Three Mountains (4) - Corporate Mountain

Modern corporates have immense power and control.

They have produced great wealth, but have also done enormous harm, when they made bad decisions.

Large corporations do not emerge naturally, because the accumulation of risk is too scary for anyone to contemplate. They were made possible when the government mountain established limited liability laws and other laws that protect big business.

Limited liability laws have allowed corporations to operate on an enormous scale, because individual shareholders are not accountable for the corporation’s debts or losses. Although these laws have fostered business, they are immoral, because they transfer risk of bad decisions from those responsible to the innocent. Unlimited profit with limited losses sounds great, but is morally flawed.

When governments pass limited liability laws, they are attempting to do something they do not have the power to do. Liability can only be removed when someone pays the price. Jesus was able to wipe out the liability for sin, because he paid the penalty on the cross. Governments attempt to wipe out liability by simply decreeing that it will be limited. They do not have that power, because they are unwilling to pay the price.

Government laws do not eliminate the liability for business losses, they just shift it to other people. When a limited liability company goes broke, the owners walk away with limited losses. The rest of the losses do not disappear. They are borne by the creditors of the failed company. The clients and employees of the failed company have to bear the cost, even though they acted in good faith.

Limited liability laws foster bad decision making by encouraging excessive risk taking and short-term profit making. Businesses that run large risks can earn big profits without worrying about the risks. Shareholders can earn enormous dividends from a company that takes excessive risks, but limit their losses during the bad years that usually follow. Unfortunately, the losses are not eliminated. The losses are just passed to other businesses that bring real benefits to society. Everyone is harmed.

God holds us accountable for our actions. Jesus died on the cross to eliminate our liability for our sin. He could not wipe that liability by amending a law, but had to carry the full cost. In the Kingdom economy, businesses owners and company shareholder will carry full liability for their losses and liabilities.

Without limited liability laws, businesses would have to be more careful about the way that they operate. Boards of directors would have to be more careful in scrutinising the actions of company management. Better stewardship would result (Luke 14:28-29). If investors bare the full costs of any failure, they will estimate the costs and assess the risks very carefully and make better business decisions.

The “Too Big to Fail” banks were created by a combination of limited liability and government financial regulation. The rot set in when they switched from being partnerships risking their own wealth, to limited liability companies risking other people's wealth. The shareholders of the investment banks and hedge funds who have taken enormous dividends would have put far greater constraints on their mangers, if they knew they were liable for all possible losses of their companies. The profits that they took in the good times would no longer be sheltered in the bad times.

As the Kingdom of God expands, businesses will shrink. Some will collapse. Others will choose to change their capital structures.