Corporations, Our Corporations
Dickman, Howard
Howard Dickman CORPORATIONS, OUR CORPORATIONS There's no business like big business. A healthy society, claimed the English socialist G.D.H. Cole in 1921, exists "only if it is in the full sense...
...Moreover, it operates to the advantage of creditors and customers who can sue the corporation without having to chase every shareholder...
...In addition to its doubtful legitimacy, Nader's brand of direct corporate democracy would prove disastrously unworkable...
...the shareholders have lost control over their own wealth and the officers have gained control of wealth which they privately do not own...
...But the managers who do control the corporation do not own it, so their control lacks the legitimacy of property rights...
...Thie true nature of entity status is also the answer to the silly debate about whether or not the Fourteenth Amendment was "meant" to apply to corporations...
...this relationship is unobjectionable because it rests on the principles of choice, consent and contractual authorization...
...There has been no usurpation, no "revolution" by the managerial class, and the image of the corporation as a participatory democracy in some lost golden age is a myth...
...But in the meantime, In Defense of the Corporation is a brilliant beginning...
...Many people will nevertheless be troubled by genuine doubts about the peculiar legal features of the corporation...
...The mass of shareholders are interested in results-profits-not in the details of management about which they have neither the time, inclination, nor expertise to inform themselves...
...The corporation exists in legal limbo, and can no longer be considered private property...
...Maitland once observed, has made it "difficult to maintain that the state makes corporations in any other sense than that in which the state makes marriages when it declares that people who want to marry can do so by going, and cannot do so without going to church or registry" Hessen agrees...
...The corporation, many believe, "exercises too much power" and is "out of control...
...The owner shareholders do not and cannot effectively exercise their property rights...
...But "the increase in the number of corporate shareholders, each owning only a few shares has enabled corporate officers to usurp authority...
...On the simplest level, Hessen reiterates what every student of American history knows, or ought to know...
...Behind this belief lies the profound confusion of economic with political power, through which such concepts as "private government" are smuggled into intellectual discourse...
...Hessen explains that these concerns are misplaced...
...The problem is that corporations are chartered by the states, whose regulatory laws are, for Nader at least, unconscionably lax and permissive (the result, he tells us, of a corrupt period in American history when state legislators sold out to the highest corporate bidders...
...Part of the reason corporations are vulnerable to such assaults stems from the "centuries of confusion about the nature and origins" of modern business enterprise...
...serve the "public interest...
...It was the separation of ownership and control-i.e., the creation of two distinct functions (investment and management)- which made possible the increased number of shareholders," and not the other way around...
...Nader's politicized version of the corporation would only create chaos, as director-politicians attempted to operate in an informational goldfish bowl, and as a definable, objective goal, profitability, receded before the chimera of "social responsibility" Hessen points out that if the corporation falls under federal control of this type the autonomy of every voluntary, private social institution is threatened, and with it the survival of a free society...
...Hessen begins here...
...His solution is federal incorporation...
...In fact, though they are still called charters, the articles of incorporation that states register, as they do other deeds and contracts, record only the existence of a prior agreement among the incorporators themselves to undertake certain activities and mutual obligations, and to conduct their business in accordance with certain publicly acknowledged legal forms...
...individuals lose their rights to due process and equal protection of the law solely because they choose to invest in a perfectly lawful organization...
...Hessen argues quite simply that "shareholders own it...
...The current Kulturkampf being waged by the federal government against "not for profit'' public and private educational institutions should be example enough...
...Legal personality gives to a corporation's opponents, if you will, a body to be kicked (if not a soul to be damned...
...The logic is inescapable...
...a corporation is in fact an association of individuals who are entitled to the same rights and legal privileges which apply to [i.e., inhere in] all other individuals and organizations...
...But Hessen's book is much more than a critique of the Nader menace...
...Indeed, this is the rationale for corporate officers' broad discretion...
...The television networks...
...He is happy to leave such matters to the Antitrust Division of the Department of Justice...
...officers make major decisions without consulting the owners, and...
...Hoover Institution, $7.95...
...The institution to be established by the federal charter would hardly be a corporation at all, for Nader's blueprint proceeds from the political principle of one shareholder, one vote, not from the business principle of voting strength relative to investment interest...
