Ode to the family business – or why personal liability in business might be a good idea.

published: talkinbusiness.nl | March 13, 2013

SBE alumnus Tobias Stöcker explains why he believes that personal liability in organisations would be a good idea.

The nationalisation of SNS Reaal on 1 February, 2013, was the second nationalisation of a Dutch bank in the last five years. The 2008 credit crisis and subsequent improvements in regulation in the financial sector apparently did not have sufficient effect to repair or prevent mismanagement. The resulting decline of confidence in the Dutch government led to media hypes and public threats directed against the ex-top manager Sjoerd van Keulen, who even felt forced to flee to an undisclosed location.

Whether salaries or bonuses paid out to managers will ever be returned is doubtful, although the government is eagerly trying to implement such a claw-back instrument by law. This gives evidence to the fact that personal liability of employees (even in the case of CEOs) is limited to behaviour that is on the wrong side of the law. Whenever actions carried out on behalf of a company are unethical or irresponsible in terms of common sense or social justice, there is hardly anything that can be done to deal out a penalty.

Consequently, there is not much that keeps people in decision making positions from stretching ethics in the name of business success.

Commitment and pride

This has led to a culture among managers of taking risks with other people’s assets, without the proper safeguard of personal liability. One might argue that taking great risks with other people’s money and livelihoods in order to generate profits is what managers get paid for. But there is little (social) control to prevent aforementioned money and livelihoods from being jeopardized in the process.

I wonder whether the 18th and 19th century laws that established legal personality and limited liability were purposely conceived with bad intentions or just ended up working out worse than planned in the long run. Either way, it might be a good idea for politicians and regulators to take a fresh look at those fundamental laws.

And there is one form of business in particular that might serve as a highly inspirational example: the family business – much older than corporations and still the backbone of economies worldwide.

Examining family businesses, we can see some essential characteristics that differ significantly from non-family businesses. Maybe the two most important ones are that people who run a family business have a stronger dependency on the business for their income and identity; and secondly, that they have a very high exposure to other people who are fully dependent on the business’ success. This generally results in a higher degree of commitment and pride in the business and its future.

This is obviously not to say that managers do not identify themselves with non-family businesses. There is, however, a difference between working for a business and working as a business.

As an illustration, think about the end of a working day for an executive of a corporation or the head of a family business. Coming back home for dinner, the CEO can switch off his phone and concentrate on his family. For the head of the family business, dinner is basically a combined shareholders and supervisory board meeting (children and partner respectively).

In short, a family business owner is liable as a person to his family. If he runs the business into the ground, he will not get any payment, let alone receive a bonus. Corporate managers systematically do, regardless of their performance.

Personal liability and humanized control

Within most societies, laws have been designed to substitute social control similar to the sort that is executed at the kitchen table. By doing that through institutions, the major drawback is that the system does not build on ethics, experience, trust and affection. It only builds on rules and codes, which are incomplete by nature, because they do not integrate the ability to learn and evolve.

As a result, they need to be intentionally adjusted in order to keep up with changes. Most of the time they are only adjusted if and when the need arises, say when the state faces the necessity to nationalise yet another bank.

Such a system basically allows organisations to behave immorally as long as their practices are not deemed illegal. Hence, it is only after someone’s behaviour has been found undesirable that rules are formulated.

In fact, the legislation of legal personhood for corporations was established when increasing numbers of people started owning parts of the same business but were no longer personally acting on its behalf. With new technologies and the ever growing availability of information, this chase will only get more complex with time.

That is why I believe that it is futile to try keeping up with this development with coded rules alone.

Instead, we need to support laws and regulations with humanized control, i.e. to equip control systems with a form of social learning ability and behaviour appraisal before undesirable actions take place! This includes subjective opinions, intuition, individual views and social pressure based on unwritten rules.

If you now think that this would take us back to times before laws and rules gave equality to people, think again. Both forms of control – coded and human – exist everywhere where people interact with each other.

Only in the business context, it appears that human control is being excluded in favour of coded rules. A stupid thing to do, because human control works best in situations for which rules have not yet been formulated.

A model of rules and regulations for business representatives along the lines of family businesses might read as follows:

“The management of a corporation is required to display a strong focus on the long term success of the business. Managers must represent their business with passion and loyalty, and act in a selfless manner towards those depending on the success of the company for survival. They need continuous approval and support from a group of dependants who have good insights into the activities of the business. Managers are liable with their personal wealth for negative business performance and its effect on dependants.”

Such a formulation might not be that strange if you think about one of the most sought after attitude in employees: “Do business as if it were your own”.

Well then…