What allows corporations to act irresponsibly?

One key problem is limited liability. Shareholders have limited liability, meaning, if a company goes bankrupt, the shareholder’s loss will be limited to its investment. While limited liability could protect the private property of entrepreneurs, it also protects multinational corporations for large claims after an environmental disaster.

A recent study focusing on the shipping industry perfectly illustrates this problem. Shipping groups evade responsibility by creating subsidiaries for each ship. In case a ship loses containers or causes an oil spill, victims of environmental damages could therefore not make claims against the shipping group itself. As a result, only the subsidiary (the ship) goes bankrupt, leaving the victims with nothing, while the shipping group could continue its business.

One solution is to remove the limited liability for parent companies with wholly owned subsidiaries and make the group fully liable for the subsidiary’s actions, reducing corporate incentives to take environmental and social risks.

Further reading: Vuillemey, Guillaume, 2020, Evading Corporate Responsibilities: Evidence from the Shipping Industry, Working paper.