Limited Liability and High Risk Behavior in Corporations

Abstract

We tried to adopt the forward approach of conceptual genealogy focusing on the contextualized meanings and dominant contemporary features; we focused on the fundamental patterns, events and mechanism that give the explanation of conceptual qualitative change. We likewise took the deliberate of exploring the impact of moral-hazard.

Limited liability can be looked as the modern corporation capitalism in the most challenging economic world. This research is seeking to understand how high-risk behavior and limited liability affects the functioning of corporation and looking into the conceptual connection or the really connection between them, we are trying to experience or conclude the structural relations between limited liability and high-risk behavior in corporation, and to understand the important factors of the systemic instability of contemporary capitalism and the challenges and impacts to the economy and societies.

1. Introduction

One of the Main ideals behind history is that, Learning history can improve the condition of the future but yet, the same history that had negative impact to the global economic is still taking place with the same negative impact or worse even with advance technologies. The relative incidence that occurred in 1929 are still occurring in the modern world precisely the stock market crashed and Great Depression of 1929-1939, this incidence caused the suffering of millions of people in the world. The Enron scandal of 2001, the 2008 financial crisis and Deepwater Horizon oil spill in the Gulf of Mexico.

We perceive that limited liability was used by the executives of Enron Corporation to evade taxes and to make personal profits which is similar to what happened to the Great depression. The Enron Corporation started taking high-risks when financial difficulties and failed projects were carried out. Corporations are more vulnerable to high-risks when their financial situations are deteriorating. If the company is liable for the debts incurred by the company and yet the company is bankrupt how will the new shareholders recover their investments?

All these incidences are based on negligent, lack of rule of law and insufficient powers to direct or determine the proper functioning of corporations, corporations need to function based on principles, transparency and accountabilities to evade high risks.

According to capitalism defined by Albert Hirschman (1977) which he stated that the pursuit of individual freedom and economic self-organization would be the driving force of political peace-treaty and collective social process whereby societies achieve an advanced stage of development and organization. Adam Smith noted that to narrow the competition will always be of the interest of the traders but to widen the market will often be of best interest of the public.

The argument is that for the economic hypothesis of the firm to function beyond ethical practice and dangerous functioning, accounts of voluntary contracting within individuals will be necessary to restoring a depressed, inactive, or unused state and build on approaches from outside economic that have long regarded the firm as a real entity.

2. Comparison research a perfect corporation should function like a family.

We considered a family as a corporation functioning; we tried to observe the approach and theories of families and compared them with that of firms finding strategies that assist families to always taking low and high risks in a very caution manner and why they are always successful with almost all their projects. We started by comparing the elements of corporations and the elements for families to make sure they were the same before carrying on the experiment or survey.

First we started with capitals, they both have capitals that they function with, then controllers and managers, the parents were controllers and managers which now gave us the go ahead to carrying on our research. We asked ourselves what are the projects of the families? This type of corporation has always proven to function perfectly without bankruptcy or high risk taken or external forces to influence, the corporation reaches its ultimate goals when all the children are independent.

Buying a car is a project, having another child or more children is a project buying food and clothing are projects, changing furniture in the house is a project, increasing luxury is a project and bankruptcy is when they lose their jobs, failed projects could be when a child is not good at math and needs extra lessons at home with a tutor, furniture is broken accidentally, engine of the car is beyond repairs suddenly and a child is sick.

We found out that for families trying to improve the living standard of their household will increase risks in the families which is the same situation with corporations, for corporations trying to make more profits will create more risks, the parents we interviewed said to improve the living standard at home was either they risk their money in investment or if possible get a second job, getting a second job was risky because their performance of their main job will decrease risking getting fired.

The parents are the entities and the children are the shareholders. How are they shareholders? Their personal affection, performances in school and assisting at home with chores are quite vital to the corporation (family). I interviewed the controllers (parents) it turns out that they were so much in need of these affections, trusting each other and appreciations from the shareholders (children) encourage them to think out of the box to perform much better than ever.

Fortunately for us, sixteen of the parents we interviewed were controllers and managers of various firms which reduced our work, they solely affirmed to us that if organizations were functioning or using the strategies of families they could work harder and will always try to be creative, and then we asked why do you keep working while not satisfied?

This question was asked to all controllers and mangers that were not satisfied and it turns out most were not satisfied or not really giving in all their best as that of the family no matter the good salaries as to compare those of families. Most of them were working to keep their careers and to make money. At this part of the research we realized that most firms really entail passions and appreciations for workers so as to achieve best innovation productions.

The second part of our research was to compare the daily operation of families and that of corporations, everyone was always up on time and gets ready for school and was liable for their functioning both at home and at school starting in the morning just as firms do . In this part of the research we found out that the families were working on intense cooperation with each other before separating in the morning and in the evening before going to beds and all these were arrange by the mangers (parents). Then we went to organizations to find out how intense cooperation was vital to their companies so as to conclude our findings on this section.

