Corporations and the Public Purpose
By Charlie Cray and Lee Drutman
(An earlier draft/extended version of the article published by the Seattle Journal for Social Justice.)
In 2003 a new tobacco company called “Licensed to Kill, Inc.” was incorporated in Virginia. The company’s purpose, as stated in its articles of incorporation, was “the manufacture and marketing of tobacco products in a way that each year kills over 400,000 Americans and 4.5 million other persons worldwide.”(1)
No one in the Virginia Secretary of State’s office questioned the officers or directors of the new company before enabling it to incorporate. It simply collected the incorporation fee, filed some paperwork, and Licensed to Kill, Inc. was free to conduct business.
Licensed to Kill was incorporated by anti-tobacco activists as a parody, but it proved an important point: virtually anybody can incorporate a business these days, even if the stated purpose of that business is to kill millions of people. In a press release announcing the formation of the company, Director Gary Vastone publicly thanked the Virginia Corporation Commission for “granting us permission to exist. If a person were to ask the state for authorization to go on a serial killing rampage, he would surely be locked up in a jail or a mental institution. Luckily, such moral standards do not apply to corporations.”(2)
By granting Licensed to Kill a charter of incorporation, the state conferred legal privileges on the company, as defined by state corporate laws. It would be allowed to grow to unlimited size and scope, with an unlimited lifespan, and its shareholders would be entitled to limited legal liability. All Licensed to Kill had to do was file some paperwork and pay a small fee ($130).
Altria (formerly Philip Morris) and RJ Reynolds are real corporations with track records of selling deadly products to millions of consumers. They, too, hold corporate charters granted by state governments. Altria is incorporated in Virginia and RJ Reynolds in Delaware. Yet in the face of evidence that they have violated tobacco control laws around the world (3), these corporations continue to enjoy the privileges granted by their corporate charters. Neither Virginia nor Delaware has ever proposed revoking the charters of these corporations, though they have the right to do so and these companies’ violations of law are just cause for doing so.
Thousands of corporations responsible for major social, ecological, and economic crimes continue to enjoy state-granted privileges, despite long criminal records. If they were ordinary persons, these corporations would probably be convicted and sentenced to long terms of imprisonment. In some states, they might be executed. But corporations are not ordinary persons. In fact, they are not persons at all.
What is a corporation? In essence, a corporation is one of many ways to organize business, money and property. It is a legal form, an abstraction that gives incorporators rights and privileges they would not normally enjoy. “Corporations are constructs of the law,” explains legal scholar Harry Glasbeek. “They are not natural phenomena. No one has ever seen a corporation, smelled a corporation, touched a corporation, lifted a corporation, or made love to a corporation.”(4)
The corporate form allows a bunch of investors to pool capital into an enterprise — the corporation — in exchange for ownership shares. The owners set up a governance structure to do the business of the corporation, and, if the company makes money, they share in the profits.
There are millions of corporations around the world, including publicly traded corporations where shares are traded on a regular basis; closely held corporations, where shares are rarely traded; corporations that are wholly owned subsidiaries of other corporations; and nonprofit corporations, such as charities, churches, and universities. The list goes on.
Among the various kinds of corporations, the one of principle concern is the large, limited-liability, publicly traded corporation. These corporations dominate our economy, politics, culture -- our entire society.
The ownership shares of limited-liability corporations are publicly traded on open markets, such as the New York Stock Exchange. Their investors are responsible for debts and judgments against the corporation only up to the value of their initial investment (limited shareholder liability). These companies also have privileges under state laws, such as permission to grow to unlimited size, enjoying a perpetual life, and owning other companies. Every Fortune 500 company is a large, limited-liability, publicly traded corporation.
The corporation that dominates our economy today has virtually no inherent limits on behavior and presents virtually no risk of liability for its investors. This was not always the case. The corporate form evolved in American history from a limited and tightly controlled entity to a sprawling, uncontrollable conglomerate. There was nothing inevitable about the corporation evolving in the way it did.
In the early 19th Century, state legislatures understood the dangers of corporations, and permitted establishment of just a few – to deal with such public matters as constructing bridges, roads, and canals, and providing banking and insurance -- tasks that would be considered the people’s business.
However, America gradually embraced the corporate form while downplaying its dangers. This unleashed a wave of corporations and weakened the mechanisms for control. As a result, today we have a system in which large corporations are the dominant institutions in our society. They maintain incredible power over our lives and can be responsible for devastating social, ecological, and financial harms. And yet, despite their dominant position, they have very little accountability to the public. The ability of the people to use public institutions, including governments, to control corporations is largely circumscribed.
Corporations have convinced us that they are primarily private entities, when in fact they are a mixture of public and private. The perspective that most of us share on the corporation has swung so far in the direction of its private prerogatives that the illusion that the citizens have no fundamental claim over corporations is now accepted as fact. This perspective is bolstered by legal theories that regard the corporation as merely a “nexus of contracts” between private individuals.(5)
We argue in this article that establishing an understanding of the fundamentally public nature of corporations is key to restoring democratic control over them. If we accept that corporations are public institutions – created under a process in which ultimate authority is vested in the citizens – then it becomes clear that corporations do not intrinsically bear any rights or privileges except those that citizens choose to confer on them.
As seen in the License to Kill example, today virtually no public benefits or obligations are bargained for in exchange for the advantages (e.g. limited liability) conferred through the corporate form, and the obstacles to doing so – built into the law and political culture -- are significant. The question becomes: how is it possible to restore public control over corporations?
An understanding of the public nature of the corporation and how to control it comes from debates over the specific functions that corporations and different industrial sectors are supposed to perform in society, and whether the broader public interest might be served in a different way. Such discussion takes place concerning privatization as well as corporate abuse of publicly-owned assets and “corporate welfare”.
For example, public policy debates that begin with questions about the role of private corporations in military affairs or the corporate media’s use of publicly-owned airwaves are compelling opportunities to raise questions about the incorporation process itself. In these arenas the public/private divide is subject to its greatest examination. There may be a place within these debates to raise the incorporation question once again, as a starting point for broader consideration. Only an engaged citizenry, motivated to reclaim its own authority to control corporations, can provide the kind of impetus that policymakers and even legal theorists need to challenge existing assumptions about the corporation’s status under the law.
In the first part of this article, we review some of the history of the corporation in America, drawing upon key judicial decisions, legislative history and legal theory to trace how the theory of the corporation evolved from a public entity to a private entity over the course of American history. We will see that the system of regulation that we currently use to control corporations emerged after the 19th Century system of placing direct limits on corporations through their charters had disappeared.
Today, there is heightened demand for corporations’ accountability to the public, while corporate law is dominated by the “nexus of contracts” theory. In the absence of effective external regulation, it is important to determine if it is possible to resurrect public obligations that the corporation must fulfill as part of its “contract” with the society that grants it the privileges inherent in the corporate form (e.g. limited liability). It will only be possible to achieve this if we are informed about past attempts to do so.
Next, we review a number of current industrial sectors, and examine the evidence for treating some corporations as public institutions. This is where our understanding of corporations as public institutions can begin to translate into broader policy. Federal chartering would be the most effective approach for industrial sectors where there is a clear national interest at stake (e.g. defense-related corporations). Other approaches, such as community-controlled corporations and non-corporate entities like community-based trusts are appropriate vehicles for the delivery of essential services and protection of public assets.(6)
In the instance where state-based chartering is maintained, strategies for holding corporations accountable to the broader public include reintroducing the “internal affairs” doctrine, as proposed by Professor Kent Greenfield.
A HISTORY LESSON
Although it is possible to trace the roots of the modern corporation back to Rome(7), a legal lineage that extends through medieval guilds and towns and churches and universities, most histories of the modern multinational corporation trace its origins to the big foreign trading companies such as the famous East India Company, created by royal charter or by special act of Parliament in the 17th century, with privileges of exploration, colonization and trading in lands beyond the sea.(8)
These companies were different from modern corporations in that they were quasi-governmental institutions chartered by the crown for specific purposes, such as capturing as much wealth as possible from the East Indies and bringing it back to England. But the basic premise was essentially the same: investors pooled their money into a “joint-stock” company and, if the enterprise was a success, shared in the financial rewards.
As author Ted Nace notes, “With pooled capital, the corporation for the first time became a single unified entity rather than a federation of independent merchants. The internal consolidation made the joint-stock corporation ideally suited for the emergence of a key defining principle of the corporate form: the idea that a corporation represents a separate legal entity from the owners.”(9)
The United States itself began partly as a series of British colonial companies, such as the Virginia Company, chartered by the crown for the purposes of exploring the New World, extracting its wealth and developing its markets. As these corporations managed the colonies, they employed colonists to develop natural resources for the British crown. Additionally, other British corporations, such as the powerful British East India Company, saw the American colonies as markets for their goods.
This exploitive relationship between the British corporations and colonists would ultimately prove unsustainable. British companies were granted exclusive “monopoly” rights to sell commodities to colonists, which meant high prices and dissatisfied colonists. Things came to a boil with the Tea Act of 1773, designed to prop up the East India Company by raising the taxes on non–East India tea and expanding the company’s exclusive access to American markets. Local businessmen responded by dumping 90,000 pounds of East India Company tea into Boston Harbor, helping to catalyze a revolution in which the fight for economic independence from British corporations and political independence from the British crown were intertwined.
After the Revolution, as the Founding Fathers set upon the task of forming a new government, one of the questions they faced was what role corporations should play in American society. As sociologist Charles Perrow has written, “What we take for granted today was hotly debated as the eighteenth century turned into the nineteenth. Citizens and elites recognized at the time that permitting the existence of large organizations that were primarily responsive only to owners, and not to the public, was a fateful act.”(101)
The memories of exploitation by British corporations and of European feudalism made the Founding Fathers wary of any large concentrations of wealth and power. And they recognized that the corporate form, given its unique capacity to combine the wealth of many parties into one single entity, could pose a threat to artisans and others if not properly constrained.
