The limitations of limited liability — how a simple legal concept caused so much success and so much harm

London in the 1855 must have been a stimulating place. A bustling city in the heart of the British Empire, it was going through an unprecedented period of growth, from one million people in 1800 to seven million people a hundred years later. There was a constant and pressing need for new infrastructure; roads, bridges, railroads and public buildings, requiring plenty of capital to fund it. The London Stock Exchange was booming. Although rewards were high for those who got lucky, it must have been nerve-wracking to be an investor in those days. If a project failed you might lose everything, since investors were liable to pay third party losses. This restrained the flow of capital.

The British government thought they had the solution — freedom of capital. At that time, freedom was much in vogue. Britain, keen to exploit its naval power, was promoting free trade. Slavery had been banned in the Empire just 20 years previously. Meanwhile British colonies were agitating for more autonomy. It seemed in keeping (and politically expedient) to extend freedom to the holders of capital.

In July 1855 the government presented the Joint Stock Companies bill in Parliament, proposing that the liability of investors in a company would be limited to the amount of their capital. In other words, once they had paid up the capital they had committed, they would have no further liability for the company’s debts. They would have “limited liability”, meaning effectively no liability.

Not everyone was happy with this. The Rt Hon Strutt MP argued in the House of Commons that the Act was designed “to enable persons to embark in trade with a limited chance of loss, but with an unlimited chance of gain. That was a direct encouragement to a system of vicious and improvident speculation. [1]

Despite the opposition, the government prevailed and the bill became law. Other countries followed suit and so it was that the concept of limited liability spread around the world, and the foundations were laid for the emergence of the modern corporation.

With hindsight we can say that both sides of the debate were right. Freedom of capital has unleashed unprecedented waves of innovation over the last 165 years. Google, Facebook, Amazon, Disney, Toyota, Boeing, Glaxo Welcome and all the other large corporations that feed, clothe, entertain, connect, inform and sedate today’s citizens would not exist without the free flow of capital enabled by limited liability.

At the same time the ”system of wild speculation” encouraged by limited liability has had a massive human and environmental cost. Free capital, unconstrained by things like a conscience or a sense of responsibility, has flowed round the world, enabling the destruction of eco-systems, the flattening of mountains and the enslavement of people in the name of profit.

Society tends to work best when freedom and responsibility walk hand in hand. Disconnecting capital from any responsibility was an invitation to trouble.

The logic of capital has enabled the efficient and ruthless conversion of things of true wealth (human, social and ecological capital) into numbers on spreadsheets and more money than we know what do with. For those who know how to ride its coat-tails, free capital offers the opportunity to gain financial wealth beyond most people’s dreams, and well beyond anyone’s needs. In its wake, it leaves a degraded environment, an addicted population of consumer-oriented individuals and a torn social fabric.

No one benefits from this. We are all human, with human needs. We all need to breathe air, drink water, eat food and hang out with other human beings. Not even the wealthy really benefit — after all, what does it do to our soul, if we gain riches while around us there is so much suffering? Free capital robs us all of our humanity.

This is the nature of freedom, a paradoxical shape-shifting notion. We all want it, don’t we, for ourselves and our loved ones? Yet freedom for one person usually means restriction for another. The more free the rich are to choose where they want to live and work, the less free are the rest of the population. In America, the “land of the free”, the freedom for individuals to carry guns means children are not free to go to school without fear of being shot.

Likewise, freedom of capital has led to the enslavement of people. In the 19th century it was the workers in the mills and mines, in the 21st century it is the workers in the sweat shops around the world and the countless millions who slog away in meaningless work to serve their corporate masters. It is the “consumers” who are not truly free to choose what products or services to buy, since free capital pays for sophisticated advertising that manipulates their minds and their choices. How much freedom do we really have?

It’s time to correct the imbalance, to put capital back in its box and allow people to reclaim their freedom (true freedom can only be claimed, not given). We need to constrain the ability of capital to flow where it wants, by reducing the power of those who control capital and obliging capital to serve the needs of the whole community of life, including all life on earth and future generations.

What might this look like?

Knocking capital from its perch. A good start would be to oblige every company to adopt a purpose beyond profit, one that the company must prioritise over the financial interests of investors. A recent British Academy report highlighted purpose as a key lever to encourage more responsible behaviour by large corporations.[2]

Shift from ownership to trusteeship. A more radical step would be to reduce the powers of investors, in particular by diluting or removing their right to appoint the board of directors.

This will require a major mindset shift. The rights of owners are a sacred cow of Western society — it is heretical to challenge or question these rights. Still, in an age of pandemics, climate chaos and social unrest due to inequality, it may be time to sacrifice a few sacred cows.

I dream of a shift away from “ownership” of a company (a very modern idea in historical terms) to “trusteeship”, a much older concept where elders in the community hold assets not for their own benefit but on behalf of the community as a whole. This is common in employee ownership and it would be natural and straightforward to extend it to the holding of community assets such as water utilities, oil companies, transport companies, telecom companies, social media enterprises and so on. It is not really such a big or radical idea — I think of it as a dropping of a more modern idea that hasn’t worked. After all, nature doesn’t do ownership. Who owns the moon or the stars? It just seems revolutionary after an extended period when the pre-eminence of capital (and those who wield it) has been assumed to be part of the natural order of things.

Trust the people. Another major re-balancing I am seeing emerge is a shift towards greater participation by ordinary workers and other stakeholders in the steering of large companies, a sort of democratization. This is not without its perils — involving a broader group in decision-making can slow things down and bring unwelcome politicking into the board room. Yet, when done well, bringing democracy into an organisation can result in far better, more thoughtful and responsible decision-making. There are some good examples of this in employee-owned businesses, cooperatives and other successful mutuals. If we constrain rampant capital, we can provide more space for such organisations to flourish so all can benefit.

Don’t you know, talking ‘bout a revolution… This may all sound like a revolution, and indeed it is. Although I prefer to think of it as a metamorphosis — not a mere over-throwing of one group by another, but a fundamental change in the nature of our society, as we let go of Newtonian models of how the world works and adopt more organic ones that recognise our radical inter-connectedness and the essential uncontrollable nature of life.

Such metamorphoses happen through an almost infinite and invisible number of tiny changes that happen, moment by moment, day after day until one day there is a tectonic shift and we suddenly realise that everything has changed.

As I write, around the globe individuals and groups are experimenting with new ways of organising. They are flattening hierarchies, dispensing with managers, exploring stakeholder ownership, and creating networks of dynamically interacting teams. Under the banners of sociocracy, B Corp, social enterprise, holacracy, agile, Teal, viable systems model, employee ownership, open source and many others, people are looking to transform the way they organise and relate to each other, to the wider community and to all of life on Earth. Meanwhile protestors round the globe, from climate change activists to Black Lives Matters protestors, are stepping up to reclaim their freedom.

In different ways, all around the world at this time people are choosing life and rejecting enslavement. Sooner or later, our company laws will have to come into line.

[1] Hansard, 26 July 1855.

[2] See

barefoot lawyer. Co-founder of Human Organising Co. Writes about governance and the future of work and organisations. See

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