Should corporate shareholders be subject to some level of personal liability?

Pretty much the entire reason to HAVE corporations is to shield people from liability. You can lose your investment and no more.

How on earth could or would that play out, in a reasonably just way, if I, as a shareholder, have limited or no knowledge or extremely limited, if any control over the day to day running of the corporation? I have no knowledge or control over corporation and I am going to be held liable for the for it’s actions? I see no benefit at all and it seems like it would really, seriously inhibit investment in certain, in any number of industries including the chemical, petroleum, pharmaceutical industries, for example. And in what possible way could something like this be put into place in any way that was even remotely “manageable?”

@lillycoyote

That is exactly what I am asking in my question. Now, publicly traded companies are required to make various disclosures to the public about their operations regularly. What information is in those disclosures and what form it’s in is regulated by organizations like the SEC.

But the SEC is grossly understaffed, and so there’s no way to be certain of the accuracy of the information. I don’t suggest bad intent in disclosure, but it is something that we must accept on faith.

However, why shouldn’t investment be a little less passive? Shareholders own registered shares in the public company, and that share represents a percentage of ownership in the company. Company liability could easily be distributed based on those percentages.

Subject to such liability, wouldn’t shareholders potentially hold D&Os responsible for better management? And wouldn’t they potentially demand more information regarding the management of the company?

Small investors, as you noted, have almost no direct control of what corporate management does, and only in cases of egregious leadership negligence are board members held to account. So I don’t see how stockholders lacking a controlling interest in a corporation could fairly be held accountable for wrongdoing by corporate officers.

To put it in perspective for those who aren’t stockholders, imagine if the law provided for voters to be held accountable for the dumb and damaging things elected officials do after they vote for them. Hell, we’d all soon be in jail—even the cops and the jailers would need to be locked up.

Please note that this question is limited to the positive and negative aspect of imposing some level of liability on shareholders for corporate wrongdoing.

It is a what if question.

@iamthemob I would imagine they do have personally accountable for a liability to pay corporate debts since their share of profits is based on how well the company does or doesn’t do. If the company is sued and has to pay a penalty, they don’t make as much money. Right?

@bkcunningham – Explained in the details. This is liability beyond the initial investment. Therefore, if you invested $20, and for some reason you owed $25 dollars of liability for something the corporation did based on your percentage of liability for that, you would owe $5.

@iamthemob Short answer? I don’t have one. It’s not just about making information available to stockholders. It’s about controlling the behavior and activities of the corporations they have invested in. Even if the SEC was fully staffed, companies don’t report the kind of information a stockholder would really need to make informed decisions, to the SEC, not the information on the day to day running of their personnel department, the workings of their plants and manufacturing facilities, their , their safety records, their R&D, that information and data is not only not reported to the SEC, much of it is proprietary and they, the corporations, are not going to give that up. And it’s not simply a matter of having access to the information. It’s about control.

Say you own 1500 shares or 15,000 share or however many shares of BP stock. What kind of information could they have reported to the SEC and what the hell could you have done about that would justify you, the shareholder, being held liable for the BP oil spill?

And what about people who manage huge investment portfolios for pension funds, for example? Even if corporations did make the information available that a share holder might need, are the people who manage these portfolios now going to be expected to understand, to be experts in the ins and outs of some very complex industries like pharmaceutical and chemical industries and the inner working of the individual companies in these industries? Are the going to now have to be experts on building roads and bridges, and the companies that do those things so they can keep themselves and the institutions that they work for from being held liable for the actions or negligence of thoseentities? That would be unbelievably burdensome for those managers. And again it would inhibit, in a big way, investment by both small investors and the larger ones. And how is it even workable, within the constraints the law, the tort system, to assign guilt and degrees of liability for something over which the shareholder had no had control? To assess intent? It’s just kind of crazy, unworkable and unjust, I think.

The money for any penalties is coming out of the shareholders’ pockets to begin with. They are paying and being held liable. Do you want shareholders to go to jail?

If “corporate shareholder” means “anybody with stock,” as I suspect that it does, then my answer is no. Say you were feeling adventurous one day and bought a share or two of Microsoft stock. Should that make you liable for decisions that are entirely out of your control, made by people that you don’t even have a chance of seeing?

Lloyds of London, famous for insuring things like supertankers and Beckham’s legs, used to expose its members to unlimited liability. It was almost brought down in the 90s by asbestosis claims against companies it insured decades earlier.

