Pilon on Corporations: A Discussion with Kevin Carson

I’ve discussed the libertarian legitimacy of the corporation before (Defending Corporations: Block and Huebert; Legitimizing the Corporation and Other Posts). I recently re-read Roger Pilon’s Corporations and Rights: On Treating Corporate People Justly, and recalled that it also has some very good material on why limited liability does not give any special privilege to shareholders. The following is an edited version of an email discussion mutualist Kevin Carson and I had about this (reprinted with Kevin’s permission):

KINSELLA: I had forgotten how good Pilon is in his discussion of why limited liability for torts is justified–have you seen this (pp. 1309-16)? He makes the arguments similar to those I have made–that the problem is respondeat superior. There is no reason to hold a shareholder liable in the first place.

CARSON: But as I’ve argued before in response to such arguments, the creation of the corporate form creates an artificially tenuous relationship between property and responsibility, precisely because the “owner” can seek a form of “ownership” in which control is lacking ex ante. IOW, plausible deniability: “Will no one rid me of this turbulent priest?”

KINSELLA: Re “precisely because the “owner” can seek a form of “ownership” in which control is lacking ex ante” — so what?

CARSON:  So if the current prevalence of the corporate form reflects the spontaneous conditions of the market, nothing. It’s a circumstance I find personally regrettable and distasteful, but will grin and bear. But if the corporate form predominates to its present extent because of the state greasing the skids, then an attenuated relationship between ownership and responsibility is artificially prevalent.

In any case, my main objection is to the fact that all the existing fragments of responsibility don’t add up to the equivalent of full accountability for anyone. Since I have argued that shareholder ownership is, in fact, a myth, I’d be more than happy to recognize it formally by treating them as equivalent to bondholders or warrant holders–on the condition that corporate management was recognized as owners, and couldn’t evade tort liability by “respecting the corporate form” in the ways quasibill described in your original Mises Blog post on the subject. The beauty of it is that management would no longer be able to use “our duty to the shareholders” as protective camouflage in internal bargaining with other stakeholders.

KINSELLA:

KC: So if the current prevalence of the corporate form reflects the spontaneous conditions of the market, nothing. It’s a circumstance I find personally regrettable and distasteful, but will grin and bear.

Right. Good. Although I don’t think there is anyting especially wrong with people letting others bear risks for them. This is the market. The division of labor. If you buy an orange from a vendor you do it in part for the simplicity and cleanness of the transaction. You are not responsible for torts or even crimes he or others might have committed in the chain of causality leading you to have the orange.

KC: But if the corporate form predominates to its present extent because of the state greasing the skids, then an attenuated relationship between ownership and responsibility is artificially prevalent.

Well, maybe, but as we all oppose the state granting and recognizing corporate status, … what is there to disagree about? I do think your side greatly exaggerates the effect of state recognition of corporate status. Remember, all the problem cases arises from larger companies, and these would all have the resources and incentives to adopt private incorporation kits even if they cost a few thousand bucks and were not recognized by states.

KC: In any case, my main objection is to the fact that all the existing fragments of responsibility don’t add up to the equivalent of full accountability for anyone.

I don’t see how this argument works. First, the tortfeasor is always liable. I mean who else would be? See the Pilon piece–he goes into this. Second, this seems to envision responsibility as some 100% pie, which implies that you acn’t even have joint responsibility–if A, the mafia boss, orders underling B, to kill C, then the simpleminded pie-of-responsibility view is that if you hold A responsible, then B can’t be. After all there is only 100% responsibility to go around.

I think this is nonsense. Individuals are responsible for torts and crimes, or they are not. They are responsible if they are proximate causes. A and B can both be 100% responsible [see my Causation and Aggression]. This shows that the whole pie analogy is ridiculous. In the corporate context, B is liable. If you want to argue A is, you have to show a causal connection. If it’s there, he’s liable also. If not, he’s not. You need to show shareholders are A’s. Showing that they chose to be shareholders because they are not A’s, does not mean they are A’s!

KC: Since I have argued that shareholder ownership is, in fact, a myth, I’d be more than happy to recognize it formally by treating them as equivalent to bondholders or warrant holders but they are not bondholders. A bondholder is someone the corp owes money to. Someone who presumably loaned money to the company. A shareholder may not be owed any money, and may have never given money to the company. And if giving money is sufficient–are all customers of the corp also jointly liable for torts of its employees?