...Immortality," or perpetual life, is similarly a legal convenience, and saves the time and trouble of periodically renewing the original incorporation agreement...
...The Brookings Institution...
...A new system of democracy is required which will allow all the people to participate in making the corporate rules and decisions which affect their lives...
...Cheating customers, exploiting workers, and despoiling the environment, immune to competition and unaccountable to the stockholders who own but do not control them, the officers and executives of our giant business corporations preside illegitimately over "undemocratic and despotic" "private governments...
...What must result is centralization, and with it that strange yet already familiar mixture of mass apathy and factional frenzy, of "apoplexy at the center and anemia at the extremities...
...His book, it must be admitted, is short (only 115 pages), rather a David facing the Goliath of Berle and Means, and their legions of followers...
...It too is available to unincorporated businesses through the use of "continuity agreements...
...All the attributes of the corporation are historically the result of mutually voluntary, contractual arrangements, which governments only recognized and protected after the fact.** "Entity status," or legal personality, means that a corporation can sue (and be sued) as a unit, and can hold legal title to property despite changes in the ranks of its shareholders...
...The board of directors will initiate policy, but all fundamental corporate transactions and decisions will be ratified by shareholder plebiscites...
...In one pathbreaking chapter Hessen shows that the "separation" of ownership and control, rather than being a later mutation, predates by several centuries the rise of the giant corporation...
...Does not Harvard University fit this criterion...
...Cole in 1921, exists "only if it is in the full sense democratic and self-governing...
...The corporation as a social organization is not well understood, and it is Hessen's larger and far more ambitious task to construct a principled, positive theory of this basic institution...
...Moreover, corporate officers (insiders) are forbidden to serve on the board of directors, or to vote for directors, even if they are also shareholders- even if they have a majority interest...
...Because of their unique and specially privileged legal status, corporations-all corporations, not only public utilities or franchised monopolies-are by their very nature public institutions which exist to serve the public interest...
...The older claim, which Nader echoes in his books, is the famous "concession theory...
...tions attain giant size...
...Hessen will need to publish a longer treatise if he is to dislodge the myth of corporate illegitimacy...
...A vestige of medieval political thought which still lurks incongruously in Anglo-American legal doctrine, this theory holds that the corporation is a "legal fiction," a creature "into whose nostrils the State must breathe the breath of a fictitious life...
...The Catholic Church...
...His real purpose in defining away the difference between private contracts, where, as Sylvester Petro has written, the "parties mutually assent to the rule which is to govern their conduct for the duration of their agreement," and political majorities, where "the conduct of some persons is governed entirely without regard to their desires," was the destruction of the business corporation, and with it the capitalist system...
...Its voluntary, contractual nature was best explained by Adolph Berle: "A clause could be put in every contract by which...
...The power to incorporate has long since ceased to be a special monopolistic privilege...
...As Robert Hessen demonstrates in his important new book, In Defense of the Corporation,* this is the goal of Ralph Nader as well...
...But Hessen, who has a masterful grasp of the history and content of these laws, demolishes Nader's arguments by revealing the phony scholarship upon which they are based...
...In the last few years Nader and his associates have moved beyond indictments of specific corporate malfeasances, real or fancied...
...They have drawn up a blueprint for "restructuring" the corporation, outlined in two publications of 1976, Constitutionalizing the Corporation and Taming the Giant Corporation...
...The advent of general incorporation laws, as the English legal historian F.W...
...It is now time for the government to call in its loan...
...A new, compulsory federal charter will drastically restructure the large, publicly-held corporations...
...Officers will be stripped of all their present discretionary decision-making powers and made subject to an outside board of directors nominated and elected by the shareholders alone...
...If a corporation is a "private government" because it has "'a-direct and decisive impact on the social, economic and political life of the nation,' " to use words that Nader quotes with approval, it is in principle impossible to stop with General Motors...
...The fact that the "relevant product markets" from which concentration ratios and market shares are computed are economically arbitrary does not deter Nader for a minute...
...He demonstrates that the concession theory is an obsolete myth...
...Information about the corporation's internal operations, including its trade secrets (though Nader is coy on this point), will be publicly available to all shareholders and appropriate government regulatory agencies...
...The idea that government makes corporations immortal while partnerships cannot achieve a permanent, ongoing existence is," Hessen states, "an illusion...
