Re‐inventing the Limited Liability Company

• DOI: http://doi.org/10.1111/j.1467-8683.2011.00851.x
• Author: Bob Tricker
• Date: 01 July 2011
• Published date: 01 July 2011

Re-inventing the Limited Liability Company

Bob Tricker*

ABSTRACT

Manuscript Type: Perspective

Research Question/Issue: The evolution of corporategovernance thinking and its implications for theory building. The 19th

century concept of the corporation still underpins corporate governance practice today: If the company was re-invented to

meet contemporary circumstances, what might it look like today?

Research Findings/Insights: The original corporate concept was superbly simple and brilliantly successful. Subsequently,

the growing diversity of corporate objectives, confused ownership structures, and complex corporate groups, has led to

abuse. Society has lost the control which it originally demanded for the right to incorporate companies in which share-

holders’ had no liability for corporate debts beyond their equity stake. Faced with government bail-outs of failing compa-

nies, allegedly excessive executive remuneration, and a growing concern for corporate social responsibility and

sustainability, the time has come to re-think the rationale, the purpose, and the governance of the joint-stock, limited-liability

company.

Theoretical/Academic Implications: This paper has been written in response to the editor’s initiative to seek contributions

that might provide alternative theoretical insights into corporate governance issues. By taking a historical, evolutionary

perspective, this paper looks at corporate governance through a different lens than those of agency theory, stewardship

theory,or the growing philosophical interest in corporate social responsibility. Theprimary theoretical call is for a taxonomy

of corporate entities that differentiates them according to the way that power is exercised over them. The paper also

highlights three unresolved paradoxes in corporate governanceorthodoxy – governance by principles or rules, independent

directors’ ignorance of the business, and the unitary board’s dual responsibility for both performance and conformance.

Practitioner/Policy Implications: The paper offers an alternative paradigm for the governance of corporate entities intro-

ducing the concepts of the governing body, executive management, and the sakeholder liaison groups. It is also suggested

that external auditors should report to regulators, not directors. The underlying argument is that limited liability is a

privilege granted by society, not a right. What society grants, society can take away if it is not satisf‌ied with the way

companies are managed or governed.

Keywords: Corporate Governance, Limited-Liability, Corporate Taxonomy, Auditors’ Responsibilities, Stakeholder

Liaison Groups

INTRODUCTION

The invention of the limited liability company in the

mid-nineteenth century has led to the formation of vast

amounts of capital, the generation of countless jobs, and the

creation of incredible worldwide wealth over the years.

However, the creators of the original idea recognized that

limiting the liability of shareholders for their company’s

debts was a signif‌icant concession by society. So companies’

powers were strictly restricted. Single entities were incorpo-

rated with clear and limited objectives. The company pro-

moters, directors, off‌icers, and shareholders had to be

declared, and public annual reports and returns were

required. The directors’ accounts were audited by share-

holders’ audit committees.

But today, the original concept has become debased.

International groups of companies operate through vast

pyramids of subsidiary and associated companies, some

enjoying the secrecy of haven jurisdictions. Others operate

through complex networks of cross-holdings and joint ven-

tures. Some use chains of public companies to leverage the

f‌inancial advantage of those at the head of the chain. Com-

panies’ memoranda of association now provide multiple

objectives; indeed some jurisdictions require no declared

objectives at all. The reporting of public, listed companies

has become vastly complicated. Remuneration consultants

gear-up top executive remuneration.Auditors are effectively

appointed by and report to the directors. And corporate

*Address for correspondence: HK Baptist University, HK Open University, The Hill

House, 23 St. Peters Hill, Brixham TQ5 9TE, UK. Tel: 44 1803 857937; E-mail:

bobtricker@aol.com

384

Corporate Governance: An International Review, 2011, 19(4): 384–393

© 2011 Blackwell Publishing Ltd

doi:10.1111/j.1467-8683.2011.00851.x