I’ve been a corporate lawyer in just about every sense since I began practicing law over 30 years ago (as in, have corporations for clients, be employed by corporations, create corporations, counsel on corporate governance, etc.).  I used to view corporations as pretty benign, and was resistant to the idea that they are somehow uniquely predatory or inherently evil.

Recent events have begun to erode that view, namely:

  • The apparent de facto, if not de jure,* collusion among Big Data and Big Social Media to warp the information available to the public.
  • The eagerness of Big Data and Big Social Media to collude with Very Bad People (yeah, I’m looking at you, ChiComs) to repress over a billion people.
  • Being exposed to the way Big Pharma does business – extraordinarily shady business practices, total disregard for the actual wellbeing of their nominal “customers”.

History.  First, a bit of history.  Corporations used to be rare, as they had to be individually chartered by a specific act of Parliament (or the US Congress or the states).  The notion that they are simply extensions or agents of the government had a lot more to it then, in part because corporations were generally thought to need some sort of public purpose.  Many were chartered for “public works” such as roads, canals, etc.  Because of their rarity and the advantages they had (the ability to raise capital with limited investor liability, charters could grant monopolies, etc.), these corporations sometimes became extraordinarily rich and powerful, to the point that a few became quasi-governments and/or competitors with the government, such as the British East India Company.

However, in the U.S., at least, this changed in the 19th century to “incorporation by registration” (sometimes called “free incorporation”), meaning that all you had to do was file your charter and pay a modest fee, similar to a shall-issue license in many ways.  At that point, corporations became more of a pre-packaged contract or bundle of agency relationships, and I think the argument that they are extensions or agents of the government loses much of its punch (although remnants of the old public purpose doctrine still linger and provide a foothold for the modern push for corporations to serve indeterminate “stakeholders” rather than their investor owners).  Of course, the requirement to serve a public purpose remains quite overt for charitable corporations.

Limited Liability.  The defining feature of corporations is limited liability, which is quite misunderstood.  There is no such thing as limited liability for the corporation itself, and (in theory and to some extent in practice) no such thing as limited liability for corporate executives, officers, directors or employees.  In practice, corporations indemnify these people to a large extent, so their personal exposure is limited, but the same is true of partnerships and other organizations that are not a limited liability entity.

Limited liability only means that the investor owners of a corporation are not personally liable.  They can lose their investment in the corporation, but beyond that their personal assets are not exposed by corporate wrongdoing.  This is justified in large part as a major incentive for capital formation, and the results on that front are hard to argue with.

However, limited investor liability is also consistent with agency law and notions of personal responsibility.  Investors in corporations are passive investors; they have no rights to run the day to day operations of the company, but instead have only limited and defined governance rights, including the right to vote for members of the corporate board or pass shareholder resolutions that the board is, in theory, obligated to carry out.  Some investors are also, in addition to being passive investors, more actively involved in corporate operations as executives, directors or majority shareholders who exert control over corporate operations in that role (and can be held personally liable for what they do in that role).  An individual’s role as an investor and their other roles (as executives, etc.) should be distinguished; being an investor does not immunize someone from liability in other roles they may have.  In broad terms, because a “mere” investor is not an agent or representative of the corporation, and cannot control what the corporation does, there is no reason to hold them personally liable.  I also note that, over time, corporate law has gradually developed to insulate management from shareholder governance or control.

Are Corporations “Problematic”?

While corporations certainly do a lot of deplorable things, is there really anything inherent to the corporate form or limited investor liability that leads them to be deplorable?  Greed, cronyism, corruption, disregard for others, these are all parts of human nature that have exhibited themselves throughout history, regardless of whether there were limited liability corporations.  Similarly, acting as tax collectors for the state or otherwise as conduits for state enforcement of misc. edicts and requirements is not unique to corporations.  These roles are not imposed only on corporations, and the state has little more leverage over a corporation by threatening to revoke its charter than it does over any business by threatening to revoke its business license.

But there is one aspect of limited liability corporations that may be both (a) a facilitator of being deplorable and (b) inherent to their nature, and that is size.  As noted, limited liability allows the formation of very large pools of capital; when you are personally liable for everything done by the organization you invest in, as in a true partnership, you tend to stay personally involved.   That creates a limit on both the number of organizations you will invest in, and the number of investors in those corporations.  Too many investors and/or too many investments, and you can no longer exert meaningful control, but are still personally liable.  A world without corporations could very well consist of more and smaller businesses each of them less able to influence the government, impair competition or impact large numbers of people with their deplorableness.  Of course, such a world would also lack a major engine for capital formation, or at least aggregation of large pools of capital.

*Its always nice to get the Latin out of the way early.