At a breakfast briefing yesterday as part of the British Academy’s Future of the Corporation project, Peter Norris, Chair of the Virgin Group and Professor Chris McKenna from the University of Oxford, discussed whether limited liability was fit for the corporation of the 21st century.
Limited liability was introduced in 1855 and has remained controversial ever since, yet it is considered as an immutable fact of business life.
Professor Chris McKenna, University Reader in Business History and Strategy at the Saïd Business School, University of Oxford, outlined the history of limited liability. As far back as the Roman Empire, as head of the family the father would be liable for the economic activities of the household. But contracts would often be made by other family members who were covered by his position, giving them limited liability.
Limited liability in the form we recognise it today emerged with the trading companies of the 17th century, where the Crown would grant limited liability to these new types of corporations, fearing that investors would not otherwise invest in new global ventures.
But limited liability was not always a central tenet of business life in the past. Indeed, American Express successfully traded as an unlimited company in the USA in the 1950s.
Fast forward to the Lloyd’s crisis of the 1990s and limited liability became associated with the idea that the state would step in.
“The suggestion of unlimited liability was unenforceable”, Professor McKenna explained. “At the height of the Lloyd’s crisis, it looked as though about a third of the sitting judges would be rendered bankrupt.”
“The long history of limited liability seems to be that there are private solutions to this problem. And what is striking is the degree to which we as a society would even agree to enforce [an alternative], or even to change them.”, he concluded.
Peter Norris, Chair of the Virgin Group then argued that the current system of limited liability needs to change in the light of recent events.
“For all of my working life, I have operated entirely within the concept of limited liability…but each one of us is entitled to a Damascene conversion in our lives, and for me, this happened as the great crash developed in 2007.”
“Reflecting on the causes of the crash and the public policy responses convinced me that there is an urgent need for a reappraisal of how we organise important parts of the economy.”
“Limited liability has adapted to technology and other changes, but not always for the better”, he explained. It has often fostered ideas of passive or inactive ownership, as well as shifting power into the hands of management.
Norris argued that limited liability was one of a series of established public policies which created “a toxic recipe for financial meltdown” in 2007.
Limited liability was part of the “perfect permissive environment” of the early twenty-first century which led to an explosion of household lending, which ended in disaster.
In the aftermath, government bailed out large corporate structures at the heart of the crisis, rather than individuals.
Reflecting on these events, Norris concluded that we need to urgently rethink public policy to rebalance risk and responsibility.
Limited liability would not be the only issue to address, he said, and questions to reframe it would take in the whole shape of the corporation, from fiscal policy to how we manage the creation of money.
“There is at least a generation of hard-fought debate and legislation needed”, he speculated.
Peter Norris concluded with a quote from the 18th-century lawyer and politician Edward Thurlow, who remarked that: ‘corporations have neither bodies to be punished nor souls to be condemned. They may therefore do as they like.’
“This must be as unacceptable now as it was then and we need to do something about it”.
The briefing was sponsored by Bates Wells Braithwaite.