Social Good Uprooted: How America's corporation's lost their public purpose.

Author:Ciepley, David
Position:THE CHARACTER OF THE CORPORATION: The Purpose Debate
 
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These may be flush times for the American corporation, but the bounty is not being translated into a prosperity that is sustainable or broad. How has the corporation's vision become so foreshortened? Its largess so narrowly bestowed? Its malfeasance so widespread? Viewed from the perspective of history, the American business corporation has lost its way.

The business corporation got its real start in the 16th and 17th centuries and came fully into its own in the 19th century. It was the offspring of collaboration between government and a growing class of enterprising individuals.

On the one side, the government would see something that it wanted done because of a perceived benefit to itself or to the public--examples include the opening of trade with distant lands, the construction and maintenance of a road or canal, or the provision of insurance. The government would decline to do it itself, for lack of financial resources, administrative capacity or will.

On the other side, private businessmen would see the revenue potential in the activity, but would also decline to undertake it, whether alone or in partnership, perhaps because of insufficient resources or capacity, or the poor prospects of reasonable risk-adjusted returns.

The corporate form of business enterprise was a legal and institutional innovation designed to bridge this gap between public need and private risk. As Henry Carter Adams, then president of the American Economic Association, explained in his 1896 address to the group, "A corporation ... may be defined in the light of history as a body created by law for the purpose of attaining public ends through an appeal to private interests."

Both sides of this formulation are worth underscoring.

First, the purpose of a corporation was not to maximize the returns to its stockholders, but to attain some specific public end. Arranging for stockholder returns was just the means to get this public purpose financed, and these returns generally took a back seat until the purpose was met.

Second, attainment of the public benefit end did not rely on public-spiritedness on the part of the investors, or even of the managers. It was assumed that most members of both groups would be driven primarily, or even solely, by private interest. This is a sobering fact for those who today call for "corporate social responsibility" while expecting this to come solely, or at least primarily, from investor and managerial commitment. Originally, what was expected to secure these public ends--what would turn private vices into public benefits--was neither investor and managerial intent nor the invisible hand of the market. Rather, it was the visible hand of the corporate charter.

Receipt of a charter is prerequisite to forming a corporate firm. Historically, a charter would be granted only if the proposed corporation's activity was of clear benefit to the public. Eighteenth-century economist Adam Smith himself recommended being even more stringent. Aware that incorporation was a legal privilege, and doubtful that corporations were as diligently managed as partnerships, he advised granting charters only for undertakings that required capital outlays beyond the reach of partnerships, could be reduced to "routine," and would, on the "clearest evidence," bring public benefits beyond the ordinary. In his view, only banking, insurance, canals and waterworks satisfied all three criteria.

The corporation's beneficial purpose was written into its charter, and to this purpose it had to stick. If a corporation failed to fulfill its purpose (for example, if a bridge company failed to start construction) it was dissolved by the state. Meanwhile, activities outside of this purpose were subject to being struck down by the courts. Finally, if the purpose was consummated --say, the bridge was completed --the corporation would be dissolved. Each corporation was tailored to advance a specific public end, and this end alone.

And what did the incorporators get in return? The benefits of incorporation.

Incorporation bestows a bundle of legal privileges, the most central of which is the charter's creation ex nihilo of a new legal entity: the "juridical person" that is the corporation in law. This legal entity owns all of the firm's assets, is the contracting party in all firm contracts, and sues and is sued in court.

Of course, the corporate entity, being a mere legal posit, cannot itself act, but relies on a board or other human agent to act on its behalf. In the language of the medieval-jurists, the corporation is a "perpetual minor," or ward, and the board its guardian, with a fiduciary duty to use the property and personnel of the corporation to advance the corporation's authorized purposes. This in effect makes the firm a special form of "sole proprietorship," with the corporation (the legal entity) as proprietor and management as its agent. The stockholders are not the proprietors. They are rather the owners of a financial instrument which, for historical...

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