Adam Smith, an economist and friend of some of America’s early leaders, issued a strong warning against the corporate form in his famous treatise, The Wealth of Nations (1776). Smith viewed the corporation as a means used by the Europeans to enforce inequalities and corrupt average workmen: “The pretence that corporations are necessary for the better government of the trade, is without any foundation. The real and effectual discipline which is exercised over a workman, is not that of his corporation, but that of his customers. It is the fear of losing their employment which restrains his frauds and corrects his negligence. An exclusive corporation necessarily weakens the force of this discipline.”(11)
Smith was opposed to corporations because he believed their tendencies toward monopoly interfered with the workings of the free market’s “invisible hand.” He wrote that “joint stock companies for foreign trade have seldom been able to maintain the competition against private adventurers. They have, accordingly, very seldom succeeded without an exclusive privilege; and frequently have not succeeded with one. Without an exclusive privilege they have commonly mismanaged the trade. With an exclusive privilege they have both mismanaged and confined it.”(12)
Despite these concerns, many businessmen recognized the corporation’s substantial potential for organizing civic and business affairs in the new post-war society. A new nation needed infrastructure projects like turnpikes and canals, as well as banks and insurance companies, to facilitate everyday commerce. Through corporations, individuals pooled funds to form the kind of capital needed to undertake projects and enterprises that presumably would benefit society as a whole and were too massive and risky for individuals to undertake alone.
Nevertheless, widespread public opposition to corporations led early legislatures to grant few charters, and usually only after much debate. But corporations did proliferate by the end of the 18th century. In contrast to the half-dozen American business charters granted in the entire colonial period, eleven were issued in the United States between 1781 and 1785, twenty-two between 1786 and 1790, and 114 between 1791 and 1795.(13) These businesses were prohibited from taking any actions which the legislatures that incorporated them did not sanction in their charter. When a corporation caused harm to public interests or went beyond its mandate, its charter could be revoked.(14)
As we will see, the struggle to control corporations through their charters continued for more than a century thereafter.(15) Legislative debates over the creation of a corporation reflected an understanding of the public nature of corporations and established that the privileges that the people’s elected representatives bestowed on a corporation would only be granted in exchange for a broader public benefit.
To keep corporations under control, limits were placed on them through rules on capitalization, debt, land-holdings, and sometimes profits. States also limited corporate charters to a set number of years, forcing their review and renewal when the charter expired. Unless a legislature renewed a charter, the corporation was dissolved and its assets divided among shareholders. Legal rules limited the issuance of stock, clarified shareholder voting rules, and determined procedures for record-keeping and disclosure of corporate information.(16)
Corporations were strictly prohibited from participating in politics. Specific rules written into corporate charters gave equal voting rights to large and small investors, outlawed interlocking directorates, and limited capitalization and debts. A company’s accounting books would be turned over to the state legislature upon request.
In addition to protecting the public by limiting corporate power in their charters, “states used corporate law to address the interests of particular constituencies vulnerable to corporate activity. Charters for banking, transportation, and insurance companies contained special provisions designed to protect the public from abusive practices (like inadequate capital reserves or abusive rate structures) peculiar to each industry. General incorporation statutes also responded to creditors’ concerns about fraud and financial irresponsibility. The so-called “trust fund” doctrine denied shareholders the full protection of limited liability by holding them personally responsible in cases of insolvency to the extent they had failed to pay full par value for their stock.”(17)
Much of what we attempt to accomplish today through regulation was thus accomplished through the chartering process that defined a corporation’s purpose. When a corporation violated its charter – i.e. operated ultra vires (outside the powers bestowed) – it could be dissolved by an act of the legislature that created it.(18)
In 1800, 334 corporations existed in the United States, the vast majority chartered to accomplish tasks that could rightly be considered the public’s business. Two hundred and nineteen (65.4 percent) of these corporations were involved in building turnpikes, bridges, and canals. Another 67 (20 percent) were involved in banking and insurance. Only 8 were involved in manufacturing.(19) Henry Carter Adams described corporations as agencies of the state. “They were created for the purpose of enabling the public to realize some social or national end without involving the necessity of direct government administration. They were in reality arms of the state.”(20)
We should not become too nostalgic for these early days of American corporations. Because legislatures controlled the granting of corporate charters, most of the charters went to politically well-connected and wealthy individuals, who became richer and more influential though their corporations. Many of these early corporations received monopoly rights as part of their charter and they pushed hard for other advantages that were not always in the public’s interest.
Perhaps the most famous confrontation with a corporation during the early days of the republic was President Andrew Jackson’s “War on the Bank.” At issue was the Second Bank of the United States, which was federally chartered in 1811 to establish “the exclusive right of Congress to control the currency.”(21) The bank had an impressive 35 million dollars in capital, one-fifth of which was government deposits. However, it could use those government deposits as it liked without paying any interest. The bank also enjoyed a monopoly and could not be taxed. In short, the bank possessed “unique and profitable relations with the government.”(22)
The bank’s charter was set to expire in 1836, and many in Congress had been ready to renew it, except that the bank’s president, Philadelphia banker Nicholas Biddle, exhibited contempt for government oversight. In an 1824 letter to Washington, Biddle wrote that “no officer of the Government, from the President downwards, has the least right, the least authority, the least pretence, for interference in the concerns of the bank.”(23)
Biddle’s sentiment, however, was at odds with the opinion of many, including Andrew Jackson, a self-styled man of the people. Jackson’s attorney general, Roger Taney, warned that “this powerful corporation and those who defend it, seem to regard it as an independent sovereignty, and to have forgotten that it owes any duties to the People, or is bound by any laws but its own will.”(24) In 1832 Jackson vetoed a congressional bill that would have extended the Bank’s charter, noting that “every monopoly, and all exclusive privileges, are granted at the expense of the public, which ought to receive a fair equivalent.”(26)
The War on the Bank went on for several years, and the debate spanned issues of currency and banking as well as corporate power. At the root of the discussion was a strong sentiment that the power of corporations must be kept under control and the reality that the Second Bank had gotten out of control. Attorney General Taney observed, “It is a fixed principle of our political institutions to guard against the unnecessary accumulation of power over persons and property in any hands. And no hands are less worthy to be trusted with it than those of a moneyed corporation.”(26)
Although it has been suggested that the opposition to corporations during the early 19th Century represents an agrarian failure to accept the efficiencies of the corporate form, small businesses and skilled artisans argued just the opposite: that businesses were able to use the advantages conferred by the corporate form to unfairly destroy the competition.(27) Historian Richard Hofstadter explained, “The prevalent method of granting corporation charters in the states was a source of enormous resentment. Very often the corporation charters granted by the legislatures were, or were construed to be, monopolies. Men whose capital and influence was too small to gain charters from the lawmakers were barred from such profitable and strategic lines of corporate enterprise.”(28)
The National Trades Union anticipated the negative effect on workers. “We entirely disapprove of the incorporation of Companies, for carrying on manual mechanical business, inasmuch as we believe their tendency is to eventuate in and produce monopolies, thereby crippling the energies of individual enterprise, and invading the rights of smaller capitalists.”(29) If chartered, corporations would transform work so radically that the citizens would become “mere hewers of wood and drawers of water to jobbers, banks and stockbrokers.”(30) The resistance to corporations, therefore, was at the core of the struggle between the new monopolists and the artisan class over the meaning of “republicanism.”
The situation was complicated by arguments for opening up the chartering process so that anyone could obtain a corporate charter, thus eliminating the air of political privilege surrounding the process of incorporation. Andrew Jackson promoted this solution, and “sprinkled holy water on corporations, cleansing them of the legal status of monopoly and sending them forth as the benevolent agencies of free competition.”(31)
The idea behind general incorporation was to encourage commerce in such a way that would benefit the public at large, by allowing anybody who wanted to go into business to enjoy the benefits of the corporate form. In other words, the problems created by the corporate form could, so the logic went, be mitigated by more incorporation.
A key moment in the process that loosened the corporation from state control was the Supreme Court’s decision in Trustees of Dartmouth College v. Woodward (1819). At issue was a law passed by the state of New Hampshire to turn Dartmouth, a private college chartered by the King of England in 1769, into a public institution in order to “extend the opportunities and advantages of education.”(32) The trustees of Dartmouth College argued that the law was unconstitutional because it violated the U.S. Constitution clause that prohibits a state “from impairing the obligation of contracts.” The Supreme Court agreed, establishing the sanctity of the corporate charter as originally created, and struck a blow against the ability of states to repeal and revise corporate charters.
The Dartmouth decision is key to understanding how the relationship between corporations and the states that created them began to shift, with the corporation becoming a rival center of power.(33)
Responding to Dartmouth, many states began to assert tighter public control over corporations. In 1825, Pennsylvania legislators gave themselves the power to “revoke, alter, or annul” the charter of any corporation at any time and then revoked the charters of ten banks in 1832. In 1831, Delaware voters adopted a constitutional amendment that would limit all corporate charters to twenty years. Louisiana and Michigan followed with similar limits. In the 1840s and 1850s, nineteen states amended their constitutions so that legislatures could revoke and alter charters. Rhode Island, for example, declared in 1857 that “the charter or acts of association of every corporation hereafter created may be amendable or repealed at the will of the general assembly.”(34)
“The [Dartmouth] decision expanded the privileges of private property against the claims of the public interest, and it helped unleash capitalist enterprise in nineteenth-century America,” Louis Menand suggests.(35) It was a first step in defining the corporation as an entity beyond citizen control.
