust destroys and where thieves do not break in and steal. For where your treasure is, there your heart will be also. ... No one can serve two masters, for either he will hate the one and love the other, or he will be devoted to the one and despise the other. You cannot serve God and money.
Sadly, making money is the final cause most modern corporations. While it need not be profit ΓΌber Alles, the fact remains it is for most. Yet, as crucial as Jesus' warning is, abolishing or
reducing corporate limited liability is unlikely to persuade anyone to take it to heart.
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