Criticisms of corporations

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The notion of a legally sanctioned corporation remains controversial for several reasons, most of which stem from the granting of corporations both limited liability on the part of its members and the status and rights of a legal person. Some opponents to this granting of "personhood" to an organization with no personal liability contend that it creates a legal entity with the extensive financial resources to co-opt public policy and exploit resources and populations without any moral or legal responsibility to encourage restraint.

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Divisions between labor, management, and owners

Adam Smith in The Wealth of Nations criticized the joint-stock company corporate form because the separation of ownership and management could lead to inefficient management.

The directors with of such [joint-stock] companies, however, being the managers rather of other people's money than of their own, it cannot well be expected, that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own.... Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company.

The context for Adam Smith's term for "companies" in The Wealth of Nations was the joint-stock company. In the 18th century, the joint-stock company was a distinct entity created by the King of Great Britain as Royal Charter trading companies. These entities were sometimes awarded legal monopoly in designated regions of the world, such as the British East India Company.

Furthermore, the context of the quote points to the complications inherent in chartered joint-stock companies. Each company had a Courts of Governors and day-to-day duties were overseen by local managers. Governor supervision of day-to-day operations was minimal and was exacerbated by the poor communications of the 18th century.

Bribery and corruption were inherent in this type of corporate model because the local managers sought to avoid close supervision by the Courts of Governors, politicians, and Prime Ministers. In these circumstances, Smith did not consider joint-stock company governance to be honest. [1] More importantly, the East India Company demonstrated inherent flaws in the corporate form. The division between owners and managers in a joint-stock company, and the limited legal liability this division was based on guaranteed that stockholders would be apathetic about a company's activities as long as the company continued to be profitable. Just as problematic, the laws of agency upon which the corporate form was based allowed for boards of directors to be so autonomous from and unconstrained by stockholder wishes that directors became negligent and ultimately self-interested in the management of the corporation. [2]

Psychopathic behavior

Legal Scholar and Professor of Law at the University of British Columbia Joel Bakan describes the modern corporate entity as 'an institutional psychopath' and a 'psychopathic creature.' In the documentary The Corporation , Bakan claims that corporations, when considered as natural living persons, exhibit the traits of antisocial personality disorder or psychopathy. Also in the film, Robert A. G. Monks, a former Republican Party candidate for Senate from Maine, says:

The corporation is an externalizing machine (moving its operating costs to external organizations and people), in the same way that a shark is a killing machine.

— Joel Bakan [3]

Writing for the American socialist publication Jacobin , writer and sociologist Nicole Aschoff attributes the "unscrupulous" and "sometimes deadly" behavior of corporations to the "elevation of profit above all else," which she says is "a defining feature of capitalism." She adds that "the catalog of the ethical and moral crimes of corporations is impressive":

Coca-Cola killed trade unionists in Latin America. General Motors built vehicles known to catch fire. Tobacco companies suppressed cancer research. And Boeing knew that its planes were dangerous. Corporations don't care if they kill people — as long as it's profitable. [4]

Analogy with totalitarian regime

Noam Chomsky and others have criticized the legal decisions that led to the creation of the modern corporation:

Corporations, which previously had been considered artificial entities with no rights, were accorded all the rights of persons, and far more, since they are "immortal persons", and "persons" of extraordinary wealth and power. Furthermore, they were no longer bound to the specific purposes designated by State charter, but could act as they choose, with few constraints.

— Noam Chomsky [5]

When the corporatization of the state capitalist societies took place a century ago, in part in reaction to massive market failures, conservatives – a breed that now scarcely exists– objected to this attack on the fundamental principles of classical liberalism. And rightly so. One may recall Adam Smith's critique of the "joint stock companies" of his day, particularly if management is granted a degree of independence; and his attitude toward the inherent corruption of private power, probably a "conspiracy against the public" when businessmen meet for lunch, in his acid view, let alone when they form collectivist legal entities and alliances among them, with extraordinary rights granted, backed, and enhanced by state power.

