Criticisms of corporations

Main article: Corporation

The notion of a legally sanctioned corporation remains controversial for several reasons, most of which stem from the granting of corporations both limited liability on the part of its members and the status and rights of a legal person. Some opponents to this granting of "personhood" to an organization with no personal liability contend that it creates a legal entity with the extensive financial resources to co-opt public policy and exploit resources and populations without any moral or legal responsibility to encourage restraint.

Divisions between labor, management, and owners

Adam Smith in the Wealth of Nations criticized the joint-stock company corporate form because of the separation of ownership and management could lead to inefficient management.

The directors of such [joint-stock] companies, however, being the managers rather of other people’s money than of their own, it cannot well be expected, that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own.... Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company.

The context for Adam Smith’s term for “companies” in the Wealth of Nations was the joint-stock company. In the 18th century, the joint-stock company was a distinct entity created by the King of Great Britain as Royal Charter trading companies. These entities were awarded legal monopoly in designated regions of the world, such as the British East India Company.

Furthermore the context of the quote points to the complications inherent in chartered joint-stock companies. Each company had a Courts of Governors and day-to-day duties were overseen by local managers. Governor supervision of day-to-day operations was minimal and was exacerbated by the geography of the 18th century.

The sailing time from India to Great Britain was many months and round trip routes often took a year or longer. It was during the interim time period that local managers took advantage of the time delay by plundering the local population at the expense of the interests of shareholders. Bribery and corruption were inherent in this type of corporate model as the local managers sought to avoid close supervision by the Courts of Governors, politicians, and Prime Ministers. In these circumstances, Smith did not consider joint-stock company governance to be honest. More importantly, the East India Company demonstrated inherent flaws in the corporate form. The division between owners and managers in a joint-stock company, and the limited legal liability this division was based on guaranteed that stockholders would be apathetic about a company's activities as long as the company continued to be profitable. Just as problematic, the laws of agency upon which the corporate form was based allowed for boards of directors to be so autonomous from and unconstrained by stockholder wishes that directors became negligent and ultimately self-interested in the management of the corporation.

Psychopathic behavior

Legal Scholar and Professor of Law at the University of British Columbia Joel Bakan describes the modern corporate entity as 'an institutional psychopath' and a 'psychopathic creature.' In the documentary The Corporation, Bakan claims that corporations, when considered as natural living persons, exhibit the traits of antisocial personality disorder or psychopathy. Also in the film, Robert Monks, a former Republican Party candidate for Senate from Maine, says:

The corporation is an externalizing machine (moving its operating costs to external organizations and people), in the same way that a shark is a killing machine.

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Democratic Criticisms

Noam Chomsky and others have criticized the legal decisions that led to the creation of the modern corporation:

Corporations, which previously had been considered artificial entities with no rights, were accorded all the rights of persons, and far more, since they are "immortal persons", and "persons" of extraordinary wealth and power. Furthermore, they were no longer bound to the specific purposes designated by State charter, but could act as they choose, with few constraints.

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When the corporatization of the state capitalist societies took place a century ago, in part in reaction to massive market failures, conservatives--a breed that now scarcely exists--objected to this attack on the fundamental principles of classical liberalism. And rightly so. One may recall Adam Smith's critique of the "joint stock companies" of his day, particularly if management is granted a degree of independence; and his attitude toward the inherent corruption of private power, probably a "conspiracy against the public" when businessmen meet for lunch, in his acid view, let alone when they form collectivist legal entities and alliances among them, with extraordinary rights granted, backed, and enhanced by state power.

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Chomsky contends that corporations transfer policy decisions out of the hands of the people and into corporate boardrooms, where public oversight is limited. The extensive financial resources of corporations and the extent to which they're employed to influence political campaigns in the United States has also been implicated as a way in which corporations undermine the democratic institutions in a society.

The Corporation: both a benefactor and a pariah

As a business institution, the corporation plays a crucial and indispensable role in the creation of goods and services. Anyone who takes the time to search out the origins of the necessary, useful, and pleasurable items in everyday life will find that an overwhelming number of them were produced by corporations. This is the case today, as it has been for the preceding century and more.

Yet, despite all the benefits that the corporation has bestowed, it has received reluctant respect and grudging acceptance at best. At worst, it has provoked resentment and even hatred. “No other institution in American history—not even slavery—has ever been so consistently unpopular...with the American public. It was controversial from the outset, and it has remained controversial to this day.”

John D. Rockefeller was one of the first to experience that paradox in a spectacular and personal way. By the last decade of the Nineteenth Century, his Standard Oil Company was providing the public with a necessary commodity, in abundant supply, of high quality, and at a low price. But, instead of being applauded for his achievement, Rockefeller found that he had become “the most hated man in the world.” He was accused of unethical business practices and even criminality. The public did not need actual evidence to be convinced of the charges; it was already prepared to believe the worst about a corporation that was so large and powerful.

This tendency has continued through the decades. As corporations grew in economic strength and importance, they continued to be dogged by hostile public opinion and sporadic antitrust prosecution. Around the middle of the Twentieth Century, the economist John Kenneth Galbraith noted that the corporate businesses which foreign visitors came to see and marvel at, as “showpiece[s] of American industrial achievement,” were the very same ones that government attorneys scrutinized in their search for monopolistic wrongdoing.

During the 1980s, when entrepreneurs and their firms became the celebrities of the day, the corporation and its managers were disparaged and dismissed as doomed dinosaurs, too big and sluggish to survive in an emerging commercial world that demanded quickness and maneuverability. Today the corporations are still around, as numerous and powerful as ever. And so are the public’s bad feelings and suspicions about corporations. One might rightly conclude that the source of such a conspicuous and enduring paradox must lie deep within the American social psyche.

Corporate law

Influential scholars Frank Easterbrook and Daniel Fischel argue that corporate law serves the general welfare by mimicking, without the heavy cost of negotiation, the contractual agreements that would be reached by shareholders, managers and employees. For example:

Limited liability decreases the need to monitor agents. To protect themselves [in its absence], investors could monitor their agents more closely. The more risk they bear, the more they will monitor. But beyond a point extra monitoring is not worth the cost. Moreover, specialized risk bearing implies that many investors will have diversified holdings. Only a portion of their wealth will be invested in one firm. These diversified investors have neither the expertise nor the incentive to monitor the actions of more specialized agents. Limited liability makes diversification and passivity a more rational strategy and so potentially reduces the cost of operating the corporation.

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External links

• CorpWatch, a corporation watchdog organisation