A warrant holder is someone who has a right to buy stock at a set price. (It’s basically a stock option.) How does having a contractual right to buy stock make you liable for torts committed by employees of the corporation you have a right to buy stock in?

KC: –on the condition that corporate management was recognized as owners,

I think this is sort of wanting Official Legal Classifications to do your work for you. I think this is too simplistic, too quick. It reminds me of Walter Block’s argument for body-alienability: you own your body. But ownership includes the power to sell. QED. See how simple? He “officially” establishes “that” you “are” an “owner” of your body. That shoehorning does all the work a real argument is supposed to. But it doesn’t work. To own means to have the right to control. The right to control does not automatically imply the right to sell, contrary to simplistic assertions of laymen who are simply used to ownership of homesteaded things having the right to sell. [See Walter’s Toward a Libertarian Theory of Inalienability: A Critique of Rothbard, Barnett, Gordon, Smith, Kinsella and Epstein; and my A Libertarian Theory of Contract: Title Transfer, Binding Promises, and Inalienability and Inalienability and Punishment: A Reply to George Smith.]

Likewise, ownership in the corporate context is divided, sure. The right to control is distributed in complex ways. But you can only think this is a problem if you adopt the simplistic view that if you own something you “are” responsible for it. I mean can’t you see you are bringing in a type of respondeat superior thru the back door? Liability is being responsible for your actions–for things you do. What has it to do with ownership–with the right to control a thing? I am liable for murder no natter what means I employ–whether I use my own property or your property to do it. And if I use your property does that make you a co-murderer? Of course not. Well I guess this means that ownership does not imply responsibility. But if it does not, then why is divided and distributed ownership some nefarious plot or scheme?

KC: and couldn’t evade tort liability by “respecting the corporate form” in the ways quasibill described in your original Mises Blog post on the subject. The beauty of it is that management would no longer be able to use “our duty to the shareholders” as protective camouflage in internal bargaining with other stakeholders.

I agree–a manager who is causally responsible for a tort committed by a shareholder should be jointly responsible for it. But note that the fact he is not, now, has nothing to do with limited shareholder liability–but rather with inadequate causation attribution in the positive law.

CARSON:

SK: I think this is nonsense. Individuals are responsible for torts and crimes, or they are not. They are responsible if they are proximate causes.

In theory, yes. But in practice, cannot a corporate officer whose policies have tortious results can avoid tort liability by paying proper respect to “the corporate form”?

SK: A warrant holder is someone who has a right to buy stock at a set price. (It’s basically a stock option.) How does having a contractual right to buy stock make you liable for torts committed by employees of the corporation you have a right to buy stock in?

I’m referring to a proposal in a footnote in an article by Alchian and Demsetz, where they propose weakening the distinction between owners of debt and equity, and do away with the myth of de jure “ownership” status of shareholders altogether.

SK: I agree–a manager who is causally responsible for a tort committed by a shareholder should be jointly responsible for it. But note that the fact he is not, now, has nothing to do with limited shareholder liability–but rather with inadequate causation attribution in the positive law.

Well, sure. But limited shareholder liability would be a lot less of an issue if we did away with the whole myth that the shareholder is an “owner” in any real sense. In purely practical terms, reforming causation attribution to hold managers fully liable for tortious corporate acts pursuant to their policies would make a lot more sense than arguing about how many shareholders can dance on the head of a pin.

KINSELLA:

KC: In theory, yes. But in practice, cannot a corporate officer whose policies have tortious results can avoid tort liability by paying proper respect to “the corporate form”?

Not sure what you mean. I think you are confusing shareholder liability, piercing the corporate veil, those issues.

In any business, as far as I know, a manager of the company is rarely held directly liable for torts of employees he directs. But this is not because of corporate form. I don’t think it matters whether it’s a sole proprietorship, partnership, etc. It’s just an inadequacy of the state’s causal theories.

KC: I’m referring to a proposal in a footnote in an article by Alchian and Demsetz, where they propose weakening the distinction between owners of debt and equity, and do away with the myth of de jure “ownership” status of shareholders altogether.

