Friday, October 11, 2013

Open Corporates: What makes a good public register?

The website Open Corporates has an excellent post under the title What makes a good company register? Part 1: The public purpose.

The post, written back in April, begins by framing the questions
"Over the past six months, we’ve been asked again and again: What does a good company register look like – what should it do, what are some good examples, do we even need one?"
And it then goes back to first principles, to start to provide an answer. Which is fascinating:
"So, let’s start at the beginning.  Why have a company register in the first place? It’s not, contrary to what some may have you believe, to generate revenue (we’ll come onto that later), but because companies are artificial creations, created out of thin air, and given a distinct legal personality separate from that of their owners or managers.

Why does it need a legal personality? Well, if it didn’t it’s just a collection of people working together (in some countries this is a de facto partnership), personally liable for what they do, and jointly responsible for assets and liabilities. A company allows the creation of an imaginary legal construct, owned and controlled by others, and able to enter into contracts, raise money, have assets and liabilities, and employ people. [Like fiat money, it's one of those things we take for granted but is actually rather more conceptual than most people think.]

Until the middle of the 19th century these were very rare things indeed – in Britain, for example, until 1844 they had to be formed by an Act of Parliament or a Royal Charter. But the arrival of the railways, and the need to raise money for the people building them, helped create the push for the joint-stock enterprise, and not too long afterwards, the limited-liability joint-stock enterprise.

If you think creating a legal personality is strange, the idea of limited liability is even more so, as what it means is that when the liabilities (debts) of a entity exceed its assets (the money the shareholders have put in and anything that’s been accrued since then), then the people that bear the shortfall are not the shareholders or the managers (who benefited from the profits), but the suppliers (who don’t get paid), the customers (who don’t get the goods they’ve paid for), the employees (who don’t get wages), and wider society (lost tax, bailed-out pension funds, benefits, cleanup of polluted sites, etc).

So strange is this, that when it was suggested many were horrified, as it not only seems counter-intuitive, but fundamentally unfair, and also offer huge potential for fraud. Gilbert and Sullivan even wrote an opera about it.

Yet the belief was, that by allowing these to exist, there would be more innovation, more investment – in short society would benefit. But that last point is a critical one – the justification behind them is not for the benefit of companies, or their owners, but the benefit of wider society."
And that is, of course, a matter of great importance for tax justice activists - and pretty much anyone else, for that matter. And there's more:
Critical to this is the ability to take an informed decision about whether you want to do business with the company, work for it, or, in the case of the state, ensure that it does not engage in fraud or other criminal activities. As Robert Lowe, the Vice-President of the Board of Trade, said when introducing the 1856 Companies Act, it was essential to give “the greatest publicity to the affairs of such companies, that everyone may know on what grounds he is dealing”. Hence the need for a company register – a public repository for that information.
The blog goes on - and it's excellent - with a Samoa surprise at the end.

Recommended reading.

To be stored permanently our offshore history section, and in our mechanics of secrecy page too.

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