The gradual shift from a system of corporate charters to the laws of general incorporation did not immediately prevent states from restricting the power of corporations in their charters. That would not come until later, as corporations began to play states against each other in a charter-mongering process that loosened certain prohibitions that were key to the formation of the giant corporate trusts at the end of the 19th Century. The move towards general incorporation eventually led to competition between the states that undermined the public’s ability to control the corporation itself. Arthur Schlesinger saw in the Jacksonian economic legislation a historical irony: it promoted the very ends it was intended to defeat.(36)
THE CORPORATE CHARTER RACE TO THE BOTTOM
As the nineteenth century progressed, the economy changed. Agrarianism gave way to industrialization. People left the countryside for the cities. In an age of railroads and steel, of oil and manufacturing, corporations became powerful and, increasingly, national institutions. And as corporate lawyers increasingly perfected the use of holding companies and trusts to get around existing limits on the size and scope of corporations, state corporate law was about to hit a crisis point.
In the 1870s, oil baron John D. Rockefeller was looking for a way to expand his Standard Oil Company without running afoul of state laws limiting corporate size. As it turned out, Rockefeller’s lawyer, S.C.T. Dodd, had just the thing: the “trust” company. By organizing several separate legal companies through one common board of trustees, the “trust” would allow Rockefeller to control 95 percent of all refined oil shipments by the 1880s.(37)
But Ohio attorney general David K. Watson was on to Rockefeller’s tricks, and in 1890 he brought an antitrust suit against the Ohio-chartered Standard Oil Trust. In 1892, the Supreme Court of Ohio ruled that Rockefeller’s Standard Oil Trust was “organized for a purpose contrary to the policy of our laws” and therefore “void.” The Ohio court found that the Ohio-chartered company had gone beyond its charter by entering into a trust. “The act so done is ultra vires [i.e. beyond the powers] of the corporation and against public policy,” the court held, and ordered the trust’s dissolution.(38)
Standard Oil, however, refused to comply and remained steadfast. In 1898, Ohio’s attorney general responded by bringing a contempt action against Standard Oil to revoke the company’s charter. But instead of sticking around to defend itself, Standard Oil simply picked up and reincorporated in New Jersey, where “reforms” in state corporate law made it possible for a giant trust to incorporate without any potential legal threat to its size, structure, or market power.
In 1891, New Jersey became the first state to allow corporations to buy and sell stock or property in other corporations and issue their own stock as payment, creating “holding companies” that were crucial to the functioning of trusts. The state followed this up by repealing its antitrust law in 1892.(39)
The real watershed came in 1896, when New Jersey enacted its General Revision Act, an embarrassingly permissive law that effectively signaled the end of states’ ability to regulate and control corporations through their charters. The General Revision Act removed the fifty-year limit on corporate charters. It allowed corporations to conduct business in any state or foreign country. It revised capitalization requirements to pave the way for massive concentration. It also permitted companies to issue nonvoting stock, which enabled certain owners of a corporation to easily retain control. It allowed directors to amend bylaws without the consent of the shareholders.(40)
The result was that a stampede of large companies like Standard Oil rushed to reincorporate in New Jersey. Between 1880 and 1896, 15 corporations with capital of $20 million or more were chartered in New Jersey. Between 1897 and 1904, 104 similarly sized companies were governed by New Jersey’s lax laws. In 1896, New Jersey granted 854 charters. In 1906, it granted 2,093 charters. By 1900, 95 percent of the nation’s major corporations were chartered in New Jersey.(41)
New Jersey reaped the intended financial rewards from this sale of its own sovereignty. In 1893, the state generated $434,000 in corporation fees. In 1896, it gained $857,000 in franchise tax revenues, and in 1906 it generated $3.2 million.(42) The cost to society, however, was dramatic. Because the vast majority of corporations flocked to incorporate in New Jersey, New Jersey’s law became the nation’s law, creating the legal opportunities for massive consolidation and combination into mergers and trusts. Between 1895 and 1904, 1,800 companies merged to form 137 megacorporations, thoroughly transforming the U.S. economy so that virtually every sector was controlled by just a handful of giant corporations. Between 1898 and 1902, 2,653 large firms disappeared in a wave of merger mania.(43)
Though other states initially expressed outrage at New Jersey’s changes, when they realized they couldn’t beat the Garden State, many of them joined it, removing almost all restrictions in corporate charters and doing away with the idea that corporations should be held directly accountable to the public and should be reasonably constrained in their quest to pursue private profits.
The epilogue to the charter-mongering game of the 1890s came in 1913, when New Jersey decided that maybe it had gone too far and it was not such a good idea after all to allow corporations to do whatever they wanted. Under President-Elect Woodrow Wilson, then the governor of New Jersey, the Garden State decided to prohibit many corporate privileges, such as combinations, monopolies, price fixing, allowed under state laws that Wilson considered inconsistent with the policy of the federal government.
“A corporation exists, not of natural right, but only by license of law, and the law, if we look at the matter in good conscience, is responsible for what it creates,” Wilson said. “If law is at liberty to adjust the general conditions of society itself, it is at liberty to control these great instrumentalities which nowadays, in so large part, determine the character of society."(44)
Despite Wilson’s rousing rhetoric, the New Jersey legislature’s efforts to tighten its rules had minimal effect. Many companies simply moved to Delaware, which in 1899 had adopted an even more permissive law than New Jersey — and offered even lower fees to incorporate. Delaware’s 1899 act allowed incorporators to insert any provisions they wanted in the charter regulating the corporation, directors, and stockholders.(45)
Today more than 308,000 companies, including 296 (59.2 percent) of the Fortune 500 largest corporations in the United States, are incorporated in Delaware, which is widely acknowledged as having the most management-friendly statutes of any state. Delaware law gives executives the most liberal control over the company. As a result, the corporate law of Delaware has effectively become the national corporate law for one hundred years.
THE RISE OF LIMITED LIABILITY
Besides reducing their own ability to hold corporations directly accountable, states also fostered increased corporate irresponsibility in the corporate form itself by a widespread shift to limited liability for investors. Limited liability meant that corporate investors were responsible for only their initial investment in the company. If a company went into debt, investors might lose what they had invested, but the creditors or unpaid employees couldn’t go after the investors’ personal assets.
Limited liability was justified as necessary to generate investment because it reduced risks. However, it also encouraged corporate irresponsibility by removing owners from the consequences of their investments. As legal scholar William W. Cook wrote in 1891, “There is nothing in the corporate form itself to justify the exaggerated application of limited liability. This pernicious movement has decreased the personal responsibility on which the integrity of democratic institutions depends, and has introduced into both investments and social services a dangerous element of insecurity.”(46)
Limited liability had been around since the early British corporations, and perhaps even earlier, but until the late 19th century, its widespread acceptance had not yet been achieved. Some states granted limited liability, others didn’t, and some did for some companies and not for others. Massachusetts, the dominant industrial state in the early nineteenth century, was opposed to limited liability. In 1822, for example, the Massachusetts law read, “Every person who shall be a member of any manufacturing company . . . shall be liable, in his individual capacity, for all the debts contracted during the time of his continuing to be a member of such corporation.(47) But by 1839, facing competitive pressure from other states, Massachusetts had changed its laws to allow for limited liability.(48)
In England, an 1844 general act of Parliament provided for incorporation by registration in a manner similar to the laws of general incorporation in the U.S.(49) Yet it took another 11 years before limited liability was broadly recognized. The fact that incorporation and limited liability were introduced separately reflected resistance to the latter. The resistance was overcome by an agreement that a limited liability company would announce its members’ financial non-responsibility by placing the word “limited” at the end of its name.(50)
Up until the 1840s, courts generally recognized that incorporators were responsible for outstanding corporate debts.(51) But over the remainder of the nineteenth century judges increasingly recognized limited liability. Some states, like Ohio, maintained double shareholder liability (investors were liable for twice their original investment) for investors even at the end of the century. And nine states, including New York, New Jersey, and Pennsylvania, held stockholders individually responsible for debts owed to workers. Many believed that “full liability served as a check upon irresponsibility, that the more one had at stake, the more carefully one would conduct business affairs. Others felt that abrogating liability was not only bad business but perhaps immoral.”(52)
The big corporate assets flooded to states with limited shareholder liability. Corporations became larger, ownership grew increasingly diffuse, and shareholders became distant from the everyday operations of the corporations they owned.
Limited liability also contributed to the separation of ownership and control. William G. Roy has suggested that a consequence of the rule of limited liability was that the corporation could act as an entity separate from its owners.(53) By shifting risks from the corporation and its investors onto society as a whole, the law changed the nature of the corporation. In short, these changes made the corporation much harder to control, less responsible by design and hence less responsive to the public.
THE RISE OF CORPORATE RIGHTS
In addition to limited liability and the shift in the incorporation process, another key development in the 19th Century lent considerable power to the corporations’ claim as a private institution independent of public control. Primarily as a result of judicial action, corporations increasingly acquired constitutional rights.(54)
This process was connected to the emergence of theories of the corporation as a private entity. That is, at the same time that the chartering process was replaced by general incorporation laws, the “concession” theory of corporations as artificial legal forms created by acts of the state was replaced by a theory of corporations as “natural entities” and “rights-bearing entities” or “legal persons.”(55)
The 1886 Supreme Court decision in Santa Clara County v. Southern Pacific Railroad, 118 U.S. 394 (1886) was not the first time that corporations were recognized as possessing a personality separate from the individuals composing it.(56) But it was the first time the Supreme Court recognized corporate personhood as conferring constitutional rights.(57)
In establishing the doctrine of “corporate personhood” the Court provided corporations with a potentially powerful new shield against public accountability. Alan Wolfe suggests, “If we believe that corporations are private agents, they are free to mind their own business outside the purview of the rest of society.”(58) More than that, private corporations are rights-bearing creatures protected by the Constitution as individuals. Most significantly, they enjoy the constitutional right to freedom of speech. If, on the other hand, corporations are understood as public actors, all of these conclusions are reversed. Corporations would have obligations not only to their shareholders, but also to others, including society as a whole.(59)
20TH CENTURY ATTEMPTS AT CORPORATE ACCOUNTABILITY
With the spread of general incorporation and the conferring of constitutional rights on corporations, questions about the relationship between corporations and society began to be directed elsewhere than the corporate chartering process. Questions about corporate social responsibility focused on systems of government regulation and norms of internal corporate governance. Much of the federal regulatory system that exists today emerged in the late 19th Century and accelerated in the 1930s during the New Deal. Regulation was actively sought and supported by the corporate community to prevent proposals for more fundamental reform.(60)
Regulatory laws were not always meek or modest, but as activist and corporate governance experts Robert Monks and Nell Minow have suggested, the federal system of regulatory agencies charged with enforcing regulations would itself eventually come under corporate control -- with predictable consequences: “The ultimate commercial accomplishment is to achieve regulation under law that is purported to be comprehensive and preempting and is administered by an agency that is in fact captive to the industry.”(61)
Meanwhile, corporate law and theory began to center around debates over corporate “citizenship” and the public duties of corporate directors and officers. This debate, which continues today, was initiated by a series of exchanges between Professors E. Merrick Dodd and Adolf Berle in the early 1930s.