Warrants are neither debt nor equity: it’s a security, a right to obtain equity.

As for their proposal: I’m not familiar with this, but I tend to agree that we should just look at the realities: who has actual control: debtholders do, customers, suppliers, unions, etc. They all have sway. I look at ownership as the right to control–the legal, recognized right to control. If I own a share in FedEx, can I just grab one of their trucks and drive it? no. Can I use their conference room to have a meeting? No. So I have only a distant, or indirect, or diluted, right to control those assets. The complicated chain of contracts between various people and groups–directors, employees, creditors, unions, managers, vendors, consultants, local stakeholder groups, what have you–determines who can actually control a resource at a given time. I think legal categories are too black and white and inflexible. I wrote about this in this post: The Over-reliance on State Classifications: “Employee” and “Shareholder“.

SK: “I agree–a manager who is causally responsible for a tort committed by a shareholder should be jointly responsibe for it. But note that the fact he is not, now, has nothing to do with limited shareholder liability–but rather with inadequate causation attribution in the positive law.”

KC: Well, sure. But limited shareholder liability would be a lot less of an issue if we did away with the whole myth that the shareholder is an “owner” in any real sense.

I agree! but just because the state calls him an “owner” is irrelevant! I think this is what libertarians take for granted when they criticize limited liability. they have this simpleminded “well, the owner is responsible…” well–why? I don’t agree anyway. Why is an owner responsible … ? For what? It’s actors that are responsible for actions: not owners qua owners. And anyway, the shareholder is not really an owner. This is another case of overreliance on feudalistic based property concepts: we say the fee simple owner is the “owner” even if someone else has a life estate!

KC: In purely practical terms, reforming causation attribution to hold managers fully liable for tortious corporate acts pursuant to their policies would make a lot more sense than arguing about how many shareholders can dance on the head of a pin.

Yes. that is what I have been arguing. Not the attackers of corporations. I think all this nonsense about limited liability is a straw man. I even think your and Roderick’s (?) view that the corporate form has increased the prevalence of the use of incorporation is weak and beside the point: maybe it makes it easier for Joe Plumber to form an LLC but who cares. It’s the big boys you guys care about–and they would still incorporate in Hessenian fashion, even if it was not as “easy.”

But note that even if managers are liable: still, they would usually be indemnified and/or insured so I still don’t see a huge difference.

CARSON:

SK: not sure what you mean. I think you are confusing shareholder liability, piercing the corporate veil, those issues.

No, shareholder liability doesn’t even enter into it. It’s about the way the corporate veil insulates management from tort liability.

SK: In any business, as far as I know, a manager of the company is rarely held directly liable for torts of employees he directs. But this is not because of corporate form. I don’t think it matters whehter it’s a sole proprietorship, partnership, etc. It’s just an inadequacy of the state’s causal theories.

I’m mainly concerned with torts directly pursuant to company policy that are either a direct result of the policy or a reasonably foreseeable indirect result.

SK: I agree! but just because the state calls him an “owner” is irrelevant! I think  this is what libertarians take for granted when they criticize limited  liability. they have this simpleminded “well, the owner is responsible…”  well–why? I don’t agree anyway. Why is an owner responsible … ? For what?   It’s actors that are responsible for actions: not owners qua owners. And   anwyay, the shareholder is not really an owner. This is another case of   overreliance on feudalistic based property concepts: we say the fee simple owner is the ‘owner” even if someone else has a life estate!

Good point, which also ties in with Rothbard on “relevant technological units” and Per Bylund’s ideas on homesteading only for specific purposes.

KC: “In purely practical terms, reforming causation attribution to hold managers fully liable for tortious corporate acts pursuant to their policies would make a lot more sense than arguing about how many shareholders can dance on the head of a pin.”

SK: Yes. that is what I have been arguing. Not the attackers of corporations.

But Stephan, I’m also arguing it, and I’M an attacker of corporations!

SK: I think all this nonsense about limited liability is a straw man.