— Noam Chomsky [6]

Chomsky contends that corporations transfer policy decisions out of the hands of the people and into corporate boardrooms, where public oversight is limited. The extensive financial resources of corporations and the extent to which they're employed to influence political campaigns in the United States has also been implicated as a way in which corporations undermine the democratic institutions in a society. [7]

Reception

"No other institution in American history—not even slavery—has ever been so consistently unpopular...with the American public. It was controversial from the outset, and it has remained controversial to this day." [8]

John D. Rockefeller was one of the first to experience that paradox in a spectacular and personal way. [9] By the last decade of the 19th century, Rockefeller found that he had become "the most hated man in the world." [10]

Around the middle of the 20th century, the economist John Kenneth Galbraith noted that the corporate businesses which foreign visitors came to see and marvel at, as "showpiece[s] of American industrial achievement," were the very same ones that government attorneys scrutinized in their search for monopolistic wrongdoing. [11]

See also

Related Research Articles

<span class="mw-page-title-main">Corporation</span> Legal entity incorporated through a legislative or registration process

A corporation is an organization—usually a group of people or a company—authorized by the state to act as a single entity and recognized as such in law for certain purposes. Early incorporated entities were established by charter. Most jurisdictions now allow the creation of new corporations through registration. Corporations come in many different types but are usually divided by the law of the jurisdiction where they are chartered based on two aspects: whether they can issue stock, or whether they are formed to make a profit. Depending on the number of owners, a corporation can be classified as aggregate or sole.

Business is the practice of making one's living or making money by producing or buying and selling products. It is also "any activity or enterprise entered into for profit."

A shareholder of corporate stock refers to an individual or legal entity that is registered by the corporation as the legal owner of shares of the share capital of a public or private corporation. Shareholders may be referred to as members of a corporation. A person or legal entity becomes a shareholder in a corporation when their name and other details are entered in the corporation's register of shareholders or members, and unless required by law the corporation is not required or permitted to enquire as to the beneficial ownership of the shares. A corporation generally cannot own shares of itself.

<span class="mw-page-title-main">Limited liability company</span> US form of a private limited company

A limited liability company (LLC) is the United States-specific form of a private limited company. It is a business structure that can combine the pass-through taxation of a partnership or sole proprietorship with the limited liability of a corporation. An LLC is not a corporation under the laws of every state; it is a legal form of a company that provides limited liability to its owners in many jurisdictions. LLCs are well known for the flexibility that they provide to business owners; depending on the situation, an LLC may elect to use corporate tax rules instead of being treated as a partnership, and, under certain circumstances, LLCs may be organized as not-for-profit. In certain U.S. states, businesses that provide professional services requiring a state professional license, such as legal or medical services, may not be allowed to form an LLC but may be required to form a similar entity called a professional limited liability company (PLLC).

<span class="mw-page-title-main">Joint-stock company</span> Business entity owned by shareholders

A joint-stock company (JSC) is a business entity in which shares of the company's stock can be bought and sold by shareholders. Each shareholder owns company stock in proportion, evidenced by their shares. Shareholders are able to transfer their shares to others without any effects to the continued existence of the company.

<span class="mw-page-title-main">Incorporation (business)</span> Legal process to create a new corporation

Incorporation is the formation of a new corporation. The corporation may be a business, a nonprofit organization, sports club, or a local government of a new city or town.

<i>The Corporation</i> (2003 film) 2003 Canadian film

The Corporation is a 2003 Canadian documentary film written by University of British Columbia law professor Joel Bakan and filmmaker Harold Crooks, and directed by Mark Achbar and Jennifer Abbott. The documentary examines the modern corporation. Bakan wrote the book The Corporation: The Pathological Pursuit of Profit and Power during the filming of the documentary.

<span class="mw-page-title-main">Private limited company</span> Type of company used in many jurisdictions

A private limited company is any type of business entity in "private" ownership used in many jurisdictions, in contrast to a publicly listed company, with some differences from country to country. Examples include the LLC in the United States, private company limited by shares in the United Kingdom, GmbH in Germany and Austria, Besloten vennootschap in The Netherlands, société à responsabilité limitée in France, and sociedad de responsabilidad limitada in the Spanish-speaking world. The benefit of having a private limited company is that there is limited liability.

In a corporation, a stakeholder is a member of "groups without whose support the organization would cease to exist", as defined in the first usage of the word in a 1963 internal memorandum at the Stanford Research Institute. The theory was later developed and championed by R. Edward Freeman in the 1980s. Since then it has gained wide acceptance in business practice and in theorizing relating to strategic management, corporate governance, business purpose and corporate social responsibility (CSR). The definition of corporate responsibilities through a classification of stakeholders to consider has been criticized as creating a false dichotomy between the "shareholder model" and the "stakeholder model", or a false analogy of the obligations towards shareholders and other interested parties.

<span class="mw-page-title-main">Corporate law</span> Body of law that governs businesses

Corporate law is the body of law governing the rights, relations, and conduct of persons, companies, organizations and businesses. The term refers to the legal practice of law relating to corporations, or to the theory of corporations. Corporate law often describes the law relating to matters which derive directly from the life-cycle of a corporation. It thus encompasses the formation, funding, governance, and death of a corporation.