In a 1932 Harvard Law Review article, Dodd espoused the theory that, as agents of the corporation, managers were not primarily responsible to the shareholders above all, but to the corporation itself. Since the corporation was a separate entity, obliged to operate as a “good citizen,” its management was empowered to make decisions in the public interest above the objections of shareholders.(62)
Dodd’s new theory of the corporation was an argument for bringing the public interest into corporate governance. As professor David Millon suggests, “Just as the natural entity theory had gained prominence, it was interpreted in ways that posed a challenge to a purely private conception of corporate law centering on shareholder financial interests.”(63)
Adolf Berle responded to Dodd by arguing that corporate management should devote its attention to maximizing shareholder wealth. He believed altruistic goals were vague and amorphous compared to the certain financial interests of shareholders.(64) Although Berle later changed his mind, his conception of the corporation as a shareholder-centered concern marginalized competing theories. This theory allowed corporate lawyers and theorists to construct purely internal explanations for how the public interest should be served, thereby defining the boundaries of corporate law and identifying policy proposals that were to be taken seriously.(65)
The theory of the corporation as made up of a “nexus of contracts”(67) was first introduced by Ronald Coase in a 1937 essay, “The Nature of the Firm.”(67) Here the corporation is conceptualized as a system of market-style bargains negotiated among various “stakeholders” who have different relationships to the corporation. This theory, which became a dominant conception of the corporation in the second half of the 20th century, diminished the public nature of the corporation and reduced the state to protecting and enforcing contracts made by private parties.
In a related manner, by assuming that corporate “stakeholders” could effectively serve as proxies for the public interest, the advocates of “corporate responsibility” were lending their support to a decision-making system that was a pale substitute for meaningful democratic control of the corporation.(68) The “stakeholder” model of corporate governance fails to adequately represent the interests of many people in the broader society (e.g. taxpayers, sometimes consumers), especially when they directly conflict with the interests of the corporation and its internal stakeholders, including the shareholders. The fact that an individual might at times be seen in all of these roles (e.g. investor, consumer, and taxpayer) does not mean that any of these roles (especially shareholders) can adequately represent the others.(69)
Compared with the detached regard of economic theorists who would reduce such relationships to a “nexus of contracts,” advocates for the public interest understand that there is no simple public/private line that can be drawn when it comes to corporations, at least in a fixed sense that leads to universal principles. While this uncertainty might put reformers at a rhetorical disadvantage, it does allow us to deal with corporations more realistically.(70)
CHARTERING A NEW COURSE
Today we have lost touch with the chartering process that creates corporations. We must once again take the incorporation process seriously and recognize that incorporation is a privilege that the public offers to private investors, and the public ought to get something back in return.
Any serious attempt to establish legal control of corporations should be built on this foundation. We must recognize that every corporation, whether Wal-Mart, ExxonMobil, General Motors or Halliburton, exists because a state or federal government granted it a charter in exchange for a promise to obey the law.
We rarely think about how we could place direct limits on corporations through their charters. As the License to Kill example illustrates, incorporation today is a routine, bureaucratic process. States ask little in return for giving incorporators legal privileges associated with the corporate form. States can reassert control over corporations by creating real threats to revoke charters. Every state except Alaska has a statute that provides for the revocation of corporate charters. This authority, exercises pursuant to a legal procedure known as quo warranto, remains woefully underused.(72) Even corporations that engage in repeated criminal activities are rarely threatened with charter revocation.
In 1998 a group of thirty citizens’ organizations and individuals asked the state of California to exercise this authority. With the help of Loyola Law School professor Robert Benson, the group filed a 127-page petition asking the California attorney general to revoke the charter of Union Oil Company of California (Unocal), based on its many environmental violations and complicity in “unspeakable” human rights violations, such as its work with brutal governments in Afghanistan and Burma.(73)
As the petition explained, courts have consistently held that certain acts of wrongdoing clearly warrant charter revocation. Judges have upheld revocation as a remedy for “misuse” or “nonuse” of the corporate charter, “unlawful acts,” “fraud,” “willful abuse of chartered privileges,” “usurpation of powers,” “improper neglect of responsibility,” “excess of power,” “mistake in the exercise of an acknowledged power” and “failure to fulfill design and purpose.”(74)
Corporations have been held dissolvable for failing to lay railroad tracks by a date promised, joining other companies to monopolize sugar, conducting fraudulent real estate practices, putting out false advertising, serving polluted water to customers, running baseball games on Sundays, paying members of the president’s family excessive salaries, self-dealing, and for the corporate president being convicted four times in a year for illegally selling alcohol.(75)
California Attorney General Dan Lungren rejected the petition to revoke Unocal’s charter three days later in a three-sentence letter, declining to act. As Benson described it, “Lungren’s office went into a comical panic when it got wind of the petition. His department called the California Highway Patrol the night before the coalition’s press conference at the state office building in Los Angeles and had the CHP warn the group not to appear because a permit was needed to have a press conference on state property. Lungren’s spokeswoman told the press first that the attorney general had no authority to revoke corporate charters; then — oops! — reversed herself hours later and said the department would take several months to study it. Three business days later, the refusal letter went out.”(76)
Though the petition failed, the petition filers regrouped and in 2003 worked to introduce a Corporate Three Strikes bill in the California State Senate. As drafted, the bill would require the state attorney general to revoke the charter of any corporation that is convicted of three major felonies (defined as felonies with a fine of $1 million or more or that result in a human death) within a ten-year period. For corporations not incorporated in the state, the attorney general would revoke the corporations’ rights to conduct business in the state. The law also would have required corporations to take out a full-page ad in the state’s leading newspapers to publicize their crimes.(77)
Predictably, the bill met stiff resistance in committee, where it failed to get the support of two key Democrats. The critics’ main concern was that a third-strike conviction would be disastrous for workers and shareholders. However, the bill contained a provision allowing the courts to appoint a receiver to take over and manage the affairs of the corporation “as justice and equity require . . . and shall issue orders to ensure that jobs and wages are not lost, to protect community interests and legitimate investor interests, and to maintain the entity’s obligations to protect the health, safety, and environment of workers and the public.”(78)
The relatively common process of placing corrupt unions or bankrupt corporations into receivership is designed to take into account any existing claims upon the corporation by those deemed innocent. A bankruptcy court’s decision to appoint former SEC commissioner Richard Breeden as a corporate monitor over WorldCom is an example of how receivership might work to eradicate criminal behavior by companies wishing to maintain their corporate status. Breeden’s report on WorldCom set out corporate governance changes that MCI (WorldCom’s successor) was required by the court to comply with in order to emerge from bankruptcy. It established important precedents, including a cap on CEO pay.(79) A similar process could be used to guide dismantling of corrupt parts of a corporation or to restructure a business to be more accountable to the public under a new charter.
