Hong Kong must not add another cloak of secrecy to company operations

News of a government proposal to obscure the identities of company directors was met internationally with bewilderment and locally with embarrassment. Officials have again showed a profoundly flawed understanding of the role of companies in a well-administered society. They are in need of a history lesson: the legal fiction we call a company can be both a boon to society and the cause of financial loss.

The concept of the company as a legal person has been around since at least the Roman Empire. Groups of people were granted the right by the state to act as if they were one person. Clubs and guilds started the trend, but private enterprise provided the catalyst for growth of the corporate form.

As companies grew larger, shareholders became increasingly distant from any kind of influence on company behaviour. But when liabilities arose, each shareholder was on the hook for the total bill. Predictably, shareholders wanted to avoid liability for company actions over which they had no control. Political agitation led to the introduction of laws to limit the liability of shareholders to the amount invested.

With the introduction of limited liability, governments and citizens implicitly struck a grand bargain. The state would grant to shareholders the gift of walking away when things went bad. In return, companies would act as aggregators of capital, funding the corporations that would fuel economic growth and raise living standards.

It behooves us to question if both sides have stuck to the terms of the deal.

The first question we should ask is whether corporations (a term that derives from the Latin word for "body of people") are aggregating money and deploying it in commercial enterprises. Well, yes and no. Public companies around the world operate in every industry, but there are also innumerable companies with only one shareholder, who in most cases is also the sole director.

The second question follows from the first: do companies with only one shareholder (who, incidentally, is likely to be another company) fulfil any useful social purpose? The answer is no. Running a business as a company is no better for society than an individual running the same business in her own name.