...Nevertheless, the "economic power syndrome," as one scholar has aptly called it, is only the noisy background for two theories upon which the critics of corporate legitimacy rest their case, and against which any defense of the corporation must contend...
...The Democratic Party...
...The state permits the corporation to exist by granting it a charter, and concedes to it certain special privileges, such as personality, perpetual life, and limited liability...
...The corporate form flourished precisely because it split the atom of ownership in two...
...The corporation is a creature of the marketplace, not the state, and its powers and privileges are properly understood by an "inherence theory...
...Corporations are created and sustained entirely by an exercise of individual rights, specifically freedom of association and freedom of contract...
...There is, then, no riddle of corporate legitimacy at all...
...Since "corporate rights," as legal scholar Edward S. Corwin has noted, "are only a shorthand for the property rights of the persons who own the corporations," the critics of corporate "personhood" are really arguing that ** With one exception, limited tort liability...
...On the other hand, given the intellectual substance of Nader's views, Hessen is using a sledgehammer on a gnat...
...For too long, the advocates of federal control argue, corporations have not done so...
...Compliance with procedural requirements does not make the state a party to the incorporation agreement any more than such compliance makes "every marriage a menage a trois: bride, groom and government.'' It does not give the state, in either case, a droit du seigneur...
...This is an abuse which should be redressed, although it is irrelevant as a grounds for criticizing the giant corporation...
...Finally, limited liability is nothing more than an implied agreement between the corporation owners and their creditors...
...they are indistinguishable from governments because they wield power of equal magnitude over their employees, customers, and neighboring communities...
...the creditor limited his right of recovery to the common fund: the incorporation act may fairly be construed as legislating into all corporate contracts an implied clause to that effect.'' Limited liability is not a mandatory provision, and Hessen points to the facts of business life:' "Creditors can, and often do, insist that one or more of the shareholders become personal guarantors or sureties for the debt.'' Hessen explains that between the partnership and the corporation there is no sharp break, but a continuum of intermediate contractual forms and arrangements (like the business trust and limited partnership) from which the essential features of the modern corporation historically arose...
...Aren't these somehow special favors created solely for the corporation's benefit, and don't they give corporations unfair advantages over creditors, competitors, and consumers...
...The New York Times...
...Democracy should apply not "only to some special sphere of social action known as politics, but to any and every form of social action, and in especial, to industrial and economic fully as much to political affairs...
...Although Nader endorses the "decentralized," self-sufficient neighborhood communes envisioned by Gar Alperovitz, a decentralized society with an active, "participating" (not to mention free) citizenry cannot be achieved by politicizing all institutions and all decisions...
...Competition will be "restored" by exorcising the "curse of bigness" once and for all...
...Originally, Berle and Means held, the corporation was owned and operated like a partnership...
...The very largest corporations are to be dismantled by divestitures automatically triggered against all firms whose "market share" exceeds 12 percent...
...He claims they were the products of corruption...
...The "separation of ownership and control" has revolutionized the corporation and the system which gave it birth...
...This aim he shared with those other architects of 20th-century Anglo-American collectivism, Sidney and Beatrice Webb, and Harold Laski...
...It is a legal convenience, obtainable by unincorporated businesses who may designate trustees to represent them in lawsuits and to accept or convey title to property in their behalf...
...The corporation charter does not imply a grant of monopoly power...
...Nader's vision of corporate democracy resembles a miniature socialist society, recklessly consuming the capital of its shareholder-citizens at the behest of those pretending to...
...This insight is the basis of his critique of the second theory of corporate illegitimacy, the famous thesis of The Modern Corporation and Private Property, written by Adolph Berle and Gardiner Means in 1932...
...Nader's answer is an attack on the gradual liberalization of general incorporation laws in the nineteenth century, particularly those enacted by Delaware and New Jersey...
...Cole's version of the great society obliterated the distinction between the political and the non-political sphere, since there is hardly any private, voluntary transaction which does not in some way affect the lives of outsiders...
...Nader's argument, as Hessen paraphrases it, is the now familiar one that "once corporaHoward Dickman, a historian, is writing a book on the theory of industrial democracy in America...
...Berle and Means, he argues,' have misinterpreted the facts...
...The federal charter proposal would increase the power of the national government by a quantum leap...
Vol. 12 • September 1979 • No. 9