Numerous law enforcement officials have recognized revocation of a corporation’s charter as an appropriate sanction for corporate crime. Revocation of a charter is particularly useful when the criminal behavior cannot be isolated to a few individuals. A 1979 Department of Justice (DOJ) report on corporate crime describes an approach to be taken for recidivist corporations with criminogenic cultures as a kind of probationary status similar to the receivership described above. The DOJ report suggests that a court-appointed director be empowered to recommend to the court appropriate internal reforms, including invasive structural reforms targeted towards eliminating the source of repeat lawbreaking activities.(80) The reforms chosen could include forbidding a corporation to engage in particular lines of business or commerce, or barring it from doing business in a geographical area or in a specific product line.(81)
The recent wave of corporate scandals can be viewed as largely the result of an aggressive effort to deregulate certain industrial sectors – banking (repeal of the Glass-Stegall Act, which separated commercial and investment banking), telecommunications (Telecommunications Act of 1996, loosening controls on media and spectrum technology corporations), and energy (the gradual gutting of the Public Utilities Holding Company Act, PUHCA, by SEC exemptions provided to Enron and other companies, as well as proposals currently before Congress).(82) All of these acts of deregulation allowed for the formation of corporate conglomerates, with intrinsic conflicts-of-interest and anticompetitive structures. In the absence of effective antitrust regulation (83), the use of structural reforms in corporate charters could be an effective means of restraining vertical integration and cross-industry ownership.(84)
Although state attorneys general have shown little interest in using corporate charter revocation as a sanction on large corporations, they have occasionally revoked charters of small corporations. The state of California alone, for example, revoked the charters of 58,000 smaller corporations in fiscal year 2001-2002 for failure to pay taxes or file proper statements.(85)
More substantially, in 2001, the Texas secretary of state revoked the charter of Lionheart Newspapers Inc. (a publisher of more than seventy publications) for nonpayment of franchise taxes.(86) And in 1998, New York Attorney General Dennis Vacco revoked the charters of two tobacco industry front groups incorporated as nonprofits: The Council for Tobacco Research and the Tobacco Institute Inc. Though the groups were officially incorporated “to provide truthful information about the effects of smoking on public health,” Vacco explained, “instead . . . these entities fed the public a pack of lies in an underhanded effort to promote smoking to addict America’s kids.”(87)
There is some evidence that law enforcement officials are becoming increasingly interested in using the charter revocation and rechartering options to combat corporate crime. When campaigning to replace Vacco in 1998, future New York attorney general Eliot Spitzer declared that “when a corporation is convicted of repeated felonies that harm or endanger the lives of human beings or destroy our environment, the corporation should be put to death, its corporate existence ended, and its assets taken and sold at public auction.”(88) Spitzer is well known for progressive views of corporate reform, and he is not alone. Referring to the powerful coal industry’s abusive trucking practices, West Virginia Attorney General Darrell McGraw said, “If a corporation uses its corporate charter to commit an illegal act, then it’s our jurisdiction and our responsibility to do something about it.”(89)
It has been suggested that the corporation’s status as a “person” under the law entitles it to certain constitutional protections against charter revocation.(90) However, Professor Kent Greenfield has suggested that since their charters provide that corporations are incorporated only for “lawful” purposes, unlawful acts can be deemed ultra vires (“beyond the power” of the corporation). In such instances, they clearly violate the heart of the corporate contract and become subject to the enforcement powers of corporate law.(91) While state officials in Delaware and elsewhere might choose not to enforce the ultra vires doctrine for political or other reasons, Greenfield suggests that shareholders could use it to enjoin the corporation’s continuing unlawful acts.(92)
The point is that it is possible to reject the notion that the law gives corporations an intrinsic right to exist in perpetuity without regard to their behavior. Instead, a sovereign people, acting through their elected government officials create corporations and grant them privileges through their charters. When corporations flout obligations to obey the law, and become a danger to society, the governments that create them have the right – and the means -- to dismantle them.
As Robert Benson explains it, “The people mistakenly assume that we have to try to control these giant corporate repeat offenders one toxic spill at a time, one layoff at a time, one human rights violation at a time. But the law has always allowed the attorney general to go to court to simply dissolve a corporation for wrongdoing and sell its assets to others who will operate in the public interest.”(93) The failure of public officials to act accordingly suggests how atrophied the use of corporate law in service of the public interest has become.
USING CHARTERS AS BLUEPRINTS FOR PUBLIC OBLIGATIONS
Another way to control corporations is by writing specific limits directly into the charters. There is nothing prohibiting any state from once again placing limits on how big corporations can grow to be, how long they can exist, or what kind of liability investors should be exposed to. There is nothing inherent in the corporation that requires it to enjoy the legal privileges it enjoys. If a state wants to get serious about controlling corporations it can change its incorporation laws to ensure that limits are placed on corporate size, scope, and behavior. Moreover, once a corporation is bound by such rules, it is not free to break them.(94)
Revising the use of charters in this manner would send a strong message that the state is serious about reasserting corporate obligations to serve public interests and to enable citizen control over corporations. Of course, without other changes of law, the only practical result of corporate law reform might be to discourage any business from incorporating in the state. Corporations can incorporate in any state they like, and the rules of interstate commerce and their rights under the Constitution allow them to protect themselves from states’ attempts to limit their behavior when they are incorporated in another state. If one state decided to enact restrictive corporate laws, most corporations would flee for friendlier legal grounds, as they left New Jersey during the charter-mongering battles of the 1890s.
As we will see, certain viable responses must be considered once the decision is made to control corporations through their charters.
THE PROBLEM OF STATE-BASED CORPORATE LAW
One of the oddities of our corporate law system is that although most of our large corporations conduct business on national and international levels, they continue to be chartered at the state level, and therefore state laws primarily supply the rules that control their existence and governance.
A state-based system of corporate law made sense two hundred years ago, when state economies were much more distinct and corporations generally operated within a single state. But today, when corporations operate anywhere in the world, such a chartering system seems woefully anachronistic.
The consequence is that the state with laws most favorable to incorporators attracts the vast majority of incorporation activity. As noted, that state is Delaware, home to 308,000 corporations, including almost sixty percent of Fortune 500 companies, and recipient of $500 million a year in incorporation fees (roughly 25 percent of the state’s total revenues).(95) The state with the second-highest number of Fortune 500 incorporations is New York, with just 25.
Delaware, “a pygmy among the 50 states, prescribes, interprets, and indeed denigrates national corporation policy as an incentive to encourage incorporation within its borders, thereby increasing its revenue.”(96) Delaware offers the most pro-management statutes available, essentially allowing incorporators to do whatever they would like as long as it is not otherwise illegal.
This situation presents a troubling obstacle to holding corporations democratically accountable through corporate law. If tiny Delaware (population: 783,600) effectively sets the corporate law for the entire nation, and in some cases, the world, more than 99 percent of Americans have essentially been cut out of deciding how corporations should be governed. Law professor Daniel J. H. Greenwood has concluded:
“Citizens, acting through the political process as presently constituted, have effectively no say in constituting corporate law. The law, and the corporations formed under it, are rather products of a market that, by historical accident, has freed itself from political control.”(97)
“Our corporate law is chosen by the very corporate managers who ought to be controlled by it, and created by lawyers, legislatures and judges unanswerable to most of the people (who are not citizens of Delaware) whose lives are affected. Large corporations and Delaware determine the nation’s corporate law, and the rest of us are not even “virtually represented.” Under the Delaware system, corporate managers are entrusted with stewardship of enormous concentrations of wealth and power—in many instances both larger and more important in our daily lives than most governmental units—with little supervision or answerability to the political process. These autonomous power concentrations, in turn, are granted the strikingly unusual right to choose the law that governs them, thus guaranteeing that corporate law will continue to respect their independence from the will of the people. In short, we have created institutions of major importance and power and then set them on their way to do good or ill with little control or influence by the citizens whom, ultimately, they should serve.”(98)
Corporations are subject to the environmental, labor, securities, and other laws of each state in which they operate. Why should corporate governance laws be any different? If state legislatures want to make sure that employees or shareholders of corporations that operate primarily within their state enjoy more rights than Delaware corporate law grants them, why should they be prohibited from doing so? There is simply no good reason. Yet Delaware effectively sets the corporate law of the nation and creates a troubling obstacle for the ability of states to regulate and control corporations that operate within their borders.
One way to deal with this problem would be for a state (say, for example, New York) to challenge the ability of Delaware to set corporate governance rules for corporations that operate primarily in New York. Professor Kent Greenfield suggests that “Delaware’s dominance is illegitimate because its ability to define the rules of corporate governance depends on the so-called ‘internal affairs’ doctrine, which says that the internal affairs of corporations (i.e. the rules of corporate governance) are provided by the state where the corporation is chartered.”(99)
According to Greenfield, the internal affairs doctrine is not established under constitutional or statutory provisions of law, but based only on judicial tradition.
In fact, during the 1980s and early 1990s -- a period of big mergers and acquisitions and plant closures -- some states moved to change their corporate laws to require the courts to reflect the interests of employees and other stakeholders. As a result, in 29 states directors are now permitted to take stakeholder interest into account. Connecticut, for example, requires boards to consider the interests of corporate stakeholders when making major decisions. Meanwhile, a recent proposal has also been made to further expand the duties of corporate directors to account for the interests of communities, the environment and other stakeholders.(100)
Greenfield argues that the state that has the greatest interest in regulating the internal affairs of a corporation should determine the rules of corporate governance.(101) In practice, this means states would impose their own corporate governance laws on corporations whose business is primarily carried on within that state, regardless of where the corporation is incorporated. When these laws come in conflict with Delaware law (as they inevitably would), it would ultimately be up to a judge. By relaxing constraints on the internal affairs doctrine, corporate law would become more democratic.(102)
TIME TO REVIVE THE FEDERAL CHARTERING OPTION?
Another way to solve the problem of conflicts in state corporate law would be to establish a system of federal chartering for businesses that operate in multiple states. Instead of a competition among states to enact the most pro-corporate laws, a federal chartering system could require a consistent set of rules about internal corporate governance.
Proposals for federal corporate charter laws were included in the 1904 Democratic Platform, the 1908 Republican Platform, and the 1912 Democratic Platform. Between 1915 and 1932, at least eight bills related to federal chartering were introduced in Congress. In the 1930s, populist Senator Joseph O’Mahoney of Wyoming promoted the idea of “National Charters for National Business.” In his statement to the Temporal National Economic Committee (TNEC) at its closing session in March 11, 1941, O’Mahoney suggested that to ensure business responsibility, it would be necessary to have “a national charter system for all national corporations.”(103)
O’Mahoney’s proposal required corporations with assets in excess of $100,000 to obtain a federal license to engage in interstate business, forbade stock ownership by one corporation in another and the diversification of a corporation’s business beyond the provisions of its charter. O’Mahoney threatened corporations that violated child labor and collective bargaining laws with the loss of their license to do interstate business. His effort to control corporate power through federal chartering was derailed by the gathering storm surrounding World War II, and the TNEC that O’Mahoney convened to ask tough questions about corporate excesses was largely forgotten.
In 1976 the idea of federal chartering was revived by Ralph Nader, Mark Green, and Joel Seligman in Taming the Giant Corporation.(104) They proposed a federal law requiring national businesses with more than $250 million in annual sales or more than 10,000 employees to obtain a federal charter. These charters would include requirements for full-time outside directors, disclosures about workplace conditions, prohibitions against monopoly concentration, and disclosure of lobbying activities and tax returns – all provisions designed to protect shareholders, employees, consumers, taxpayers, and communities.
