TGIF: "Corporate" Is Not a Four-Letter Word

I rise today to protest the widespread and malicious use of the adjective corporate as a synonym for evil, corrupt, exploitative, or any number of other pejoratives. As a descriptor, corporate merely says that an association that makes or sells goods for profit is publicly registered as a corporation. (Nonprofits can be corporations too.) This distinguishes the association from sole proprietorships and partnerships. That in turn means the participants in the association have agreed contractually to do business and raise capital in particular ways. Its ownership shares are readily tradeable; it may pay dividends to shareholders; it has a board of directors that hires officers and managers who may not be shareholders, etc.

That's it! That this form of free association should be so despised by "left" and "right" is rooted in misunderstanding, illiberalism, or both.

Incorporation carries no privileges or special obligations under the law. It is a free arrangement arising from a contract and the efficiency-enhancing division of labor between owners and managers. As an association of individuals who have the rights to life, liberty, and lawfully acquired property, the corporation is properly subject to the same laws as anyone else, no more or less. Corporations are (groups of) people. It's as simple as that. (Thus the decision in Citizens United v. FEC was a no-brainer.)

So why do we constantly hear terms like corporate state, corporate America, and corporate media? These are always intended to disparage companies rather than merely describe their business structure. However, what may be objectionable about particular firms is not that they have shareholders, boards of directors, officers, and managers. That is not why they might do things we don't like. To condemn them because they are corporations makes no sense. It's condemnation by non-essentials.

This of course is not to say that individuals associated with corporations never do anything wrong. Virtually every method of organization, like every tool, has been put to good and ill purposes. That cannot invalidate a particular noncoercive method in itself. You may have noticed that corporations have done a lot of good over many years in bringing goods and services to consumers. That some have sought government privileges, which harm taxpayers and consumers, is not the fault of the corporate form. It is the fault of particular individuals. More than that, it's the fault of the "bazaar" model of the state. If the government had no power to force the taxpayers to pay for other people's favors, no one could lobby for favors. That's simple logic.

I suspect that many commentators—of various ideological stripes—use corporate pejoratively for a bigger reason. They dislike the market economy, that is, the property-based, profit-and-loss system of which the corporation is a symbol. They wrongly think that corporations are inherently privileged "entities." But they are not. As noted, they are free associations of people that get no government favors qua corporations. The term corporate America is especially misleading. America has many, many corporations, and they have diverse and divergent interests in particular matters. The idea that public policy is manipulated by "corporate America" is ludicrous. No such monolith exists. One firm's or industry's subsidy is another's cost. Auto companies don't like steel tariffs.

The term corporate state did not originally mean rule by big business. Rather it was the name of the political system, such as Mussolini's fascism, in which the government controlled economic affairs through large monolithic social bodies, such as manufacturers, workers, and farmers. It was state socialism pitched as the reasonable middle way between the allegedly heartless market economy and revolutionary Marxist socialism.

The anti-corporate intelligentsia prefers to think that corporations owe their existence and special status as separate fictitious persons to the government, which grants them favors denied to others. This is false.

Every feature of the corporate association has resulted from the free contractual relationships that evolved over many centuries. No government favors were required. Neither was a fictitious personhood that was separate from the individual participants. Since the 19th century, when general incorporation laws were enacted, corporate status ceased to be a special quid-pro-quo grant from the government. Today any association can register as a corporation by filing a state form. It's a formality. Articles of incorporation are nothing but a public declaration that the company does business as a corporation.

No one is forced to invest in, work for, or lend money to any corporation. If anyone does so, it's because he thinks that's his best option. At any time, a dissatisfied shareholder can quickly sell his shares and invest in something else or nothing at all, something no taxpayer can do. No need to lament the average shareholders' lack of direct control over management. That's exactly why they bought the shares in the first place! If they wanted to manage a company, they would have started their own or joined a partnership. The separation of ownership and management is one of the attractive features of the corporation to people who just want to save and invest.

If corporate managers ill-serve their shareholders (and by implication consumers), the resulting fall in the share price would make the corporation ripe for a takeover and the replacement of the poor managers. The market for corporate control protects stockholders and consumers—unless the government inhibits takeovers, which it does today.

This was all spelled out by the late Robert Hessen in his 1979 book In Defense of the Corporation. (Hessen summarized his work in the Concise Encyclopedia of Economics here.) A business historian, Hessen shows in great detail how the general corporate form emerged through voluntary activity. Contrary to the anticapitalist myth, the corporation—featuring the separation of ownership and management, limited debt liability, entity status, "perpetual" duration, and limited tort liability for non-active shareholders—all can be established through contract. In fact, the corporation is not the only business form that can have these features.

As Hessen wrote (32):

[A]ll varieties of business organization—partnerships, limited partnerships, trusts, and corporations—were created and perfected in the marketplace through a process of experimentation. The reason is clear: because no one can be compelled to invest in a business or extend credit to it, the terms of association and the rules of liability have to be mutually acceptable to all parties—investors and creditors alike. None of these organizational forms was created by the decree of any king, court, or legislature.

What about the corporation's status as a separate "person" with perpetual life? Is that not a state favor? Here's Hessen (17):

[E]ntity status is an optional feature available to all unincorporated businesses, including partnerships, limited partnerships, and trusts. Owners can designate trustees to represent them in lawsuits and to accept or convey title to property on their behalf. Being a legal entity, then, is clearly not a feature unique to corporations, or a one-sided advantage, or a state-created privilege.

Nor is it accurate to call perpetual duration a special privilege conferred by government. Perpetual duration simply means that the articles of incorporation need not be renewed, unless the founders originally specified that the enterprise was to exist only for a fixed period of time. The privilege of perpetuity certainly does not guarantee that a corporation will continue in business forever; more than half of all corporate ventures fail and cease to exist within five years of their inception. On the other hand, although partnerships are not automatically immortal, many firms—of attorneys, accountants, architects, and stockbrokers, to mention a few—have been in continuous existence for a century or more.

Anticapitalists have fretted that shareholders enjoy limited liability in torts, meaning that if an employee harmed someone, the personal assets of the shareholders could not be the targets of lawsuits. This was much ado about nothing, Hessen wrote (20):

Vicarious liability should only apply to those shareholders who play an active role in managing an enterprise or in selecting and supervising its employees and agents. The tort liability of inactive shareholders should be the same as that of limited partners—that is, limited to the amount invested—and for the same reason: namely, inactive shareholders and limited partners contribute capital but do not participate actively in management and control.

If you have a bank account, which makes you a creditor of the bank, should you be personally liable if a bank employee accidentally injures someone in the course of his work?

At any rate, the tort-liability issue was always a red herring, an attempt to have the government impose special obligations on corporations. As Hessen wrote (21), "Regardless of one's view about limited liability for torts, the whole issue is irrelevant to giant corporations, which either carry substantial liability insurance or possess sizable net assets from which claims can be paid."

In truth, the corporation has been a godsend. By facilitating the pooling of the savings of large numbers of people, including those of modest means, who don't know each other and who don't want to manage a business, the corporation has made possible mass production, that is, an abundance of consumer goods; improved quality; greater variety, lower production costs, and lower prices. Further, it has increased the productivity of labor through large-scale capital investment, which raises wages. Finally, it has enabled regular people to save and invest for retirement directly or through various diversified funds.

In other words, the corporation is a major reason the inhabitants of market economies are the richest people who ever lived and why world poverty has plummeted from 90 percent to under 10 percent in recent decades. Thus the word corporate should not be a term of abuse but a term of endearment!