Thousands of members were bankrupted.

Imagine if you were a successful dentist who invested £25K in the 1991 – and then you lose your home thanks to WWII-era contracts written by people who died wealthy when you were a child.

@lillycoyote – Please presuppose workability. That’s part of the question.

Bad corporate acts reduce the value of shares at times for the shareholders. It is rare that “bad acts” or something resulting in tort liability result in the liquidation of corporate assets to pay for the entire suit. So how much of a chilling effect would it have?

@bkcunningham – No. “Some level.” Going to jail is not on the table. Please discuss the drawbacks or benefits. Not the possibility of it.

@Nullo – But you suffer because of those decisions if they harm stock prices. Shareholders also exert some influence over managerial decisions in proxy votes. They also can bring derivative suits against managers. So these roles aren’t completely alien – but the result of no liability is that profits are the only motivation.

@jaytkay – unlimited liabiliity is different from some level of personal liability. Please, don’t be crazy. ;-)

Why force liability on shareholders merely because Officers and Directors are not personally liable?

Why not just change the law so that Officers and Directors of corporations are personally civilly and criminally liable for wrongdoings of the Corporation?

Shareholders’ risk should be limited to the value of their share diminishing. Why add more risk to that, when it’s the Directors and Officers who are the Real Deciders?

Look at all the damage Enron did, and it was shareholders and American citizens, who paid for it, mostly. That money should have come directly out of Ken Lay’s family’s pocket, should it not have?

Investors tend to be somewhat innocent compared to the shenanigans brewed up by corporate officers and directors.

@Kraigmo – They tend to be innocent because they have no motivation to monitor anything but stock price. That’s not so much innocence as ignorance.

Assuming a larger population of individual investors, liability is spread so that individual impacts may be reduced. And this isn’t unlimited liability, realize. Consider something like “Liability up to 150% of initial investment if corproation liable for x, y, z types of damage.”

Realize also that Enron’s liability was for fraud upon it’s investors, employees and the government that misled all parties to believe the company was much more valuable than it really was. Therefore, liability wouldn’t really apply to investors for a crime committed on them.

Sorry but stock holders are already liable up to the value of their stock. If the lawsuit doesn’t bankrupt the company then who are they paying the money to? Back into their company again or do you want the stockholders to pay the plaintiff so the they get thier award from the company and then again from the stock holders? You say not to look at how it would work be ant assessment no matter how cursory has to take into account how it would work.

It is an unworkable scenario that would curb investment severely. And think what would happen when a lawsuit was filed. All the stockholders would scramble to unload the stock dropping stock values to peanuts and probably bankrupting the company. And who does the collections on all this, the IRS? Sorry the notion is complete absurd. But it would be an incredible boom for foriegn investment. Now that’s what we want to see.

@iamthemob I’m not much for speculating and spending time on ideas that to me are completely unworkable, I very practical when it comes to that sort of thing. There are plenty of problems in the world that need to be solved and I don’t like wasting my time with ones that are unworkable, I don’t see the point. But, for you, I’ve give it a shot. How chilling an effect would it have? I don’t know. I think it would have more of an impact on some industries than others. Yes, “bad acts” and perceived bad acts certainly do hit shareholder. Dupont’s little issue with Benlate certainly wasn’t good for shareholders. Asbestos litigation very much did put companies, the manufactures out of business. What protects shareholders from the next asbestos, if there is one? And it’s just not right. Is that a valid argument if I can’t argue that it’s unworkable? CEO and the other Os, all the D&Os justify their salaries, bonuses and stock option deals by claiming that they are the cream of the crop, that without those large salaries and perks, well you know what they say. If they are willing to share, to funnel some significant part of those salaries, bonus and options into my dividends then I might be willing to share the blame. They are already paid very well to do what you want me to do for them and what you want me to be held partially liable for and that is to run and manage their companies in way that is legal, profitable, efficient and rational. I am also not much for taking a hit in order to make people who are already well compensated and are already supposed to be accountable to the companies they run, their shareholders, the regulators, and the law to what they are already supposed to be doing. They have the knowledge and the power to run their companies they way they should be run; I do not.

@Jaxk – Please, again, assume workability. If you need to assign your own parameters, do so.

