My biggest pet peeve of people arguing against the "evil corporation" is their apparent lack of a basic understanding of what a corporation even is as
a legal matter. The reason this is important is because when you have no idea how the "evil" you are fighting against operates, how are you going to
The post does not address issues of campaign finance reform or corporate tax or capital gains tax. Let's just leave those outside for now. I just
want people to understand what they are talking about at the most basic level.
"Corporation" as used politically is a catch-all term. In fact, a business entity can take a variety of forms depending on the state of its
"formation." The choice of entity is driven by a variety of considerations, including tax, governance flexibility, etc. Some examples include limited
liability companies, limited partnerships, limited liability limited partnerships, etc. Business entities, whether corporations or otherwise, are
creatures of state law. The state you incorporate in governs your "internal affairs." For a corporation, this is the relationship between the
stockholders (the investors), the directors, management, etc.
Corporations became the entity of choice because of the limited liability protection afforded to the stockholders (the investors). Under a
traditional partnership model, liabilities could be imposed jointly and severally on each of the partners. That means if partner A does something
unlawful, partner B could have to pay all of the damages for that wrongful act, even if absolutely unaware and innocent (I will leave the concepts of
contribution for a more advanced tutorial).
Corporations, however, provide limited liability for their investors. That means, generally, the investor cannot be held liable for the actions of
the corporation, its board of directors (the main managing body) or its officers (CEO, etc.). This was great for passive investors and helped fuel
corporate investment. Stockholders can, however, be held liable to the extent the corporation is a sham front to protect them fraudulently (see
piercing the corporate veil), but that is also too advanced for this initial discussion.
Let's not forget, a corporation does not exist without its investors. Those investors can be the founders in a small private corporation, or, if the
corporation seeks to be listed on a national securities exchange and have its shares traded publicly, it can become a public corporation. Lots of
individuals are investors, but investors also take the form of institutional investors, Vanguard (your 401k), hedge funds, pensions, etc. Once
public, the corporation becomes subject to regulation from the US Securities and Exchange Commission. The SEC is a government agency tasked with
protecting investors against those running the corporations in which they invest and to protect the public in their decisions whether to invest
(through various regulations, including disclosure requirements). Public corporations are still subject to the corporate law in the jurisdiction in
which they were incorporated, they are just subject to federal regulation as well.
Koch Industries, much hated in the MSM, is a PRIVATE corporation. That is something to consider.
It is important to remember that corporations (private and public) are also subject to the state laws in the states in which they operate. Various
civil (tort) and criminal laws still apply to the corporations and those that run it. They are also subject to applicable federal laws invoked from
concepts of interstate commerce, etc. Federal jurisdiction is obtained in a few ways, including diversity jurisdiction.
We will use Delaware as an example, as more than 60% of Fortune 500 companies are incorporated there. As a matter of LAW, the board of directors can
only act in the best interests of the corporation and its stockholders. NO ONE ELSE. If directors make a decision that is "for the greater good," and
it hurts their stockholders, the directors can be held personally liable for breaching their fiduciary duties to those stockholders. In light of
certain entities wanting to act for the greater good, "public benefit corporations" were created. These corporations are allowed to consider other
constituencies as set forth in their corporate charter beyond their stockholders. Normal corporations are not.
Limited liability companies are much more free than corporations and generally subject to principles of contract per their limited liability company
agreement. These agreements tend to move away from having any fiduciary duties (pretty much the managing members can do what they want) subject to
some underlying, unwaivable contractual principles such as the covenant of good faith and fair dealing (but that is also focused on the relationship
between management and investors, not the public-at-large).
By acting in a self-serving fashion (for the investors), directors of corporations are complying with the LAW.
In addition, from a practical perspective, the value of corporations will drop and investors will choose to invest their money alternatively if you
expand the constituencies that directors must consider in making decisions.
Any revamping of corporate law will need to occur at the state levels. Federalization of corporate law is another possibility (although one I do not
support because of the nuanced development of corporate law at each state level and attentiveness of the state courts that could never be achieved at
the federal level). Nevertheless, even federal regulations on corporations are intended to protect investors (with the exception of environmental
regulations, etc.). If you think that further corporate regulation will be for the public at large, I caution that such a belief is most likely
mistaken. Corporations are creatures of statute whose legal purpose is to provide return on investment to their investors.
Like I said, this post merely addresses how corporations work at the most basic level.
edit on 15-2-2016 by ExNihiloRed because: (no reason given)