“The problem is ultimately one of power,” they wrote. They posed this question: How do we limit unaccountable power and ensure that corporate executives who hold managerial power are the best possible managers? (105) They proposed a system of federal chartering that requires corporations to pay attention to a broad range of public concerns beyond profits.
There are a handful of federally-chartered companies today. Amtrak is federally chartered, as are mortgage lenders Freddie Mac and Fannie Mae. Both of these lenders were created to operate in the Department of Housing and Urban Development for the public purpose of increasing home-ownership. Fannie Mae’s amended charter directs it towards purposes that would not normally be served by for-profit corporations. It provides assistance to secondary markets for residential mortgages, including activities related to mortgages on housing for low- and moderate-income families. Fannie Mae also provides home loans, including loans for energy conservation and solar power systems, and collects data to monitor discriminatory practices in the home mortgage industry.(106)
EVALUATING THE FEDERAL CHARTERING OPTION
As a policy matter, we believe it makes sense once again to consider federal chartering as a mechanism for containing corporate power and effectuating important national corporate reform policies. A state-based system of corporate law presents formidable obstacles to national reform. It makes the use of the chartering process to increase accountability in corporations difficult unless all fifty states were to adopt the same reform simultaneously.
Consider Big Tobacco. Towards the end of his memoir, A Question of Intent, David Kessler, the head of the Food and Drug Administration from 1990 to 1997, concludes that regulating the tobacco industry in the traditional sense would not achieve national public health objectives: ”My understanding of the industry’s power finally forced me to see that, in the long term, the solution to the smoking problem rests with the bottom line, prohibiting the tobacco companies from continuing to profit from the sale of a deadly, addictive drug,” Kessler wrote. “These products are inevitably used to promote that same addictive product and to generate more sales. If public health is to be the centerpiece of tobacco control — if our goal is to halt this manmade epidemic — the tobacco industry, as currently configured, needs to be dismantled. . . . The industry cannot be left to peacefully reap billions of dollars in profits.” (emphasis added)(107)
After attempting to regulate the tobacco industry for seven years, Kessler concluded it was necessary to dismantle the industry in order to deal with the public health menace it had created. He proposed forcing tobacco companies to be spun off from their corporate parents, and called for Congress to “charter a tightly regulated corporation, one from which no one profits, to take over manufacturing and sales.”(108)
Kessler’s solution to the tobacco problem resonates with the argument we make about federal corporate chartering. The public needs to exercise control over corporations its laws have created. Corporations that consistently harm the public should not have government charters that allow them to continue to conduct business. Kessler’s ideas would help rein in corporations that directly threaten our collective well-being. Tobacco has been recognized as a public health threat for some time. The Centers for Disease Control and Prevention estimates that in addition to 440,000 premature deaths, smoking costs the nation $167 billion a year in health care costs and lost productivity – well over 7 dollars for each pack of cigarettes purchased by consumers.(109)
Although Kessler’s tobacco proposal is unlikely to be introduced in Congress anytime soon, it reminds us that that our ability to control corporations comes from a powerful starting point: We create corporations and endow them with rights and privileges for one ultimate purpose—to serve the public good. Upon this basic framework, much follows.
Kessler’s proposal to federalize and recharter the tobacco industry stems from the need for a strong national health policy, with explicit consequences for industrial practices.
A similar approach could be used to control other dangerous technologies. The chlorine industry is at the center of the spread of certain persistent toxic pollutants (e.g. dioxin, PCBs, pesticides, ozone-depleting chemicals, etc.) recognized to cause a wide range of serious human health and environmental effects.(110) Various organizations, including the American Public Health Association (111) , the U.S./Canadian International Joint Commission on the Great Lakes (112) and environmental groups have called for a planned phase-out of the industrial production and use of chlorine-based chemicals – a class that includes 11,000 individual chemicals.
In 1994, the EPA proposed to study the viability of a national strategy to “prohibit, substitute, or reduce” the use of chlorine in four industrial sectors (PVC, solvents, pulp bleaching, and water treatment), but a powerful response from the Chlorine Chemistry Council defeated the EPA’s proposal.(113) Additional calls for the elimination of chlorine-based chemicals were made in the Stockholm Convention on Persistent Organic Pollutants(114) , which has targeted a “black-out” list of global pollutants of highest concern.(115)
A national public health strategy to phase out chlorine in order to protect human health, the environment and national security(116) could be achieved by a strategy similar to Kessler’s proposal for controlling Big Tobacco. Under such a policy, corporations that produce and use chlorine would be required to phase it out or separately re-charter their chlorine-based production activities as part of a planned phase-out, providing a transition that considers the effect on communities and workers.(117)
FEDERAL CHARTERING AND NATIONAL SECURITY
It’s hard to imagine an industrial sector better suited for federal chartering than the nation’s defense and security contracting firms. The existence of defense contractors’ is predicated upon federal policy goals, with the largest receiving major income streams through federal contracts. Lockheed Martin, the Pentagon’s No. 1 primary contractor, received $21.9 billion in 2003 from the Pentagon out of its total sales of $32 billion. (118)
Chartering defense contractors at the federal level would allow Congress to control an industry that is less a servant of foreign policy objectives than its driving force. President Dwight Eisenhower warned in his 1961 farewell address to the nation: “[W]e have been compelled to create a permanent armaments industry of vast proportions….We annually spend on military security more than the net income of all United States corporations. This conjunction of an immense military establishment and a large arms industry is new in the American experience and is felt in every city, every statehouse, every office of the federal government.”(119)
Two decades later, John Kenneth Galbraith suggested that it was time to recognize that big defense companies like General Dynamics and Lockheed, which do all but a fraction of their business with the government, are really public firms and should be nationalized (120):
“The process of converting the defense firms from de facto to de jure public enterprises would not be especially complicated,” Galbraith suggested. “The defense industry is highly concentrated. If a company or subsidiary exceeded a certain size and degree of specialization in the weapons business, its common stock would be valued at market rates well antedating the takeover and the stock and the debt would be assumed by the Treasury in exchange for Government bonds. Stockholders would thus be protected from any loss resulting from the conversion of these firms to de jure public ownership. Directors would henceforth be designated by the Government and the firms, subject to any needed reorganization and consolidation, would function thereafter as publicly owned, nonprofit corporations.”(121)
“By no known definition of private enterprise can these specialized firms or subsidiaries be classified as private corporations,” he wrote. For one, “[a] very large part of the fixed capital of these firms is owned by the Government of the United States. … Recognizing tacitly the public character of these firms, the Government extensively instructs them on their management. It tells them what costs are billable to the Government and what are not and advises them on what work is to be subcontracted and what is not.”(122)
The greatest enthusiasm for Galbraith’s proposal came from individuals associated with the defense firms who had witnessed fantastic waste and misuse of the nation’s resources.
Another reason Galbraith cited for seeing defense firms as public entities is the fact that they were protected from competition. In 1968 ten percent of defense contracts were subject to competitive bidding and sixty percent went by negotiations to contractors which were the only source of supply.(123) There was no market between the firm and the Government. Members of two public bureaucracies worked out agreements for supplying weapons and other war technologies.(124)
Finally, Galbraith suggested, as a matter of public policy-making, a public firm acting as part of a government bureaucracy would participate in defining public needs for war technologies and inform the policy that creates the requirements. Defense contractors now participate in such public policy-making as a matter of course.
Examples of private contractors defining the government’s defense policy are rampant and systemic. In the recent case of Halliburton in Iraq, for example, Bunnatine Greenhouse, the senior contracting specialist with the Army Corps of Engineers blew the whistle on Halliburton’s involvement in the contracting process. “I can unequivocally state that the abuse related to contracts awarded to KBR represents the most blatant and improper contract abuse I have witnessed during the [20 year] course of my professional career [in government contracting],” Greenhouse said.(125)
The problem extends beyond Halliburton. Interlocking relationships exist between large defense contractors and the Pentagon – including corporate representation on key defense planning boards, and the regular passage of Pentagon and industry personnel through the “revolving door.”(126)
The result is a steady stream of abusive contracting practices, and a potentially dangerous distortion of American national security objectives. As a New York Times reporter describes the situation, “Lockheed has become more than just the biggest corporate cog in what Dwight D. Eisenhower called the military-industrial complex. It is increasingly putting its stamp on the nation’s military policies, too.”(127)
The result of defense contractors’ influence over Congress and Defense policy boards is also a long-term commitment to the development of high-tech weapons systems that only these contractors are able to produce.(128) These weapons systems arguably have little to do with preventing acts of terrorism – one of the nation’s greatest security concerns. The problem is self-reinforcing. By pretending that these essentially public firms are really private enterprises, we enable them to engage in lobbying and other political activity on behalf of weapons expenditures. The growth of private military firms and corporate intelligence contractors in the past decade has created additional profit-making pressures on national security policy-making processes.(129)
In a similar fashion, post-9/11 we are also witnessing the emergence of a new “security-industrial complex,” sustained by taxpayer-funded homeland security contracts.(130) It is ironic that one of the largest contracts awarded by the Department of Homeland Security in its first years of operation was a $10 billion “border security” contract awarded to Bermuda-based Accenture, the former consulting arm of Arthur Andersen.(131)
By making defense and security firms full public corporations we would eliminate the influence of the profit motive on national security strategy and judge the performance of such firms by criteria consistent with the national interest.
ACCOUNTING IN THE PUBLIC INTEREST
The accounting industry(132) is another industry whose failure to serve the public interest adequately remains a significant problem. It, too, creates an opportunity to introduce national policies which would place in the public domain a function crucial to sustaining investor confidence in the markets.
