Whose Organization Is It Anyway?

• Author: Richard Tudway
• DOI: http://doi.org/10.1002/bl.30047
• Published date: 01 May 2016
• Date: 01 May 2016

MAY–JUNE 2016 5

Board Leadership’s mission is

“to discover, explain, and

discuss innovative approaches to

board governance with the goal

of helping organizations achieve

effective, meaningful, and suc-

cessful leadership to fulfill their

missions.”

Board Leadership aims to ful-

fill this mission by engaging its

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tive. This inquiry is based on three

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• Boards exist to lead

organizations; not merely

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• Effective board governance

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theories, practices, culture, or

behaviors—it is about all of

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Here’s what a few of the key

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• Innovative: Creating

significant positive change.

• Approaches to:

principles, theories, ideas,

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• Board governance: The

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organizations.

WHEN WE SAY ...

Whose Organization Is It

Anyway?

by Richard Tudway

Here, Richard Tudway, author of The Looming Corporate Calamity: Restoring

Corporate Legitimacy,1 which provides an examination of the evolution of

corporation and corporate governance norms in a range of different jurisdictions

and recommendations for reform, shares his thoughts on this foundational

governance question.

Who Owns the Corporation?

Few rhetorical headline-grabbing state-

ments capture better the collective

state of angst about the modern cor-

poration. Qualifications are, of course,

needed. People are not thinking about

all corporations or firms in this way. But

they are thinking of some of the biggest

publicly traded firms that straddle the

planet and impact upon the lives of all.

The fear is fueled by serious investiga-

tive reports of events across a wide

spectrum of public interest concern.

They embrace everything from massive

and systematic tax evasion to lies and

misrepresentations about the products

and services they offer, to the price they

charge for those same products and

services, to employing people on wages

that deny affordable living without ben-

efits from taxpayers to make good the

difference. The complaints are legion.

When challenged, the leaders of these

great industries seem to disappear like

mist in the morning sun. All the public

is left with is the steady drip of scandal

and disclosure. The damage to corporate

legitimacy is immeasurable. Yet little

changes. Corporate abuse continues.

Public esteem of these great institutions

sinks deeper by the day. Global protest

is brushed aside.2 Corporate leadership

elites appear mostly unmoved.

It is my belief that all this reveals a fun-

damental flaw in corporate governance

arrangements, which must be addressed.

What the Historic Record Tells Us

So how did it all happen? This is a

tangled story. It starts life in the mid-

nineteenth century with the passage of

laws of limited liability. This happened

initially in Britain and Europe and later

in the United States and elsewhere.

Limited liability created a new corpo-

rate entity with a legal status quite dis-

tinct from the social and political mores

of incorporation that then existed.

Until the mid-nineteenth century,

unlimited liability corporations—or

partnerships—were the predominant

form of incorporated status.3 Things

were fundamentally changed by the

introduction of limited liability. The new

law provided shareholders with a cap

on their downside risk in the event of

company failure or other tort.4 Under

unlimited liability, this risk was literally

without limit. Under the new arrange-

ments, shareholder loss was limited to

the value of the equity invested.

The aim of limited liability was to

encourage the wealthier middle classes

to invest their capital into companies

without exposure to any commercial lia-

bilities generated by the company dur-

ing its existence. Though opposed by

luminaries of the day, it would fly in the

face of the facts to say other than that

the innovation was highly successful.5

The Discovery that the

Corporation Owns Itself

So far, so good. But what was then

to follow is an example of the law of

unintended consequences, it being so

frequently the fact that actions taken

by authorities produce unintended

results. In this case, the action of limit-

ing liability produced quite different

responses in different jurisdictions. This