You may be right. I was already inclined to believe that the issue of management liability behind the corporate veil was more important than the liability of shareholders as “owners,” and this exchange has sharpened that tendency. I do think your idea of imperfect causation is somewhat isomorphic with my idea of the individual liabilities not adding up to full liability for torts: the lack of full mgt accountability behind the corporate veil, coupled with the fiction of shareholder ownership and limited shareholder liability, mean that a legal fiction of ownership is simultaneously being used to protect tortfeasors from liability (under the pretense that they’re just serving the interests of the real “owners”), and to prevent that liability from being transferred to those same ostensible owners.

Treating a share as a limited bundle of contractual rights, without the distraction of thinking of it as “equity,” would eliminate the confusion and allow management to be liable for its acts.

In fact, I’m beginning to wonder if it would make sense to eliminate the corporate veil altogether and simply treat official management acts as done in their own name, for purposes of liability.

SK: I even think your and Roderick’s (?) view that the corporate form has increased the prevalence of the use of incorporation is weak and beside the point: maybe it makes it easier for Joe Plumber to form an LLC but who cares. It’s the big boys you guys care about–and they would still incorporate in Hessenian  fashion, even if it was not as “easy.”

Again, you may be right. The focus on limited liability benefits of the corporate form may be beside the point. And you may well be right that even if the corporate form were far less prevalent, it would still be used by the people with the expensive lawyers. I would add one caveat: in a society of law codes based on prededents by local libertarian juries, and with no automatic recognition of a corporate entity under statute, a Hessian entity would have to negotiate recognition as an entity in as many venues as it operated in–and with juries in the picture, the old herding cats thing would come into play.

SK: But note that even if managers are liable: still, they would usually be indemnified and/or insured so I still don’t see a huge difference.

Well, insuring them against third party torts would have the same material effects as (say) Pigouvian taxation, so it would increase the operating costs of certain (say, polluting) business models and get compensation to all the people harmed by it. I don’t think someone like Tokyo Tom could ask for anything more.

KINSELLA:

KC: No, shareholder liability doesn’t even enter into it. It’s about the way the corporate veil insulates management from tort liability.

You lost me. The corporate veil, as I understand it, is simply the legal fiction that treats the corpo as a separate entity. It is what prevents shareholders from being fully liable.  To the extent it protects managers it seems to me this is not unique to the corporate form. That is just a defect of the law on causation and responsibility.

SK: “In any business, AFAIK, a manager of the company is rarely held directly liable for torts of employees he directs. But this is not b/c of corporate form. I don’t think it matters whether it’s a sole proprietorship, partnership, etc. It’s just an inadequacy of the state’s causal theories.”

KC: I’m mainly concerned with torts directly pursuant to company policy that are either a direct result of the policy or a reasonably foreseeable indirect result.

This sounds like a reasonable start–but you would need to flesh out a careful, coherent, libertarian-grounded theory of this to show that and when managers should be liable, and then to mount a critique of current law to show that it for some reason deviates from this.

SK: “I agree! but just because the state cals him an “owner” is irrelevant! I think this is what libertarians take for granted when they criticize limited liability. they have this simpleminded “well, the owner is responsible…” Well–why? I don’t agree anyway. Why is an owner responsible … ? For what? It’s actors that are responsible for actions: not owners qua owners. And anyway, the shareholder is not really an owner. This is another case of overreliance on feudalistic based property concepts: we say the fee simple owner is the “owner” even if someone else has a life estate!

KC: Good point, which also ties in with Rothbard on “relevant technological units” and Per Bylund’s ideas on homesteading only for specific purposes.

Hmm. Well, I’m saying that we should just be realistic and look at actual control (and the actual practical legal right-to-control) to determine who is owner. I see somewhat of a tie in with RTU but he is focused on the extent of actual use for practical purposes, to determine the extent of homesteading. Not quite the same thing, I think. I’m simply saying that just because the state uses the word “owner” to refer to the “fee simple owner” even if he doesn’t have any practical rights to use the thing–and doesn’t use the word “owner” to refer to a manager who does have the de facto or situational legal right to control–we should not be trapped by the state’s cribbed terminology and classifications. We should not confuse reality with the positive law compartments law professors and judges force situations into.

Anything in particular by Per Bylund you have in mind that you would recommend?

KC: But Stephan, I’m also arguing it, and I’M an attacker of corporations!

