The Limitations of Ltd. Companies: An Insurgency
By Shlomo Maital
One of the great social innovations that made possible rapid economic growth and progress was that of the limited liability company. The idea began in England and spread to America. By limiting what you lose in starting a business, many were encouraged to do so. According to Wikipedia:
“By the 15th century, English law had awarded limited liability to monastic communities and trade guilds with commonly held property. In the 17th century, joint stock charters were awarded by the crown to monopolies such as the East India Company. The world’s first modern limited liability law was enacted by the state of New York in 1811. In England it became more straightforward to incorporate a joint stock company following the Joint Stock Companies Act 1844, although investors in such companies carried unlimited liability until the Limited Liability Act 1855.”
Is it possible that public companies have outlived their usefulness? An article in The Economist, “Reinventing the company”, makes this point.
“…after a century of utter dominance, the public company is showing signs of wear. One reason is that managers tend to put their own interests first. The shareholder-value revolution of the 1980s was supposed to solve this by incentivizing managers to think like owners, but it backfired. Loaded up with stock options, managers acted like hired guns instead, massaging the share price so as to boost their incomes”
“In insurgent companies, by contrast, the coupling between ownership and responsibility is. Founders, staff and backers exert control directly. It is still early days but, if this innovation spreads, it could transform the way companies work.”
Here is an example of an insurgent company – a huge one, Alibaba, founded by Jack Ma in 1999 – a Chinese public company, of all things, listed in America.
“In June, Jack Ma, the founder of Alibaba, a giant Chinese e-commerce firm, addressed the Economic Club of New York, whose members include many Manhattan luminaries and Wall Street chiefs. Mr Ma’s message was that his company exists for the long-term good of society, a far cry from the creed of shareholder value followed by many in the room.”
Run that by us again? Alibaba exists for the long-term good of society? Alibaba wants to help millions of small American businesses sell their goods globally? (How come AMERICAN companies haven’t said the same, or done the same??).
U of Chicago Professor Milton Friedman and his group of free-market economists fiercely criticized companies that donate money to charity, saying the money belongs to shareholders, and is not the company’s to give away.
We have seen where THAT kind of capitalism leads. Perhaps capitalism is evolving, in a positive direction, after all.