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Re‐Inventing the Limited Liability Company

Research Question/Issue: The evolution of corporate governance 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 shareholders' had no liability for corporate debts beyond their equity stake. Faced with government bail‐outs of failing companies, 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. The primary 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 governance orthodoxy – 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 introducing 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.