Well you say you are, but I think you are realy attacking firms in general (not just “corporations”); and you are criticizing inadequate state law on causation, which is not a corporation-specific issue.

SK: “I think all this nonsense about limited liability is a straw man.”

KC: You may be right. I was already inclined to believe that the issue of management liability behind the corporate veil was more important than the liability of shareholders as “owners,” and this exchange has sharpened that tendency. I do think your idea of imperfect causation is somewhat isomorphic with my idea of the individual liabilities not adding up to full liability for torts: the lack of full mgt accountability behind the corporate veil, coupled with the fiction of shareholder ownership and limited shareholder liability, mean that a legal fiction of ownership is simultaneously being used to protect tortfeasors from liability (under the pretense that they’re just serving the interests of the real “owners”),

I am not really sure if this is the reason. the reason seems to me to be that the law says the actor is liable–the direct cause–and the corporation is liable under respondeat superior; the shareholders are not liable because of limited liability. Why are managers not liable? I suppose because they didn’t directly cause the harm and the law does not permit you to argue or show that they should be liable as indirect proximate cause. One reason it does not permit this is because it’s assumed (maybe) that the corporation’s vicarious responsibility for the tort of the employee is enough.

But if we get rid of the fiction, then: 1. Shareholders are not liable usually, because they don’t have enough causal role; 2. Managers who direct the commission of the tort are liable (but this requires a careful and developed theory of causation). But in any case we can expect the firm’s insurance policy to kick in in almost every case so I still don’t see how such reform would change much. I do not see that such changes would make it more difficult for large corporations to form, etc.

KC: and to prevent that liability from being transferred to those same ostensible owners. Treating a share as a limited bundle of contractual rights, without the distraction of thinking of it as “equity,” would eliminate the confusion and allow management to be liable for its acts.

Of course. Yes. And this is more or less what Hessen advocates, I believe.

KC: In fact, I’m beginning to wonder if it would make sense to eliminate the corporate veil altogether and simply treat official management acts as done in their own name, for purposes of liability.

Well of course. This presumes you have a coherent theory of causal responsibility to use, but sure, I agree, I think.

KC: Again, you may be right. The focus on limited liability benefits of the corporate form may be beside the point. And you may well be right that even if the corporate form were far less prevalent, it would still be used by the people with the expensive lawyers. I would add one caveat: in a society of law codes based on prededents by local libertarian juries, and with no automatic recognition of a corporate entity under statute, a Hessian entity would have to negotiate recognition as an entity in as many venues as it operated in–and with juries in the picture, the old herding cats thing would come into play.

I think such organizations would be routinely recognized just as common law marriage would be, partnerships would be, and so on.

CARSON:

SK: You lost me. The corporate veil, as I understand it, is simply the legal fiction that treats the corpo as a separate entity. It is what prevents shareholders from being fully liable.  To the extent it protects managers it seems to me this is not unique to the corporate form. That is just a defect of the law on causation and responsibility.

I’m not sure of the proper legal terminology, but I’m referring to management’s more or less free pass when they claim an act was taken in the name of the corporation, and for the sake of maximizing shareholder value.

SK: Anything in particular by Per Bylund you have in mind that you would recommend?

Bylund, Per. “Man and Matter: APhilosophical Inquiry into the Justification of Ownership in Land from the Basis of Self-Ownership.” (Lunds Universitet, 2005), and “Private Property or Possession: A Synthesis” (September 7, 2005).

KINSELLA:

KC: I’m not sure of the proper legal terminology, but I’m referring to management’s more or less free pass when they claim an act was taken in the name of the corporation, and for the sake of maximizing shareholder value.

I’m not aware of this claim or legal doctrine. Are you sure you have this right? Are you sure you are thinking of anything other than the simply lack of liabiltiy under the law, of managers, for acts of employees?

[Update: I think Carson may have been thinking here of the business judgment rule. But that has nothing to do with limited liability. It only has to do with the basically contractual or fiduciary liability of directors to shareholders for decisions that affect the corporation’s success.]

CARSON: Maybe not. It’s been a long time since I followed the debates at Mises. But I’d be satisfied with any doctrine that treated acts of a corporation pursuant to management policy, or to direct orders from management, be treated as the acts of management as individuals.