I do seriously wonder of the concept of limited liability has reached the end of viability.
Two examples have made me ponder this weekend. The first is the tale of Iceland where the people of that state have voted by 93.1% to not accept liability to the UKI and the Netherlands for debts due by failed banks registered in their state. The UK and Netherlands have bailed out those depositors. Now they want the people of Iceland to repay them even though the banks in question had limited liability. And they have said no, they can’t wand won’t pay. I happen to think they’re right to do so. The UK and Netherlands should have regulated sales into their states, but more importantly, people who have no link with a bank are not liable for its debts. If they are, then the concept of the company is radically transformed.
Second is the tale of the UK’s private / public partnership to upgrade London’s tube line. This has failed in all but name. As the Guardian notes:
An exchange of letters between LU, the government and the PPP contract referee, seen by the Guardian, indicate that the publicly owned tube operator will have to make multimillion-pound spending cuts, raise fares or cut back on network upgrades to plug a £400m funding gap in the troubled contract with Tube Lines — the last surviving PPP contractor.
Again the message is clear: the private sector fails and the bill is picked up by the state.
Several important things become clear.
First, banking cannot just be a domestic regulatory issue.
Second, small states can’t regulate banks operating internationally. Actually, that extends to financial services as a whole.
Third, apparently limited liability is in these situations meaningless: we are all providers of capital, whether we know it or not.
Fourth, in that case the relationship between companies and those who engage with them has to be radically transformed. This transformation would involve a reappraisal of what capital is, who provides it and what the duty to report might be. What is quite clear is that the providers of capital in the cases noted are not the shareholders, conventional lenders or even recorded creditors. The International Accounting Standards Board says that the users of accounts (which they use as a proxy for those with interest in companies) are:
The primary user group includes both present and potential equity investors, lenders, and other creditors, regardless of how they obtained, or will obtain, their interests. In the framework, the terms capital providers and claimants are used interchangeably to refer to the primary user group.
Well in that case we are all providers of capital to many companies. How does that, then, change the perception of reporting?
This is a key issue and the professions aren’t engaging with it.
Why not?
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What is really required is to eliminate the separate class which owns capital. Labour is the only active producer and the only class which needs to own the capital goods which it produces and uses to produce other goods. Banks make loans for this sort of thing. The stock market is a totally unnecessary beast.
Agree with you in that what we have understood about limited liability in the past certainly does not apply in many situations. What is happening is that the taxpayer now seems to have unlimited liability and those who run busted companies no liability at all. As for Iceland the fact that some UK shark outfits and some local money men put together a major ponzi scheme should not be an excuse for saddling a small number of people with vast debts they did not contract for. One issue that is being studiously avoided in the UK media is which property moguls borrowed and used vast sums from the banks concerned and are still being propped up indirectly by their political pals in government.
I don’t get why the government are incapable of structuring a PPP deal to share the risks with the private sector?
Surely projects such as the northen line upgrade could be through a non limited liability JV between say TFl and the main contractor?
If the main contractor will only come onboard through a special purpose vehicle, to limit their actual exposure to a notional amount – then why give them the contract? And if no contractor will work under this arrangement then surely Tfl could do the work themselves? A sort of contractor of last resort. The CBI are happy with the bank of england’s remit – surely the principle holds true?
Alex – Don’t you understand that only the private sector are capable of doing anything and that all public sector people are numpties who cannot be trusted to do anything efficiently. As for the London underground and the banks, well we mustn’t let the facts get in the way of a good ideology! 😆
@Alex
Other Alex, the reason it is impossible is because ultimately the government has to bear the risk of the Underground not working, because the contractors, PFI counterparties etc, are just not big enough to be liable for all the consequences of their actions. What beats me is why nobody realised this.
Oh, yeas, now I remember. PwC, the engineering and the lawyers trousered the best part of £100million in advisory fees in setting up the LU maintenance PFI deal, which lasted for 18 months of its 30 year term.
@Alex
Incidently I may have misunderstood your point – Are you saying that companies like Bechtel and Balfour (who’s core competance I am told is project management) can’t manage projects?
The tories say the that gorverment can’t manage capex projects. You say that firms can’t either. Worrying for all of us.