Monday, October 24, 2005

Dealing With Corporate Theft - bankrupt the Directors!

Raymond Garcia, writing in Swans Commentary ( on 24 October, makes a trenchant case against Corporate entities having no restraints in the US on their conduct once they go bankrupt. Individuals are not so fortunate in escaping the consequences of their actions, he notes, because their entire assets are exposed to retribution by courts if they are deemed to have acted irresponsibly or illegally.

He quotes Adam Smith in support of his case from “Wealth of Nations”. Here is an extract (read the article too):

"Ironically, this very contradiction was illustrated in the business section of The Chicago Tribune on October 13, 2005. The top of the fold article was titled "Delphi Chief Warns Workers," in which the CEO of Delphi warned workers that if they didn't accept these radical pay and benefit cuts, they'd hire scabs or go bankrupt. Directly below it was an article about Federal Reserve Chief Alan Greenspan (ex-Ayn Rand disciple) glowingly pronouncing that the US economy was avoiding energy price-fueled inflation because of its "flexibility."

Here you have the definition of "flexibility": unfettered (by regulation) liquidity for capital and its investors; zero legal accountability for corporations who abrogate contractual obligations to real people; and a workforce of individuals forced to legally and financially bear the burden of their own demise. It's laughable that we are still regularly treated to blather from the punditocracy that we are "the pinnacle of free market capitalism."

The sainted prophet of such ideology, Adam Smith, warned in The Wealth of Nations that the power of what became monopoly and oligopolistic groups (in his day, monarchy charter entities like The East India Company and The Hudson Bay Company) would destroy the possibility of truly free markets and their social benefits, as he envisioned them. In the U.S., we ignore(d) that part of Smith's writings. We have set up corporations and their elite ownership to be insulated from democratic influence and legal accountability, and reduced individuals to the status of mere corporate supplicants. That's who we are, what we've become, in The United Corporate States of America.”


Smith did indeed write about the pernicious effects of joint stock companies, which became the main organising entity of capitalist development in the mid-19th century in Britain and the USA. In various forms they dominate the corporate activities of most capitalist countries (all versions).

Smith regarded the inevitable fact that joint stock companies, which are necessary to raise the vast capital stock of the large private chartered monopolies of his day, such as the East India Company, would have the obvious defect that the managers of them would not be the owners because shares would be dispersed among savers, who would not be directing the business. This opened option for the Directors to act in their own, and not the owners’, interests.

Raymond Garcia focuses on the legal fact that Corporations were given a legal identity, became legal ‘persons’ in their own right, and could be sued just like an individual, the difference being that once the corporate entity is bankrupt, it ceases to exist and can no longer be sued, except that the remaining assets are used to liquidate its debts or that proportion of them that are disposable.

Smith saw the joint stock company from the perspective of the mid-18th century. He had no notion of the sheer scale of capital accumulation that became possible, or the funds that would be mobilised, from societies much wealthier in a real sense than anything known or imaginable to him or anybody around him. The records of the Chartered private companies were so bad that it stigmatised the concept of joint stock companies for him. His vision of commercial firms were smallish scale in the main, though he had access to some quite large firms and their owners, such as the Carron Ironworks, near Falkirk, under Dr John Roebuck and he knew Wedgewood in England (pottery). His entrepreneurs were independent tradesmen, journeymen, blacksmiths, iron forgers, saddlers, weavers, builders, and such like, whose capital requirements were obtained, and to be obtained, by harsh frugality out of their revenues, plus a little borrowing.

Stepping outside of Smith’s time, the expansion and legalisation of joint stock companies was inevitable. The weakness he rightly points to is glaring and, fortunately capable of some partial remedy. If the Directors or managers act in a criminal fashion, they should remain accountable, and at peril of judicial sanctions against their private property. That already happens in the UK to an extent. Moreover, if the Directors manage a pension fund for their employees, better the company manages that this at arm’s length with no borrowing from it. If they mismanage the pension fund, as they seem to do regularly, they are in breach of contract on the basis of what they promised – deferred income for a pension – they should be liable to be sued individually for this breach, and their private property put at risk.

I do not suggest that this solves all the problems, but it equalises the misery for the perpetrators with their victims. That should act as a deterrent (with close attention paid to the source of the funds with their families acquire ownership of assets in their names to keep them out of reach of creditors.

“The sainted prophet of such ideology, Adam Smith” was never linkable in any way to "the pinnacle of free market capitalism." That is a creation of those who purloined his legacy.


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