Accounting firms played an important role in Enron and other recent financial accounting scandals by authorizing financial reports that involved major forms of deception.(133) The Sarbanes-Oxley Act of 2002 provides for strong penalties for financial fraud (134), and eliminates certain conflicts of interest created by the consulting work that accounting firms conducted for their audit clients. But tax consulting was exempted from the law and continues to constitute a major part of the auditing industry’s business.(135)
“Tax work requires you to be an advocate for the client,” a critic of the loophole recently pointed out to the Financial Times. “That is not compatible with audit work.”(137) In addition, tax consulting companies continue to engage in outside business dealings with their directors and have high-ranking executives who formerly worked for the accounting firm, which can compromise the objectivity of the auditors.(137)
Professor John Coffee suggests that auditors serve a necessary function as “gatekeepers” for corporations whose assertions about their own financial health are inherently suspect.(138) As independent watchdogs, auditors scrutinize corporate financial statements and certify their accuracy. Yet the conflicts of interest created by the millions of dollars in consulting fees that auditing firms continue to receive for consulting for the same clients has undermined their objectivity and prudence. Given the financial rewards for complacency built into the system, it is difficult to imagine that public confidence could be restored until auditing functions are established in a completely independent body accountable to the public.
The Supreme Court reversed a lower court’s conviction of Arthur Andersen for its role in the Enron scandal, but the firm was already a recidivist offender that suffered reputational damage for its role in other accounting scandals, including Waste Management and Sunbeam before Enron, and MCI/WorldCom, Global Crossing and Qwest afterwards.(139)
Andersen was not alone in its failure to provide an objective check on corporate financial reporting. All of the remaining Big Four accounting firms have been implicated in failed audits that cost billions of dollars in recent years and remain in serious danger.
Deloitte & Touche, for example, is threatened by major lawsuits for its role in Parmalat, the “Enron of Europe.”(140) The firm has paid $50 million to settle SEC civil charges that it failed to prevent massive fraud at Adelphia.(141)
Ernst & Young has had major problems that threaten its existence, including a $4.7 billion negligence claim by UK-based Equitable Life.(142) In April 2004, the SEC barred the firm from taking on new clients for six months and ordered it to take on an outside monitor to overhaul its independence policies, described by the SEC as a “sham.” The SEC administrative law judge found the firm’s “day-to-day operations were profit-driven and ignored considerations of auditor independence” by jointly marketing consulting and tax services with an audit client, PeopleSoft Inc. (143)
KPMG faces lawsuits and serious reputational damage for its auditing role at Fannie Mae (widespread accounting manipulations forced it to restate an estimated $9 million in earning in 2005)(144) , Xerox (KPMG paid $22.5 million to settle charges brought by the SEC, the largest regulatory penalty paid by an auditor in history)(145) , and Gemstar-TV Guide International, Inc. (it agreed to pay $10 million to Gemstar shareholders).(146) KPMG is negotiating with the Justice Department to avoid criminal sanctions for marketing problematic tax shelters that cost the IRS hundreds of millions of dollars from 1996 to 2002. Enforcement efforts are targeted at 30 former partners. But KPMG had “firm-wide numerical goals for new tax idea submissions” and pressured KPMG tax professionals to meet this goal, according to one report.(147)
PricewaterhouseCoopers (PwC), the last of the Big Four, paid $48 million in 2005 to end litigation related to Safety-Kleen, a payout consistent with previous class-action settlements for its role in Raytheon ($50 million) and U-Haul International’s parent company Amerco Inc. ($50 million).(148)
Industry observers say that there will be no easy way to restore public confidence in the accounting industry. Sharper limits on the provision of non-audit services and mandatory rotation of entire auditing firms (rather than the rotation of individual partners required by Sarbanes-Oxley) might be effective and smaller firms might gradually grow to the size where they can handle multi-national clients, but few in the industry believe that will happen soon. The “Big Four” audit 97% of all public companies in America with sales over $250 million. Industry concentration has raised concerns that a new major scandal and accounting firm collapse could cause “paralysis in financial markets.”(150) With only three big accounting firms left, it would be difficult for companies to juggle the relationships necessary to comply with conflict-of-interest rules.
Regulators feel constrained in dealing with the Big Four when it comes to new evidence of unprofessional behavior. After Andersen, no one wants to be blamed for causing another firm to collapse. Yet major accounting scandals are a virtual certainty. The FBI predicts that "major corporate crime will impact the U.S. economy over the next five years." The Bureau is currently investigating over 189 major corporate frauds, 18 of which involve losses exceeding $1 billion.(151)
It’s not clear that the collapse of another big accounting firm can be prevented given the emasculation of corporate crime enforcement and tort reforms that extend beyond the already problematic ones passed in the 1990s.(152) As it is, the Big Four accounting firms face an estimated $50 billion in outstanding claims, and have huge problems getting insurance, particularly against unpredictable “catastrophic” risk.(153) In 2005, the industry implicitly acknowledged its perilous position when it signaled its intent to introduce a legislative limit on auditors’ liability.(154) The firms’ precarious position and continuing conflicts of interest provide a significant basis for federalizing the auditing function.
Rep. Dennis Kucinich (D-OH) proposed an approach to financial auditing problems in early 2002, before Andersen collapsed and Sarbanes-Oxley was completed. Kucinich’s bill would have created a Federal Bureau of Audits responsible for auditing all publicly traded corporations.(155) “Americans rely on the FBI to protect them from criminals and terrorists, the FBA (Federal Bureau of Audits) [would] protect American stockholders from the silent crimes committed by corporate criminals,” Kucinich suggested. “The Enron scandal suggests we need cops who carry calculators instead of firearms!”(156)
Given the precarious state of the accounting industry, a conservative case can be made that placing the auditing process under federal control is necessary to preserve the country’s free-market system. We must recognize that accounting fraud has calamitous consequences for the firms involved, for millions of people who depend on the performance of the market for their retirement security, and for the broader economy. In this respect, confidence in corporate financial reporting is a question of national economic security.
So far, we have described cases in which public interests would effectively be protected by a system of federal chartering (e.g. defense). In addition, there are reasons to restructure specific industry sectors in order to place a critical part of the industry under direct public control (i.e. tobacco, auditing) at the federal level.
In some sectors of the economy, in order to protect the public interest, it will be more effective to re-envision the corporation through a framework of local control. When it comes to providing communities with essential services (e.g. electricity, water, transportation), municipally-controlled corporations move us closer to our ideal of corporations as public entities. The purpose of and technologies associated with the delivery of essential services (e.g. water, electricity, transportation) make them particularly suited for municipal control.
These essential “services” are measured by their responsiveness to the people they serve, rather than their ability to benefit remote shareholders. Moreover, their inherent technological requirements and structural efficiencies make them “natural monopolies.”
Tyson Slocum of Public Citizen describes how this is the case for electricity generation and distribution:
“Unlike other industries in the American economy, it is very difficult to foster competition in the electricity industry. Electricity’s high overhead costs limit the number of players, since it requires hundreds of millions to build or buy a power plant….Constraints on siting power plants also inhibit competition because plants must be near power lines and meet minimum public health standards, since those using natural gas, oil or coal (as 70% of U.S. plants do) produce harmful emissions.”(157)
In the case of essential services like electricity and water, the public interest cannot merely be determined by what level of government should charter a corporation, but what kind of institution – public or private – is best suited to providing such services. Municipally-incorporated utilities, restricted to a specific purpose and accountable to the local citizens, are arguably the best equipped to provide continuous services to the broader population.
The 2000-2001 California electricity crisis, which cost ratepayers tens of billions of dollars, did not affect everyone in the state because the cities and municipalities (e.g. Sacramento and Los Angeles) that controlled their own utilities were not subject to Enron and other companies’ predatory trading.
Across the country, 2,100 municipalities own their own utilities, and there are an additional 900 energy cooperatives. In 1999, the Department of Energy found that, on average, customers who owned their utilities paid 18 percent less than customers of investor-owned utilities.(158) The New Rules Project explains, “Because customer-owned utilities are democratically and locally controlled, and service rather than profit oriented, we should encourage their formation. In today’s topsy-turvy electricity world, states should encourage the formation not only of customer-owned distribution utilities, but public transmission utilities as well.”(159)
Local control creates additional benefits. As the big northeastern blackout of August 2003 demonstrated, a nationally- or regionally-integrated grid system is potentially vulnerable to a failure in one location. Recognizing that vulnerability, beginning in the early 1980s, Pentagon analysts and energy efficiency experts made the case that a decentralized system of energy and electricity would improve our national security.(160) Smaller, locally owned utilities rarely build giant power plants that are costlier to the environment and prime targets for terrorist attacks.(161) Additionally, municipal control facilitates the introduction of locally-appropriate and ecologically sustainable technologies.(162)
Past examples demonstrate that municipal services performed better under public control than when privatized. According to historian Clifton Hood, New York City’s subway system was first operated in 1904 by the Interborough Rapid Transit Company and with the Brooklyn Rapid Transit Company in 1913. Rising inflation after World War I caused both companies to teeter in and out of bankruptcy, and in 1933, the city started its own subway network. The Independent Subway System competed with the private lines, which delivered poor service, and in 1940, the city created a unified, municipally run system.(163)
Firefighting is another example of a service that was once in the private sector but is now traditionally maintained as a public service. Although communities have experimented with privatization, the results have often been disastrous. In 1985, the Salem, Arkansas Fire Corporation arrived at a fire and let the home burn because the owner had not paid the $20 annual subscription fee. “Once we verified that there was no life in danger, and no immediate danger to a (subscriber’s) property, then according to our rules we had no choice but to back off,” the fire corporation’s chief explained.(164)
Our perspective on municipal services can also benefit from an understanding of the history of municipalities, which themselves were once regarded as corporations. These early municipal corporations operated like democratically-controlled governments.
