Corporations 101

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 fix it.

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.

corporation - a bunch of people.

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originally posted by: ExNihiloRed
Corporations are creatures of statute whose legal purpose is to provide return on investment to their investors.

What is mysterious to me is how some really big corporations exist for a long time, they apparently do a lot of business and yet their stock goes nowhere (stays around the same price). What is point? .. makes me suspect some funny business

originally posted by: nOraKat
corporation - a bunch of people.

A corporation is actually considered a person under the law. That concept pisses a lot of people off.

It's all semantics and legal loopholes created and or influenced to be created for the super rich to rape pillage and plunder the masses with out being held accountable.

I don't fault the folks running their corporations their job is to make money. But the revolving door between corporations in a given industry and Govt entities who are supposed to be working in the best interest of the people has lead to terminal levels of corruption.

The whole system is rotted and needs to be torn down and burned clean.

Well I am thankful for Proctor & Gamble, as well as General Electric and Ford. These two companies practically gave us the America we know today and the technology and products we use everyday. Thank you JP Morgan for creating GE, but then # you at the same time for setting the precedent of buying our Presidents.

a reply to: AmericanRealist

Yep. I just watched one of the episodes of The Men Who Built America on H2. I've seen them all, but this episode with JP Morgan, Carnegie, and Rockefeller buying the election was one of the best.

It's interesting that these "Titans of Industry" are principally responsible for making the US the most powerful nation in world in the 20th century. But their business practices were also quite inhumane as well. Unfortunately we are headed back to those days of gigantic trusts, vast wealth disparity, and poor treatment of the workforce.

-dex

a reply to: ExNihiloRed


In lay terms, the flaws of our Corporate system is a direct result and product of Gov't. That further gov't restriction/rules likely will have more down-side that good?

Is this a correct view of it?

a reply to: ExNihiloRed

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.

Thank you for pointing out one of the biggest problems with corporations, especially in light of patents... one example, Big Pharma. The way the laws are written, Big Pharma Inc might have two medicines that both cure the same illness, but one is nonpatentable and one is patentable. The nonpatentable natural medicine is cheaper, with no adverse side effects, widely available, and quite effective. But Big Pharma Inc can't make much money off of it. On the other hand, they can charge 100x more for the patented medicine, with several adverse side effects, only available from them, and not quite as effective.

By law, Big Pharma Inc must act in the best interests of the shareholders... who just want to make the biggest profit possible. So the cheap natural nonpatentable medicine is thrown to the wayside, and the oh-so-expensive patentable medicine they have the monopoly on is the one shoved down our throats. And all those nasty side effects? Thanks to limited corporate criminal and civil liabilities, no one is held accountable. Woohoo!!!

Oh! And the real kicker? We as individuals cannot access some of the best medicine available because Big Pharma helped criminalize it...

Excellent synopsis.

Two points. First, as you point out, many of the people who rant and rave about evil corporations don't seem to realize that they either directly or indirectly are owners of those corporations. A significant portion of the institutional investors are pension funds, 401ks, mutual funds, etc. The common man is in fact a shareholder and their own retirement often depends on these companies being successful and earning "excessive profits."

Secondly, even though I am a greedy capitalist, I understand why some get upset. However, I think their anger needs to be directed at GOVERNMENT, not the corporations. I work in finance and the industry is highly regulated. Because government is constantly sticking it's nose in our business, we have to constantly be lobbying to stave off damaging regulations. With that said, many of the larger Too Big Too Fail banks use government as a way to suppress competition.

originally posted by: Edumakated
Excellent synopsis.

Two points. First, as you point out, many of the people who rant and rave about evil corporations don't seem to realize that they either directly or indirectly are owners of those corporations. A significant portion of the institutional investors are pension funds, 401ks, mutual funds, etc. The common man is in fact a shareholder and their own retirement often depends on these companies being successful and earning "excessive profits."

Secondly, even though I am a greedy capitalist, I understand why some get upset. However, I think their anger needs to be directed at GOVERNMENT, not the corporations. I work in finance and the industry is highly regulated. Because government is constantly sticking it's nose in our business, we have to constantly be lobbying to stave off damaging regulations. With that said, many of the larger Too Big Too Fail banks use government as a way to suppress competition.

You've raised some excellent points here. I fear that many people would rather put their head in the sand and take the easy route of pointing the finger at corporations than really thinking about what the true problems are and where they generate from.

originally posted by: nwtrucker
a reply to: ExNihiloRed


In lay terms, the flaws of our Corporate system is a direct result and product of Gov't. That further gov't restriction/rules likely will have more down-side that good?

Is this a correct view of it?

A corporation is a creature of statute (law), so, in a way, yes. The solution to the problem (whether more regulation or less, etc.) is up for debate.

a reply to: Boadicea

I see your point. The corporation, its directors, and its officers can still be liable. Product liability, however, is another story. Generally, proper labeling can avoid a lot of issues. Your point still remains that a corporation arguably needs to pursue the patentable drug with greater side effects that will make money (assuming their risk assessment of any liabilities still shows a profit) instead of the no patentable drug with no side effects that won't make any money (if that scenario so exists).

The corporation cannot commit fraud or other torts, don't forget. It would need to be open and honest about the side effects, etc. and make sure it complies with any other pertinent regulation. Still, we could end up where you fear if the facts work out in a certain way.