Saturday, September 16, 2006

Thoughts on Limited Liability

Vinay at WorldChanging posts...

One of the persistent threads running through environmentalism is the notion of "Corporate Responsibility." I've been thinking through some of the issues involving how corporations are formed and how the nature of the corporation affects how the economy assesses and handles risk and I'd like to present an idea for comment and examination.

The seed of the idea is that the limited liability corporation is a government subsidy to risky investments and as such may be partly what drives the reckless attitude of corporations towards the environment...

While Vinay is correct in stating that limited liability corporations (LLC) encourage investors to invest. I believe he is missing the point in assigning the cost of the limited liability.

If investors are willing to accept a given level or risk for a given level of return on investment (ROI), as you increase the expected risk, you must increase the expected ROI to generate the same level of investment.

The risk in his example can be quantified by the cost of insuring against liability; a product that by his estimates would be very costly because it covers a large risk.

Using his example of an insured partnership. To encourage a given level of investment (I1) and the purchase of the required liability insurance (LI), the partnership would have to generate ROI on I1 equal to a lower risk investment (I2) where I2 = I1 + LI.

If the partnership operates at the same level of efficiency/effectiveness as the LLC, microeconomic theory tells us that the increased requirement for ROI, i.e. increased cost, would be past onto the consumer by higher prices and/or fewer choices.

In other words, the individuals he wish to protect from the damaged caused by imaginary governmental subsidies would suffer real damages caused by increased prices and/or reduced choices.

Additionally, since the insurance paid for by the partnership's customers would maintain the status quo in regard to risk exposure for organizational management, the decision making environment will not have changed, e.g. your system provides no incentive to choose a more environmentally friendly path of action.

In fact, under his system of thought where increases in greed = increases in environmentally-damaging business activity, the added pressure to perform, i.e. to act more greedily to generate higher ROI, provides an incentive for organizations to consider proposals and pursue activities with greater potential for negative environmental impact.

Given the protections that LLCs provide for everyone, not just investors, I would think that that any clear minded individual: liberal or conservative, industrialist or environmentalist would be supportive of this type of governmental protection.

At least these are things I would consider when I was analyzing the situation.

On a side note: A few years ago, I took my girls yurt camping. The semi-permanence combined with the openness of the structures provided an exceptional camping experience. Vinay is working a project called Hexayurt. He is positioning it as a refuge shelter. However, given my experience in yurt camping, I bet this project would make a fantastic opportunity for a visionary investment capitalist to underwrite in such a way that it would support both humanitarian and capitalist objectives.

Take care…

John

Check out Vinay's post at WorldChanging...

Check out Hexayurt at MindsMoving...

No comments: