Home > Uncategorized > Who “owns” a corporation?

Who “owns” a corporation?

from Peter Radford

I have become quite a fan of David Ciepley this summer.  He, amongst many I am sure, is blazing a trail through the morass of corporate law and providing new insights into the role and status of the animal we know as the “corporation”.

Anyone with an interest in the role business plays in the economy needs to understand what Ciepley is saying.

In one talk he gave, at MacGill University, the introductory remarks by his host were illumination in themselves.  The occasion was a presentation and interdisciplinary discussion about the corporation and its role in shaping the social landscape.  The host rattled off the university departments and working groups involved in the discussion in his welcoming remarks.  There was no mention of economics.  The omission tells us all we need to know.  Economics cannot engage, easily with other disciplines in discussions about the organization of business because it cannot recognize the reality associated with said organization.  This is not to say that somewhere in the great archipelago known as economics there isn’t some little island of thought about institutions — at one time that island was much more significant — but nowadays the need to crush everything into an anti-social market driven explanation makes the odds of communication with such distant shores very difficult if not impossible.

Which is a shame because I think the key to understanding the contemporary economy requires a solid knowledge of modern business theory, that theory is, after all, simply an expression of neoclassical thought.  It is mid-twentieth century economics packaged as organizational technology, and as such, is one of the most powerful innovations and foundations upon which our economy rests.  The arc of wages since the 1970s depends upon the incessant and pervasive uptake of that organizational technology.  As does the subsequent woeful policy reaction, the supine regulatory response, and the invasion of politics by corporate-financed interests.

This technology has one idea at its core which gives it supreme simplicity and ideological power.  That is the idea of shareholder value.

Which gets me back to Ciepley.

Most theories of the firm within economics pick up the narrative with the existence of the corporation as a given.  They then bend over backwards to retro-fit this highly centralized pseudo economy into the larger free market narrative preferred in all major textbooks.  In so doing they blithely ignore Alfred Chandler’s famous explanation for the rise of modern business organization, which he argued became possible “only when the hand of management proved be  more efficient than the invisible hand of market forces”. 

Chandler, being a historian rather than an economist, was more interested in reality than in hypotheticals.  He understood and tried to explain the actual landscape of large-scale business.  I have always wondered what would have happened to economics had it absorbed the true gist of the challenge issued by Coase in 1937.  The impudence of that challenge has never been fully understood.  Coase asked simply: “why do firms exist?”.  After all if market forces are as supreme as the textbooks tell us, there is no room for business organization at all.  We ought be able to accomplish all our transacting through a web of contracts in the open marketplace.

Indeed the most common response of economists to the challenge represented by business organization is to argue that a business organization is simply such a web of contracts.  In this view we can continue to ignore any oddities of business organization since it is indistinguishable from the market.  In this view the firm exists at a “nexus of contracts” and has no special attributes that cannot be negotiated and contracted for in the marketplace.

Except this is not true.

The corporation, as Ciepley and his ilk tell us, is a unique vessel.  It has capacities and attributes unavailable in the marketplace.  And it precisely these attributes that make it so convenient for the execution of large-scale business.

The concept of the corporation pre-dates the modern economy and industrialization by centuries. It has its roots way back in the Roman era.  It was adopted along the way by all sorts of organizations needing the advantages it brings.  Those advantages include being able to act as a “legal person” for the purposes of property ownership, being able to enter into contracts in its own name, and having legal standing for the purposes of being sued or suing on its own behalf.

And right there, if we ponder for a while, sits a conundrum for the purveyors of shareholder value.

If we pull on the string hard enough we discover that shareholders do not own corporations.  They are simply one group, amongst many, that have varying degrees of financial claims against the corporation.  They do not own the corporation’s assets.  The corporation does.  The myth of shareholder ownership exists only because of subsequent laziness on the part of analysts, and on the ideological preference of neoclassically oriented legal and business scholars: The Chicago School take a bow!

The reality is more complex.

The corporate form as we know it is an adaptation of its medieval precursor.  It came down to us via the colonial experience where it proved very useful as a vehicle for assembling capital to take on large-scale trading ventures, exploration, and, eventually, colonization.  Those same virtues linger on in its modern business form.  Perhaps least recognized is that the corporate form of organization is that of a mini-state.  It has the same ability to regulate itself as any modern constitutional state with the exception that its internal statutes must not contradict those of the state where it obtained its original charter.  Our separation of the economy into two domains, public and private, needs an addition: the quasi-state of the corporation.

As long as its internal rules are not “repugnant” to the laws of the state the corporation can establish any internal rules it likes.  And since no one actually “owns” the corporation, its existence depends only on an originating charter, which is a delegation or power by the state.  The corporation truly is a state within a state.

Be logical about the establishment of a new corporation: a charter grants it legal existence; that existence allows the appointment of a Board with fiduciary responsibility to uphold the charter; and then the Board seeks financing to bring the hitherto legal-only corporation into physical reality.  So the existence of shareholders, if they are a source of that funding, is secondary to the existence of the corporation.  That most corporate charters are sought by people who subsequently provide the funding should not allow us to miss this crucial sequence.  Their existence as shareholders is not the same thing as the existence of the corporation.  The latter is its own entity, with its own, and prior, legal standing.

Shareholder value thus sits on a false premiss — a rotten one at that.

And the rest, as they say, is history.

Anyway, go read Ciepley.  He can explain all this much better than I do.



For those of you carrying the torch for New Institutional Economics, I recognize the effort.  The problem, as I see it, is that NIE still tries to force the square peg of organizational reality into the round hole of equilibrium-oriented market-based analysis.  Transactions cost minimization is a valuable idea only if we recognize that, ultimately, that it implies the secondary nature of the marketplace in the organization of complex business activities.  So textbooks need to be re-written.  We ought to start with an explanation of the economy through the prism of business organization.  We then could talk about the exceptions, one of which is the marketplace.  The other of which is government.  

Such a narrative seems to recognize reality.  NIE seems still to be bending over backwards to allow the market to retain a supremacy, which if it ever had, has long since disappeared.  Markets and hierarchies may be substitutes for one another in theory, but in practice the pragmatic choice is always the hierarchy. 

  1. Econoclast
    October 11, 2018 at 5:01 pm

    Thanks for this excellent brief post that helps focus our attention on the dominant institution of our time. All of today’s media hysteria about stock market index crashing misses the big picture, which includes the transition of corporate dominance from productive to speculative purposes, from the “real” economy to the financial economy. Reading Ciepley and rereading Chandler is time well-spent.

    • Robert Locke
      October 12, 2018 at 2:16 pm

      Chandler”s work on the Visible Hand, a work for which he won the Pultzer Prize in 1977, building on his Strategy and Structures of 1962, and ending with Scale and Scope in 1990, are indeed pioneering works, but they are intimately associated with what I and others have called Managerialism, (Confronting Managerialism, 1911) a view of firm firm dominated by managerial elites, which drowns out the voice of employees in corporate governance. I asked H. Thomas Johnson, at dinner in Portland, January 31, 2015( Johnson wote Profits Beyond Measure with Anders Broems in 2000 among many others on the Toyota Kata what remains of Chandlers view of managment, and he answered, after a long pause, “nothing.” So when you take up the corporation, go beyond Chandler.

      • Econoclast
        October 12, 2018 at 8:29 pm

        My interest is in the core nature of the modern limited-liability corporation, including historical knowledge of its evolution, which I began to learn about 25 years ago, relatively late in my life. My vaunted economics training taught me nothing whatever about the institution. My bias: I believe the corporation to be an irresponsible, dangerous, psychopathic, predatory institution. It dominates our lives — and now is our governance — and I will spend what remains of mine viewing the institution as an enemy. Acting on the sage advice of Sun Tsu, I wish to know my enemy.

        I’ve found it useful to view the evolution of the institution in phases, such as these: pre-industrial origins (both Roman era and the 1600 East India Company); pre-Civil War; post-Civil War robber baron (my grandfather was a robber baron); progressive era/New Deal/World War II manufacturing (the Henry Ford/Frederick Winslow Taylor) era; 1950s-late 20th-century managerial manufacturing era; current financial/speculation era. Along the way I will note the concept of “corporate personhood”, beginning in about 1886 with a famous Supreme Court case.

        You say, “Managerialism … drowns out the voice of employees in corporate governance.” I agree, although in my view this voice has been heard only through the unions. But the managerial era helped counter the dominance of Neoclassical during my economics training via Management Science, an interest in which paved the way for my current knowledge and values about systems thinking. And that era brought us such things as “team concept” and “quality circles” and “public/private partnerships”, which my study and experience shows me are tactics to coopt support for corporate agendas. I suppose one might argue that cooptation is less violent than the tactics employed by robber barons and others against union organizing, but to me it is a distinction without a difference. Just a more effective way to corporate power abuse.

        In any event, managerialism was an era in the evolution of the corporate institution, and Chandler’s work might still be useful to some who want to educate themselves about this evolutionary history. The same with Gardiner Means’ book and other classics on corporations.

        I’ll close this comment with some recommended reading for those interested:
        • Thom Hartmann, UNEQUAL PROTECTION: THE RISE OF CORPORATE DOMINANCE AND THE THEFT OF HUMAN RIGHTS (2004). This is a seminal work on “corporate personhood”, a strange concept that recently culminated in the landmark Supreme Court case, Citizens United, the outcome of which has locked corporate power abuse into our electoral system.
        • Joel Bakan, THE CORPORATION: THE PATHOLOGICAL PURSUIT OF PROFIT AND POWER (2004). The subtitle of this essential work is self-explanatory. Bakan’s work is partly based upon conversations with Canadian psychologist Robert Hare.
        • David Korten, WHEN CORPORATIONS RULE THE WORLD (2001). I have a particular affinity for Korten’s work (he is co-founder of Yes! Magazine). He and I had similar training in economic development at about the same time. I averted the subject in my career; he practiced it. Late in his career he realized that the Neoclassical is founded on jello, and realized his work was flawed. I highly respect such conscious discovery through experienced practice.
        • Marjorie Kelly, THE DIVINE RIGHT OF CAPITAL: DETHRONING THE CORPORATE ARISTOCRACY (2001). Among other things, Kelly’s book shows some fundamental limits on the idea of “corporate responsibility.” Corporate responsibility is an oxymoron where the modern limited-liability corporation is concerned. Founded in 1600 to diffuse investor liability, the process is designed to dump impacts and their responsibility onto others. This is the source and meaning of the cliche, “privatize profits and socialize costs”.
        • Naomi Klein, THE SHOCK DOCTRINE: THE RISE OF DISASTER CAPITALISM (2010). This best-seller is so timely, being read widely as financialism and predatory globalization more and more infect the world.
        • My own essay, OUR LADY OF TEARS CHAPEL OF THE DISMAL SCIENCE (2004), pdf available upon request from me, davidhupp@charter.net. The essay sketches my own discovery of the nature of the corporation. Crucially, I discovered (see Hartmann’s book also for this) that American governance once effectively had control of the corporate institution via state charters. Robber baron legislative bribery took care of that problem more than a hundred years ago. But the idea that this country once had such governance gives me hope. I didn’t learn that in many years of training in the field of economics.


      • Robert Locke
        October 13, 2018 at 3:31 pm

        I do not have a quarrel with what you say about US corporations and their goverane, only with your ignoranceof nonUS systems that have been successful, e.g, German and Japanese.
        I discussed in ch. 2, “German Obstinacy” of my 1996 book, collapse of the American management mystique (OUP), then expand this view by looking at Japanese ideas about cororation, Kaisha, in ch. 3of the collapse of the American Management Mystique,” Self-Absorption.” managemenTrump doesn;t think there is anything wrong with US corporatet, only bad trade deals stymie US manageriaism; I, based on a vast literature about corporate management accumulated since the 1970s think that the US corporate government explain US competitive management failure.and and that can only be understood if you study the alternatives like H Thomas Johnson has done, and I have done through looking at educational systems, and people in the Toyota Kata movement have done in US production engineering (e.g. Rother)

      • Econoclast
        October 17, 2018 at 10:22 pm

        My “IGNORANCE of nonUS systems”? Wow!

        Where in all I have posted here have I revealed that I know nothing about “nonUS” systems?

        I have explicitly limited my comments to the corporate institution of the United States in my posting here, especially concerning corporate “personhood”.
        My focus on the subject is radical in the sense of addressing fundamentals. And the historical fact is that the limited-liability, joint-stock corporation is fundamentally irresponsible in the sense that it is designed to shift costs, liabilities, and diverse negative impacts on to others wherever and whenever it can.

        You are free to disagree with anything I post. But, lacking evidence, you cannot call me ignorant without eliciting a response such as this. From what I can tell, you are a career academic scholar. I thought such people depended upon evidence for their viewpoints. Where is the evidence that I am ignorant?

        I would hope that in this blog we’d agree to have civilized discourse.

  2. October 12, 2018 at 1:23 am

    Yes thanks Peter, informative. btw my description of the corporation (as a unit, not its internal organisation) is the apotheosis of homo economicus, which better described as a calculating reptile. A brute materialist sociopath. And psychopath.

  3. Grayce
    October 12, 2018 at 8:28 pm

    The corporate charter, the thing that legitimizes the legal personhood, is seldom talked about. Which government entity approves that, state or federal?

    As to the legal fiction of personhood, how can that be stretched to total personhood when there is no designated felon to incarcerate? Fines are money and therefore are speech, and do not constitute the whole potential penalty of breaking laws. SEC penalties need to include losing personal freedom. What is the corporate equivalent?

    Yet, large corporations break contracts through defaulting on them, and settling out of court in sealed agreements. The sealed agreements are now just another means to transition to better terms, as one of the options in risk assessment when the moneyed corporation can outlast the funds of smaller plaintiffs. Include, in the varying degrees of financial claims against the corporation, the terms of enticed lifetime retirements that the Supreme Court now opines only last as long as the life of the current union contract. Bankruptcy, that was once a demerit for management is now a financial tool to pay ten cents on the dollar to smaller vendors.

    As Radford’s idea leads, corporate raiders do not own the corporation’s assets. The corporation does. But the raiders highjacked the narrative and renamed themselves “activist stockholders.” This latest kind of person is not interested in growing more or better corn, but is eating the seed corn. Sustainable corporations have two pathogens: excessively compensated executive officers and “increasing stockholder value” in a corporate raid by proxy votes. “The Economy” and its indicators, did not comprehend this drain.

    • Econoclast
      October 12, 2018 at 10:54 pm

      Good questions.

      The type of corporation to which I refer here is the Joint-Stock type.

      As I understand it, at least in many cases, a corporation files Articles of Incorporation (what I referred to as the “charter”) with a state, most often Delaware. In order to operate in other states, it registers, in mine — Oregon — the Secretary of State office. In the post-Civil War to early 20th centuries state charters had teeth, which they no longer have.

      About corporate “personhood” this is discussed in some detail in Hartmann’s book. What happened, basically, was that the Supreme Court in 1886 considered the concept and decided to put it on hold. The Chief Justice’s head clerk made an extralegal entry in the minutes, which in essence moved the question into law. This action held for decades, after which the legal profession decided it was too late to challenge the extralegal question, and it held “sort of” until Citizens United solidified it into coded constitutional law. Hartmann makes a great point: if corporations are persons, are their employees slaves and can the corporate person be prosecuted under the 13th Amendment?

  4. patrick newman
    October 13, 2018 at 1:12 pm

    The oligopolisation of markets, disappearance of trade unions, information hegemony of corporations, continuous stream of laissez faire/free markets propaganda found in most of the media is building a new totalitarianism that would make Russian Communism seem like a village committee!

  5. October 19, 2018 at 5:14 am

    Colonial Americans understood the history of the corporations and sought to free themselves from control by English corporations that stole their wealth and dominated trade. After fighting a revolution to end this exploitation, most Americans retained a healthy fear of corporate power and prudently limited corporations to a narrowly defined business role. Corporations were forbidden from attempting to influence elections, public policy, and other realms of civic society.

    The new Republic limited the privilege of incorporation to enable activities that benefited the public, such as construction of roads or canals. Enabling shareholders to profit was a means to that end. The states also imposed conditions (some of which remain on the books, though unused) like these:

    • Corporate charters (licenses to exist) were granted for a limited time and could be revoked promptly for violating laws.
    • Corporations could engage only in activities necessary to fulfill their chartered purpose.
    • Corporations could not own stock in other corporations nor own any property that was not essential to fulfilling their chartered purpose.
    • Corporations were often terminated if they exceeded their authority or caused public harm.
    • Owners and managers were responsible for criminal acts committed on the job.
    • Corporations could not make any political or charitable contributions nor spend money to influence law-making.

    For 100 years after the American Revolution, legislators maintained tight control of the corporate chartering process. Because of widespread public opposition, early legislators granted very few corporate charters, and only after much debate. Citizens governed corporations by detailing operating conditions not just in charters but also in state constitutions and state laws. Incorporated businesses were prohibited from taking any action that legislators did not specifically allow.

    States also limited corporate charters to a preapproved number of years. Unless a legislature renewed an expiring charter, the corporation was dissolved, and its assets were divided among shareholders. Citizen authority clauses limited capitalization, debts, land holdings, and sometimes, even profits. They required a company’s accounting books to be turned over to a legislature and/or regulatory agencies upon request. The power of large shareholders was limited by scaled voting, so that large and small investors had equal voting rights. Interlocking directorates were outlawed. Shareholders had the right to remove directors at will.

    In Europe, charters protected directors and stockholders from liability for debts and harms caused by their corporations. American legislators explicitly rejected this corporate shield. The penalty for abuse or misuse of the charter was not a plea bargain and a fine, but dissolution of the corporation.

    In 1819 the U.S. Supreme Court tried to strip states of this sovereign right by overruling a lower court’s decision that allowed New Hampshire to revoke a charter granted to Dartmouth College by King George III. The Court claimed that since the charter contained no revocation clause, it could not be withdrawn. The Supreme Court’s attack on state sovereignty outraged citizens. Laws were written, or re-written and new state constitutional amendments passed to circumvent the (Dartmouth College v Woodward) ruling. Over several decades starting in 1844, nineteen states amended their constitutions to make corporate charters subject to alteration or revocation by their legislatures. By 1855 it seemed that the Supreme Court had gotten the people’s message when in Dodge v. Woolsey it reaffirmed states’ powers over “artificial bodies.”

    But the people running corporations pressed on. Contests over charter were battles to control labor, resources, community rights, and political sovereignty. More and more frequently, corporations were abusing their charters to become conglomerates and trusts. They converted the nation’s resources and treasures into private fortunes, creating factory systems and company towns. Political power began flowing to absentee owners, rather than community-rooted enterprises.

    The industrial age forced a nation of farmers to become wage earners, and they became fearful of unemployment–a new fear that corporations quickly learned to exploit. Company towns arose and blacklists of labor organizers and workers who spoke up for their rights became common. When workers began to organize, industrialists and bankers hired private armies to keep them in line. They bought newspapers to paint businessmen as heroes and shape public opinion. Corporations bought state legislators, then announced legislators were corrupt and claimed they used too much of the public’s resources to scrutinize every charter application and corporate operation.

    Government spending during the Civil War brought these corporations fantastic wealth. Corporate executives paid “borers” to infest Congress and state capitals, bribing elected and appointed officials alike. They pried loose an avalanche of government financial largesse. During this time, legislators were persuaded to give corporations limited liability, decreased citizen authority over them, and extended durations of charters.

    Attempts were made to keep strong charter laws in place, but with the courts applying legal doctrines that made protection of corporations and corporate property the center of constitutional law, citizen sovereignty was undermined. As corporations grew stronger, government and the courts became easier prey. They freely reinterpreted the U.S. Constitution and transformed common law doctrines.

    One of the most severe blows to citizen authority arose out of the 1886 Supreme Court case of Santa Clara County v. Southern Pacific Railroad. Though the court did not make a ruling on the question of “corporate personhood,” thanks to misleading notes of a clerk, the decision subsequently was used as precedent to hold that a corporation was a “natural person.” This story was detailed in “The Theft of Human Rights,” a chapter in Thom Hartmann’s book Unequal Protection.

    From that point on, the 14th Amendment, enacted to protect rights of freed slaves, was used routinely to grant corporations constitutional “personhood” and protection. Justices have since struck down hundreds of local, state and federal laws enacted to protect people from corporate harm based on this illegitimate premise. Including the Citizens United v. FEC decision. Armed with these “rights,” corporations increased control over resources, jobs, commerce, politicians, even judges and the law.

    A United States Congressional committee concluded in 1941, “The principal instrument of the concentration of economic power and wealth has been the corporate charter with unlimited power….”

    Many U.S.-based corporations are now transnational, but the corrupted charter remains the legal basis for their existence. Reclaim Democracy believes citizens can reassert the convictions of our nation’s founders who struggled successfully to free us from corporate rule in the past. These changes must occur at the most fundamental level — the U.S. Constitution.

  6. Helen Sakho
    November 4, 2018 at 12:30 am

    Let us please recommend the latest (global as always) edition of Corporate Watch to our readers. I have quoted them here before and remain a great supporter simply because their work is thoroughly researched on a very limited budget.

  1. No trackbacks yet.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.