It turns out that intense cooperation was quite significant but difficult to obtain in firms based on the fact that employees were from different cultural backgrounds making it difficult for intense cooperation to take place. The third part was to assess the nature of limited liability of the shareholders (the children) in the family, actually there was limited liability of the shareholders externally but liable at home, trouble caused by the children at school was resolved by the (firms) parents but they were punished at home so they took responsibility for their actions which reduces the possibility for the child to risk getting into trouble in future according to parents (controllers).

But shareholders or controllers in companies are not liable of any debts incurred by the company thereby encourages the company to take more dangerous risks or higher risks, In this section of the research we found out that firms were likely to take more risks and even dangerous ones because of the rules of Limited liability.

Failed projects in the families were when the kids needed tutor for subjects they were not good at or when the family needed to change furniture or car unexpectedly, the family took loan only for the particular issues at hand and were more cautious and sure they were up to the task and they solved one issue at a time depending on the gravity of the issues at hand.

When we interviewed twenty five of the managers and controllers all revealed that companies always want to take loans for new projects while the other projects are still going on. Here we found out that families were more caution and take longer time to make decisions on dangerous loans than corporations. The next step was to assess average and rich families on their risks management, what kinds of risks can families take?

When they were about to use almost all their savings to carry on any kind of project, buying a house or starting a new business. After the interviewed, average families were more cautious and take longer time to make final decisions on the issues that will use almost all of their savings while rich families were quick in such decisions. Then we chose ten rich and average corporations respectively for the same survey it turns out that the big organizations were quick to their decision than average organization and average organization were more cautious to decision making.

Then this idea came into my head, managers and controllers who grew up with rich and poor backgrounds or who had a lot of difficulties in life, this was quite easy to carry out since we were already familiar with many of them, from interviewing their employees it turns out that Managers and controllers who had difficulties while growing or searching for their careers were more cautions and took longer time for them to make decisions with high risks.

3. Conceptual Genealogy Method

Conceptual genealogy is the history of moral thinking, ideals and metaphysical concepts. It is the critical elaboration of history or successive expression aiming to different types of systems of regulations and regimes of power, the epistemological convection behind this type of approach is that human activity is contextual and socially constructed and likewise language and politics are developing too.

To follow the complex course of decency is to maintain passing events in their proper dispersion, it is to identify the unfortunate happenings, variation that deviates from the standard or norm or conversely, the errors and the faulty calculation that generates things that continue to exist that are valuable to the society M. Foucault (1961).

A Special Purpose Entity (SPE) is a legal entity created to fulfill narrow objectives which is ordinarily used by companies to prevent the company from financial risks and can be used to hide debts, possession and make less visible between entities. The Special Purpose Entity was used by Enron Corporation to deceive, hide possession and encourage new shareholders to invest in the company without knowing the financial situations of the company.

The ideal behind SPE is that corporation will transfer assets to the SPE for management then use the SPE to finance a large project because of that achieving a limited size or scope of goals without putting the entire company at risk. The easiest way for company to go about this is by registering as tax haven and Round-tripping is another strategy where company sells their not yet used assets while agreeing to buy it back or buy similar assets in the same price at the same time.

During or before the fourth century, creditors were free to sell into slavery or kill debtors with legal backings who did not pay their debts. We argued that, these types of extreme liability of course will cause fear within corporations and business places reducing the ability of controllers to function professionally and take any type of risk associated with businesses, even business projects that could be fruitful with limited risks. With this type of liability controllers might never be creative or improve the innovation of production in corporations.

We assumed that limited liability was created to make controllers more creative and to perform freely and professionally, most business projects come with various types of risks that need perfect assessment before working on them but the limited liability is more political with controllers taking advantages to make more profits for themselves. The principles of limited liability are involved with moral hazard and always with accusations that brings into intimate and usually incriminating connections either legal or not legal.

Conclusion

The conclusion of this research is that families were perfect corporations than other corporations and this was because they were passionately involved in all aspects of their duties and have intense cooperation. Then we realized that corporate directors were only more or well-functioning on sections that could put them in trouble and were negligent with situations that the impact might not be directly liable to them.

We likewise wondered if the rules of limited liability were intentionally created to advocate directors to take higher risks without fear because of the intense competitions and slow economic progress in the world, and for better innovations. Even though the pressure of global economy and competition is quite high, it is quite vital for companies to maintain smooth progress and avoid risks that are not wealth taking or dangerous.

References:

1. Albert Hirschman (1977). The Passions and the Interests: Political Arguments for Capitalism before Its Triumph, Princeton University Press.

2. M. Foucault (1961): Madness and Civilization: A History of Insanity in the Age of Reason.



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