More on Corporate Personhood

By dispensing with corporate personhood, we simultaneously get rid of two important things: limited liability and the corporate income tax.

After all, if the corporation is not a legal separate person, funds flow directly to the shareholder (similar to a partnership or sole proprietorship).  Now we could create a legal structure to allow these funds to be held at the corporate level by arguing that each person really simply owns a certain percentage (share) of the corporation and can only realize gains or losses by selling.  This would treat corporations as what they really are: assets of the owners.

While many conservatives would like to rid themselves of the corporate income tax, they simultaneously do not understand that if they do this, they lose the rationale for limited liability.  Limited liability is a benefit but not as great as it might at first appear.  What it really does is help not the common stockholder (who can always sell before his or her stock value goes to zero) but rather the last stockholders who is left holding the proverbial bag.  Yet what limited liability does is exaccerbate the asymmetry between short sellers and long buyers.  Short sellers already have unlimited liability (theoretically) and limited potential benefit (when the stock price goes to zero).  Long buyers have limited liability and unlimited potential benefit.  Eliminating corporate personhoood will reduce this asymmetry.

Here are a few questions that I have received concerning this proposal:

Couldn't companies simply get limited liability through contract?

The answer is no.  While a company can negotiate limited liability with suppliers and customers, third parties who are injured cannot be so casually dismissed.

Couldn't executives simply find a way around these restrictions?

Well, they could purchase insurance but who would insure them?  Since they are the ones making the decision that would lead to the corporation's demise, it would be foolish to provide insurance.  After all, you would be stepping directly into moral hazard.  They, of course, could also reduce their exposure below the 1% threshold provided they resign their office immediately.  However, they cannot keep their office and their benefits without incurring the costs.  Receiving reward without risk is immoral and must not be allowed to continue.

The point is that those who want the rewards should take the risks.  No risk = no reward.  It works for shareholders.  Why not corporate executives?

The Evils of Corporate Personhood (and the legal solution)

The fact that corporations have personhood and not limited liability is the root of the problems with respect to modern capitalism.  Limited liability actually emanates from this idiotic idea because one person cannot be responsible for the debts of another unless that person co-signs on the loan application.  Yet, while limited liability leads itself to the problem of excessive risk-taking (because you gain all of the upside and limit your downside), it is corporate personhood that is actually even more problematic.

As I sit here in the Wyhdham Resort and Casino in The Bahamas typing this blog, I am reminded of something I tell my students in my classes about the problems of corporate CEOs receiving stock options.  Since they receive only upside (stock prices can only go to zero in the extreme on the downside), it would be like handing $50,000 to each of them and telling them to go to the casino and whatever they win with my money we will split but if they lose the money, they are not liable for my losses.

I would want them to play Blackjack -- they will go for Roulette and the Slot Machines. By going for the riskiest games, they increase their chances of large scale gain.  After all, it isn't their money.

What personhood does for the corporation is allow it to declare bankruptcy even before it destroys its common stock.  Thus, corporate stockholders get effectively two bites of the apples -- no, actually three, for they can always turn around and sell to another sucker in the market (only the last one holding the stock has a 100% loss).  Of course, eliminating limited liability entirely might prove too drastic a step for those who wish to be market participants but who have little in the way of actual assets.  We can solve this problem by limiting limited liability only to shareholders who hold less than 1% of the overall common stock and who do not hold a senior management position at the C-level (CEO, CFO, CIO, etc.) or above (e.g., President, Chairman).   Such di minimus participation is incompatible with being able to fundamentally alter the overall course of the business.

Furthermore, do not allow senior managers to be senior managers unless they have at least 1% of the overall common stock (make them have "skin in the game", so to speak) and then apportion the excess of limited liability to those senior managers.  Sell so that you drop to less than 1% and you have to immediately resign your senior leadership position.

Now the personhood issue can actually be put to bed quite easily.  After all, the US Constitution prohibits slavery and involuntary servitude (13th Amendment).  If corporations are persons and they are owned by other persons (stockholders), isn't the corporation by definition a slave to the stockholders?  Wasn't that outlawed by the 13th Amendment except in cases of punishment for a crime?  I think that you cannot make a case that corporations are slaves because of such punishment, ergo, corporations are illegal in the United States.  I rest my case (at least in the US case).