<span class="mw-page-title-main">Limited liability</span> Business structure where shareholders cannot owe more than their stake in a venture

Limited liability is a legal status in which a person's financial liability is limited to a fixed sum, most commonly the value of a person's investment in a corporation, company or joint venture. If a company that provides limited liability to its investors is sued, then the claimants are generally entitled to collect only against the assets of the company, not the assets of its shareholders or other investors. A shareholder in a corporation or limited liability company is not personally liable for any of the debts of the company, other than for the amount already invested in the company and for any unpaid amount on the shares in the company, if any, except under special and rare circumstances permitting "piercing the corporate veil." The same is true for the members of a limited liability partnership and the limited partners in a limited partnership. By contrast, sole proprietors and partners in general partnerships are each liable for all the debts of the business.

Shareholder value is a business term, sometimes phrased as shareholder value maximization. It became prominent during the 1980s and 1990s along with the management principle value-based management or "managing for value".

<span class="mw-page-title-main">Limited partnership</span> Form of partnership

A limited partnership (LP) is a type of partnership with general partners who have a right to manage the business and limited partners who have no right to manage the business but have only limited liability for its debts. Limited partnerships are distinct from limited liability partnerships, in which all partners have limited liability.

Corporate liability, also referred to as liability of legal persons, determines the extent to which a company as a legal person can be held liable for the acts and omissions of the natural persons it employs and, in some legal systems, for those of other associates and business partners.

<span class="mw-page-title-main">Company</span> Association or collection of individuals

A company, abbreviated as co., is a legal entity representing an association of legal people, whether natural, juridical or a mixture of both, with a specific objective. Company members share a common purpose and unite to achieve specific, declared goals.

<i>The Modern Corporation and Private Property</i> 1932 book by Adolf Berle

The Modern Corporation and Private Property is a book written by Adolf Berle and Gardiner Means published in 1932 regarding the foundations of United States corporate law. It explores the evolution of big business through a legal and economic lens, and argues that in the modern world those who legally have ownership over companies have been separated from their control. The second, revised edition was released in 1967. It serves as a foundational text in corporate governance, corporate law, and institutional economics.

<span class="mw-page-title-main">United States corporate law</span> Overview of United States corporate law

United States corporate law regulates the governance, finance and power of corporations in US law. Every state and territory has its own basic corporate code, while federal law creates minimum standards for trade in company shares and governance rights, found mostly in the Securities Act of 1933 and the Securities and Exchange Act of 1934, as amended by laws like the Sarbanes–Oxley Act of 2002 and the Dodd–Frank Wall Street Reform and Consumer Protection Act. The US Constitution was interpreted by the US Supreme Court to allow corporations to incorporate in the state of their choice, regardless of where their headquarters are. Over the 20th century, most major corporations incorporated under the Delaware General Corporation Law, which offered lower corporate taxes, fewer shareholder rights against directors, and developed a specialized court and legal profession. Nevada has attempted to do the same. Twenty-four states follow the Model Business Corporation Act, while New York and California are important due to their size.

<span class="mw-page-title-main">History of company law in the United Kingdom</span>

The history of company law in the United Kingdom concerns the change and development in UK company law within the context of the history of companies, deriving from its predecessors in Roman and English law. Company law in its current form dates from the mid-nineteenth century, however other forms of business association developed long before.

Akciju sabiedrība is a Latvian word for a legal form of a corporation in Latvia. In English, the Latvian term akciju sabiedrība is translated as stock company by the Commercial Law of Latvia. In Latvia, stock companies are being registered by the Register of Enterprises of Latvia.

References

  1. ↑ Adam Smith The Lost Legacy.com
  2. ↑ Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations 741 (Clarendon, Oxford 1776).
  3. ↑ Bakan, Joel (writer) The Corporation (2003) (Documentary)
  4. ↑ Aschoff, Nicole (January 21, 2020). "Corporations Would Literally Kill You to Turn a Profit". Jacobin. Retrieved November 14, 2021.
  5. ↑ Robert Barksky, Noam Chomsky and the Law Archived 2007-12-14 at the Wayback Machine
  6. ↑ Chomsky, Noam (1999). Profit Over People: Neoliberalism and Global Order. New York, New York, United States: Seven Stories Press. p. 175. ISBN   978-1-888363-82-1.
  7. ↑ Ned Resnikoff. 2007 Corporations Versus Democracy. The Nation.
  8. ↑ Irving Kristol. Reflections of a Neoconservative. NY, 1983. p. 204.
  9. ↑ Charles Churchyard. "The Corporation and John D. Rockefeller's Bewilderment."
  10. ↑ David F. Hawke. John D. NY, 1980. Ch. 36.
  11. ↑ John Kenneth Galbraith. American Capitalism. NY, 1956. p. 91.
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