I recently read David Ciepley’s “Beyond Public and Private: Toward a Political Theory of the Corporation”. I recommend reading it yourself, but here’s my best attempt to summarize it in my own words.
Historically, we used to think of corporations as institutions that existed by the authorization of the state and for the public benefit – although the public often did not benefit in practice (*coughs* British East India Company). In the 19th century, especially in the United States, we began to view corporations instead as part of the private sphere. This has led to incoherent legal and political results. Ciepley argues that, rather than viewing corporations as public or private, they ought to be considered as part of their own distinct sphere.
The first corporations were created in the image of constitutional republics, such as Dutch East India Company, whose governing board held a proportional balance of representatives from each of the Dutch provinces. Several American States such as Massachusetts and Virginia were originally chartered as corporations. Despite this history, there are some key distinctions. While republics are “by, of, and for the governed”, those most subject to corporate action (workers, and secondarily customers and contractors) are not represented in its governance.
There are three main spheres of rights that make a corporation a corporation, and it’s important to note that these are all governance rights, not business rights. After all, there are many corporations that are not businesses, and many businesses that are not corporations. The three rights are: 1) the right to own property, make contracts, and sue and by sued, as a unitary entity, which Ciepley calls ‘contractual individuality’; 2) the right to centralized management of their property; and 3) the right to establish and enforce rules within their jurisdiction beyond the laws of the land. Ciepley only talks about the first and third rights.
Right #1: Contractual Individuality
All corporations are granted contractual individuality by the government. Business corporations additionally are granted by the government the right to use a joint-stock mechanism – that is, to sell shares. The three key elements of contractual individuality are asset lock-in, entity shielding, and limited liability.
‘Asset lock-in’ refers to how investors in companies cannot directly withdraw their funds. In a business partnership, a partner leaving the business withdraws their assets. An investor in a corporation cannot withdraw their assets, only sell their shares to another investor. This gives corporations an enviable stability, allowing them to specialize their assets and therefore increase their productivity.
‘Entity shielding’ means that the corporation’s assets are protected by creditors going after shareholders. A creditor may take a shareholder’s shares, but cannot take assets from the company. ‘Limited liability’, conversely, means that shareholders’ assets are protected by creditors going after the corporation. Limited liability makes corporations attractive to small and/or passive investors. Together entity shielding and limited liability are what make the trading of shares possible. Share trading in turn is what makes investment attractive in the first place, because it allows investors to get their money back when they want – they do not have to wait until the company is dissolved.
Some people like to conceive of corporations as like fancy partnerships (a legal theory we’ll return to later) but this is incorrect. Asset lock-in and limited liability can be approximated by partnerships, although with significant shortfalls (for instance, assets cannot be locked-in indefinitely and limited liability cannot protect against tort claims). However partnerships cannot approximate entity shielding. To do so would require every shareholder to contract with every one of his creditors, from their bank to their plumber, against their laying claim to corporate assets. This would be wildly impractical even if shareholders were willing to do it, but they would have an incentive not to, to allow the corporation’s credit to back up their own.
Contractual individuality means that corporations rely on the government for certain key privileges in way that other businesses do not – privileges which are foundational to their functioning and which allow them dominate the market through preferential accumulation and specialization of capital, as compared to private business.
Asset lock-in, entity shielding, and limited liability also mean that shareholders do not own a corporation. So who owns a corporation? No one: the corporation owns itself. It is therefore neither publicly owned nor privately owned but corporately owned.
One of the central rationales of private property is that the owners bear the consequences of use or misuse of their property, and are therefore incentivized to use it well. Because shareholders are alienated from corporate property, and in particular because limited liability means they bear fewer consequences, they are not well incentivized.
Neoliberal reforms which attempt to tie corporate management to shareholders have therefore only made things worse. Shareholders more than anyone else are incentivized to take risks with a corporation. Tying management to shareholders thus increases financial and legal risk-taking. Shareholder also tend to be more interested in short-term gains than other associates of a corporation. Over the last forty or so years, as these shareholder-focused reforms have been made, the average amount of time a stock is held has dropped from eight years to four months.
Right #3: Establishment and enforcement of rules
Management authority within an organization is widely assumed to derive from shareholders, who as “owners” of the corporation elect the board of directors. But as Ciepley as shown, neither shareholders nor anyone else owns a company. Where does management authority derive from, then?
It comes from the state, as specified in the corporate charter. The corporate charter establishes the board of directors and then authorizes it to issue stock to shareholders – hardly the order of events you’d expect if the board’s authority derives from the shareholders. Indeed, some corporations never issue stock at all, and some corporations issue nonvoting stock. The current popular system of boards elected by shareholders is merely one possible way a charter can delegate control.
Ciepley refers to corporations as “franchise governments”: run on private initiative, but receiving their form and purpose from the state. This is easy to see with municipal corporations (New York City is the largest municipal corporation in the US) but harder to see with business corporations, since we tend to view commerce as a private matter. The increasing identification of corporations with business corporations, the increasing commercialization of the public sphere, and the elimination of the requirement that corporations be for the public benefit all go hand in hand.
(Ciepley doesn’t delve too deeply into the judicial history behind these trends but does cite a number of key court cases, starting with Dartmouth vs Woodward (1819) where the Supreme Court ruled that corporations were independent of the state and did not have to prove they were acting in the public interest. According to Wikipedia, the eloquence of Daniel Webster’s oratory was thought to have been a deciding factor in the case. Thanks, Daniel Webster.)
Implications of Ciepley’s theory of corporations
Ciepley argues for a return to the older view of corporations: that they are an artificial entity created by government, whose enjoyment of special legal rights requires them to act in the public benefit.
He also notes that during the mid-twentieth century, the Supreme Court began requiring that states and towns observe the core provisions of the Bill of Rights. If municipal corporations are required to respect these rights, shouldn’t business corporations also be required?
Two alternative legal theories of corporations have dominated judicial arguments, the theory of “corporation as partnership” and the theory of “corporation as real person”. The theory of “corporations as partnership” argues that corporations are voluntary associations of individuals and therefore the constitutional rights of the individuals extend to the corporation. But a foundational element of the corporation is the alienation of shareholders from their property. So why would their property rights apply? And more generally, why should corporate partners enjoy rights such as limited liability that no other individual or group enjoys?
The theory of corporations as real person answers this question by claiming that corporations are a special, emergent entity distinct from the state. But while some corporations may predate their current government, as do some medieval towns and as did Dartmouth College (the Dartmouth in Dartmouth vs Woodward), all corporations derive their status from the government, whereas real people have rights inalienable by their government.
Despite the flaws in these theories, they have been used to grant corporations a vast number of legal rights, for instance in Citizens United. Lawyers for Citizens United argued both the “corporation as partnership” and “corporation as real person” perspective, even though the theories are contradictory. If corporations are partnerships are reducible to their members, why should it get extra rights? If corporations have emergent properties distinct from their members, why should it claim their constitutional rights?
There’s actually nothing worth summarizing in the conclusion, but I felt bad just stopping abruptly.
tl;dr: corporations are not private concerns, shareholders do not own them, we should go back to requiring corporations act in the public benefit, there’s no rights-based reason for shareholders to have any influence on the governance of a corporation, the rights granted to corporations based on these conceptually incoherent theories are bad for the economy, bad for society, and really rather unfair to actual private businesses, and someone should rewrite The Devil and Daniel Webster to be about Darmouth vs Woodward