I will address the investment aspect of this because it’s responsive. The filing of suit would lock liability, which would not thereafter follow the share. There might even emerge a sub-market for the “risk of liability” (e.g., traders could offer the shares at a rate reflecting current value, and a discounted rate reflecting rate if share is sold and liability based on the outcome of the suit comes with the share). This seems in line, in fact, with discussions suggesting the creation of a tort liability market. Trading on such a market might sound cold, but it may very well also greatly speed information as all parties would demand knowledge of (1) the likelihood of the size of the suit (2) the effect on the value of the company (3) the likelihood of bankruptcy and (4) all affected parties.

Foreign investment was a concern of mine. But there’s nothing to say that can’t be remedied with something along the lines of a shift in tax liability for earnings in U.S. investments to those in foreign, and again to limit the types of liability.

@lillycoyote – Again, this isn’t about limitless or a form of joint and several liability – a defined liability based on investment amount. There may be an allowance for a seperate class of stocks for people who refuse to be a part of the liability trade, priced at x amount above market price such that an equity cushion is built for potential suits that can be invested elsewhere – and earnings wouldn’t be recognized until the market price increased past the investment.

And why is it really not right to make people responsible for investing in companies that are doing bad things, just because they’re making money? Remember, we’re talking about a limited amount of liability to inspire more oversight from the owners themselves. Shareholders simply don’t demand disclosure very much – they demand profits.

Further, there’s nothing to say that D&O liability can’t happen to – or that this liability wouldn’t create an additional type of claim against D&O for oversight claims. And again, the SEC and market regulators are (1) understaffed, (2) bureaucratic, (3) unconnected to those that they oversee. I would rather find ways to internalize the externalities of market participation in ways that make it valuable for market participants to care about what’s going on than keep relying on regulators that, clearly, will generally be behind the curve.

@iamthemob

Sorry, how can you determine the impact without knowing how it would work. You’ve got to be reasonable. Does the liability go to the current stockholder even if the actions being disputed happened years or even decades ago? Or does the liability go back to the past stockholders that may have sold years or even decades ago? Would I be liable for a stock I owned when I was in my 20s held for a year and then sold? Now I’m retired living on a fixed income and you want to hit me with a liability I can’t even remember. And to what point? You still haven’t told us who gets this money and for what purpose.

The whole point of the stock market is so that I don’t have to micromanage (assuming I could) the companies where I have no expertise. How in the hell would I know that the gas tank on a certain car might be misplaced causing explosion on impact. As a stock holder, am I supposed to get the design specs and analyze the possible crash scenarios. Get real!

You would kill the stock market as we know it. You would spur the foriegn markets however, since they would never do such a crazy thing and they don’t use lawsuits as a lottery ticket.

@Jaxk – It’s open as to open it to all potential problems, and consider multiple benefits.

It could be limited in temporal scope, such as to periods within 5 years of the purchase of the shares.

Liability would probably travel with the share, as resting liability on non-owners would likely interfere in a significant way with the liquidity of the market (e.g., if you buy and sell several types of shares in a short period, having the liability remain with you aggregates liability if several of the companies have an issue for some reason.

I don’t think I would believe in a policy that rewarded an individual with both payments from the company and from the shareholders (this sounds like a windfall).

And I don’t see the necessary outcome being “micromanagement.” The incentive would be increased awareness and the consumer market having a hand on the level of disclosure necessary to inform the shareholder of what they’d need to know to be reasonably comfortable that not only was the company profitable, but was also managed reasonably.

You’re imagining much more liability than is required for the question. Claiming that it would kill the stock market as we know it – I can’t really see how, as you stated, the impact can’t be determined. And again, you’re assuming that there are no balancing incentives to control for the effect on foreign investment.

A lot of assumptions based on very little information, right?

@iamthemob

“A lot of assumptions based on very little information, right?”

Very true and it is my major point. How do you assess the pros and cons without the information to do so. But a couple of questions on your post.

If the liability moves with the shares, your assessing a penalty to share holders that didn’t even own the stock when the problem occurred. Such as the asbestos nightmare or the exploding gas tanks.

If the penalty payments don’t go to the plaintiff, I assume they would go to the government. Sounds like another way to assess taxes. Kind of a windfall for the government not doing thier job.

As for the balancing incentives, I assume you mean a higher tax rate for foriegn investments. Sounds like a trades wars kind of scenario. Not to mention just another way to raise taxes.

Finally, I still don’t know why. Is it really just to make investors more knowledgeable? The average person doesn’t want to have to do that research. That’s why they buy mutual funds and such so that they don’t have to be experts in a variety of industries.