Every recession yields a shakedown of responsibility: political, legal, economic and corporate. When things go wrong, fingers are pointed. We are now witnessing, in addition to political finger-pointing, a great deal of buck-passing and blame-shifting in the corporate world. Inevitably some of this has ended in the courts.
Last week in the NSW Supreme Court Justice Rogers set out some principles dividing responsibility for huge corporate losses among auditors, senior management and directors. While he was dividing responsibility, there were others dividing blame. Justice Rogers was ruling on who should bear the alleged loss of $50 million by the Australian electronics company AWA Ltd, much of it in foreign-exchange dealing.
Under Australia’s corporate law, the foundation of which goes back 1{ centuries, responsibility and power is divided. Unlike a sole traders, who are themselves responsible for raising capital, making decisions about how it will be spent and the distribution of profit, companies split the responsibility for these functions. One of the central reasons for the law creating corporations was to create a dichotomy between capital and management. The corporation has been part of the genius of Anglo-Saxon capitalism. It has been a recognition that some people have capital, but no knowledge in how to put it to good effect, and others has skills of management, but no capital to put them to good effect. Married together, the results can be hugely productive. They are productive in a way not achievable without the legal creation of the business corporate entity, which has perpetual succession and can sue and be sued in its own right. The corporate entity has shareholders (who provide capital) and directors who provide management. Part of the genius of the corporate system is that shareholders have no inherent right to interfere with management. Collectively, they have a right to elect a board of directors, but after that they have no rights other than to vote to replace them. Even the distribution of profits is determined by directors. It is much like the relationship between voters and government in a democracy.
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