One historian explains, “[T]he corporation was far from being regarded as simply an organization for the more convenient prosecution of business. It was looked on as a public agency …. In a little book, entitled “The Law of Corporations,” published anonymously in 1702, it is said: “The general intent and end of all civil incorporations is for better government, either general or special. The corporations for general government are those of cities and towns, mayor and citizens, mayor and burgesses, mayor and commonality, etc. Special government is so called because it is remitted to the managers of particular things, as trade, charity and the like, for government, whereof several companies and corporations for trade were erected, and several hospitals and houses for charity.”(165)
Recalling our discussion above about the chartering of early American corporations, we can see how municipal corporations once provided for strong local controls, a standard by which today’s municipally-operated utilities can be measured.
THE NEWS MEDIA DEBATE
One sector in the U.S. where corporations owe a debt to the public is the broadcast news media. Broadcast corporations pay nothing for use of the public’s airwaves, the most valuable resource of the information economy, with an estimated commercial value of over $750 billion.(166) The U.S. Supreme Court in Red Lion Broadcasting v. FCC (1969) concluded that broadcasters who receive licenses to operate on the public airwaves free of charge must serve the public interest. Given a license to operate, they are entrusted with the “privilege of using scarce community broadcast frequencies, and are therefore obligated to give suitable time and attention to matters of great public concern.”(167)
Currently, corporate broadcasters are required to meet minimal requirements as a condition of their local station licenses. These requirements include preparation of public reports on children’s programming and an assessment of how they are serving their listening communities(168), providing “reasonable access” to legally qualified political candidates as defined by FCC rules and regulations(169) , and providing closed caption television programming.(169) The broadcast industry is guilty of poor performance in fulfilling these public obligations to serve local communities.(171)
A 2003 survey of local TV stations in six different markets determined that .5 percent of programming covered local public affairs, despite the fact that a commitment to “localism” is a primary mechanism for broadcasters to serve the public interest.(172) Most broadcasters air community messages in the “wee hours of the night,” when audiences are at their lowest and it is impossible to sell commercial advertising.(173)
Media policy analysts Michael Calabrese and Matt Barranca suggest, “Public airwaves that are exclusively licensed and sold off to the highest industry bidder, or given away without commanding any sort of compensation for their use – represent an immense waste of human and civic potential beyond any economic calculation.”(174)
The handful of huge media conglomerates that dominate today’s media -- including Viacom, Time Warner, Rupert Murdoch’s News Corporation, General Electric and Disney -- and emerging second-tier conglomerates, use top-down approaches to determine the information an average American receives. Media analysts link this concentrated corporate ownership of the media to biased news reporting and a decline in the dissemination of community, cultural, and political perspectives.(175)
FCC loosening of ownership caps for radio stations resulted in Clear Channel’s rapid acquisition of over 1,200 radio stations, and an increased use of homogenized programming in cities and towns across the country.(176) The people in Minot, North Dakota, experienced a graphic example of the dire consequences of the loss of local control in early 2002, when a train derailed releasing anhydrous ammonia over the town. Police called local radio stations, all six of which are owned by Clear Channel, but it took them over an hour to reach anyone, because the company beamed its signal from 1,600 miles away in San Antonio, Texas.(177)
Criticism of the obstacles to diverse access to the airwaves that corporate control of the media has created occurs across the political spectrum, and even from industry insiders. Ted Turner argued that had he started his career in broadcast ownership in 2003, when the FCC proposed to further loosen media ownership rules, he would not have been able to launch CNN: “Large media companies are more profit-focused and risk-averse. They sometimes confuse short-term profits and long-term value. They kill local programming because it’s expensive, and they push national programming because it’s cheap – even if it runs counter to local interests and community values.”(178)
“The concentration of power – political, corporate, media, cultural – should be anathema to conservatives,” New York Times columnist William Safire observed as he joined critics of the media oligopoly in their opposition to the FCC’s new ownership rules. “The diffusion of power through local control, thereby encouraging individual participation, is the essence of federalism and the greatest expression of democracy.”(179)
A growing media reform movement has developed a number of strategies to reclaim the public airwaves, protect public broadcasting and hold news corporations accountable to their public interest obligations. These strategies include challenges to renewals of station broadcast licenses, demands for limits on commercial advertising, and establishing free municipally controlled wireless communication networks.(180)
FCC Commissioner Michael J. Copps – who dissented from his fellow commissioners’ proposal to loosen the media ownership rules – has called for changes in FCC rules that would bolster public responsibilities in the broadcast industry. He wants a “comprehensive proceeding on the public-interest obligations of digital television broadcasters,” licensing of low-power FM stations to local community-based organizations, and broader license renewal obligations that force radio stations to take their public interest obligations more seriously or lose their licenses.(181)
“The widest possible dissemination of information from diverse and antagonistic sources is essential to the welfare of the public,” the U.S. Supreme Court declared in Associated Press v. United States (326 U.S. 1, 20 (1945)), and that “[i]t is the purpose of the First Amendment to preserve an uninhibited marketplace of ideas in which truth will ultimately prevail, rather than to countenance monopolization of that market, whether it be by the government itself or a private licensee.”(182)
In addition to reforms described in this section, a structural limit on news corporations’ ownership of media resources should be inscribed in their corporate charters, and required as conditions for obtaining a public broadcast license. Meanwhile, we should declare parts of the broadcast spectrum off-limits to for-profit private corporations.
CONCLUSION: FROM PRIVATE BACK TO PUBLIC
Alan Wolfe once suggested that “if we believe that corporations are private agents, they are free to mind their own business outside the purview of the rest of society...If, on the other hand, corporations are understood as public actors, all these conclusions are reversed. Corporations have obligations not only to their shareholders, but also to others in the society as well; they have public duties.”(183)
In this paper we have invoked specific examples of corporations and industries (e.g. media, defense, financial accounting, and community-based services) that are commonly considered to be more public than private. But ultimately, it is important to ask how private can any corporation be if it exists by legal rights granted to it by a public charter?
The legacy of the corporation as a private entity beginning with Dartmouth and continuing with the adoption of general incorporation laws resulted in the loss of an important means of holding corporations accountable to the public interest. Although “the idea persisted that the state conferred the privileges of incorporation not simply for the private benefit of the incorporators, but also to further the general welfare,”(184) easy access to incorporation significantly weakened the perspective that corporations are entities with privileged legal status created by the state.(185)
The acquisition of certain constitutional rights and the dissemination of key judicial doctrines and legal theories provided the corporation even further independence from the state. The result is an assumption that the state can no longer bargain on behalf of the public in exchange for the advantages of incorporation -- a major concession, the implications of which are now largely forgotten.
Corporate law and theory have long been skewed in the direction of treating corporations as private entities. As a result, citizens’ ability to reclaim our fundamental authority to determine the role corporations should play in society has been thoroughly undermined. It is as if we have been colonized by the very institutions we granted the privilege to exist.(186) Only by showing how corporations are essentially public entities can we reassert the authority of states, laws and ultimately, the sovereign rights of the people to control corporations.
Rather than attempting to force corporate law to attend to these questions immediately, we recognize that public opinion must change significantly before it will be possible to achieve corporate law reforms. The arguments to be made for conceptualizing the public nature of corporations are defined not merely in corporate law, but are rooted in the broader culture. Debates like the one we begin here must occur in public forums before the impetus for developing a framework of effective law reform can occur.
David Millon suggests that corporate law has never had an ambitious social agenda. It is hard to imagine how it would come to have a social orientation in the future. In fact, corporate law may be an impediment to real corporate accountability. Policy debates surrounding existing theories of the corporation tend to drag participants into a dynamic that impoverishes democratic imagination.
Until citizens fully imagine ways to reassert our collective authority over corporations, we will necessarily work within the corporate-dominated political and economic systems to raise questions about corporate power. We want to know why there is no balance sheet that accounts for public subsidies to corporations and the estimated $2.6 trillion in both legal and illegal costs that corporations cost the public each year.(187) What exempts corporations from this kind of corporate accounting?
From the beginning of their existence, corporations have had a public dimension. Actually, the concept of corporations as private entities is more artificial than the idea of public corporations. The theory of the private corporation is the product of decades of advocacy by corporate lawyers, judicial opinions and doctrines that favor corporate interests and legislation dominated by corporate influence. By reclaiming a history of the corporation we can begin to lay the foundation for legitimizing a new public theory of corporations.
In the Dartmouth College case Justice Marshall wrote that “the objects for which a corporation is created are universally such as the government wishes to promote. They are deemed beneficial to the country, and this benefit constitutes the consideration, and in most cases, the sole consideration of the grant [of corporate identity].”(188)
In another famous U.S. Supreme Court case, the Charles River Bridge case (1837) (189), Chief Justice Taney insisted that the notion of corporate charters as private contracts be rejected, and that corporations must benefit the whole community: “[W]e must not forget, that the community also has rights, and that the happiness and well-being of every citizen depends on their faithful preservation.”(190)
Justices Byron White, William Brennan, and Thurgood Marshall noted in First National Bank of Boston v. Belotti (1978):
“Corporations are artificial entities created by law for the purpose of furthering certain economic goals. In order to facilitate the achievement of such ends, special rules relating to such matters as limited liability, perpetual life, and the accumulation, distribution, and taxation of assets are normally applied to them. States have provided corporations with such attributes in order to increase their economic viability and thus strengthen the economy generally. It has long been recognized, however, that the special status of corporations has placed them in a position to control vast amounts of economic power which may, if not regulated, dominate not only the economy but also the very heart of our democracy, the electoral process. . . . The State need not permit its own creation to consume it.”(191) (emphasis added)
These Justices are correct about the nature of corporate power and the threat it creates to democracy. The state should not stand back in the face of pervasive corporate power and allow itself to be overpowered and consumed. If we consistently remember that corporations are creatures of the state and its laws, and that “We The People,” acting through our democratic governments, have the power to control corporations, we will be on the path toward restoring democracy.
Notes:(1) See http://www.licensedtokill.biz.