[From: CORPORATE GOVERNANCE IN THE TWENTY-FIRST CENTURY-A PRELIMINARY OUTLINE, by Robert A. G. Monks]
America’s founding fathers were profoundly aware of the abuses of power and the importance of making sure that all power — private as well as public — drew its legitimacy from a system of checks and balances. The fight for independence, after all, stemmed not from the imposition of rules or taxes from England, but from the lack of representation to ensure that the actions of the legislature reflected the priorities of the community which they affected. The earliest documents of our country’s history reflected these concerns and the commitment that all power, public and private, would be grounded in accountability. The solution would be a government “of, by, and for the people.” Private power exercised by privately established entities was not explicitly considered as a part of this process. The word “corporation” is not mentioned in the Constitution.
In England, corporations developed as a structure for exercising power outside the monarchy and the church. In the new United States, democratic government was the source of power, and the founding fathers limited that power very carefully. Thomas Jefferson wrote in a letter of his concerns over corporate accountability: “Merchants have no country. The mere spot they stand on does not constitute so strong an attachment as that from which they draw their gains.”1 Jefferson was concerned about what we now refer to as agency costs. He warned that we could not expect corporations and their officers to act in accordance with the best interests of the state, because their incentives were determined by commerce.
For this reason, in the early days of the United States, a corporate charter was granted only by a special act of the state legislatures. Applicants for corporate charters had to negotiate with legislators to arrive at specific charter provisions, notes Harvey H. Segal, including “the purpose of the enterprise, the location of its activities, the amount of capital to be raised by stock sales, and the power of its directory.”2 The theory was that the state should separately and specifically approve each new corporation, to guard against improper activity. But, as Segal noted, instead of oversight, this process “invited bribery and corruption.” So, in 1811, New York enacted a general incorporation statute (though restricting it to manufacturing enterprises), and other states followed suit. The states, however, remained deeply involved.
One early controversy that arose in the early 1830s concerned the charter of the Bank of the United States. The Bank, as originally chartered, was a private corporation, though it had the power to issue notes of exchange. The Bank was not taxed, and Congress was not allowed to charter any similar institution. In return for these favors, the government was allowed to appoint five of the Bank’s twenty-five directors. The Bank’s powers shocked democrats. Roger B. Taney, Congressman and later Chief Justice of the Supreme Court, said: “It is this power concentrated in the hands of a few individuals — exercised in secret and unseen although constantly felt — irresponsible and above the control of the people or the government … that is sufficient to awaken any man in the country if the danger is brought distinctly to his view.”3
It was the fear of centralized power that caused Americans in their Constitution and Bill of Rights to protect themselves against Government and established religion. Possibly the most eloquent statement of the threat of corporate power is in the dissenting opinion of Justice Louis D. Brandeis in Liggett v. Lee :
Although the value of this instrumentality in commerce and industry was fully recognized, incorporation for business was commonly denied long after it had been freely granted for religious, education, and charitable purposes. It was denied because of fear. Fear of encroachment upon the liberties and opportunities of the individual, fear of the subjugation of labor to capital, fear of monopoly. Fear that the absorption of capital by corporations, and their perpetual life, might bring evils similar to those which attended mortmain. There was a sense of some insidious menace inherent in large aggregations of capital, particularly when held by corporations.4
After the Civil War, companies began to form “trusts.” It was clear that if competitors in the same line of business worked together instead of separately, they could control prices. This was not illegal or even disapproved of at the time. Indeed, the directors of these new entities were called “trustees,” a term that still lives on in the nonprofit, banking, and securities sectors to describe those with special obligations to protect the rights of others. Segal points out that “In wielding such broad discretionary power, the trustees established important precedents for the control of corporations by professional managers rather than dominant shareholders.”5 The first antitrust laws ended the trusts, but the professional managers were there to stay. As corporations grew bigger and more complex, and the connection between ownership and control stretched to the breaking point, professional managers took on more authority. Jefferson’s analysis of the loyalties of the businessman was intended to justify government oversight. In earlier centuries, mankind created institutions — the Church, the nation state — that dominated human existence. As the twentieth century began, Henry Adams’ famous chapter The Virgin and the Dynamo recounted how technology rather than piety had become the driving force of society. As we approach a new century, there can be little question but that large corporations have an increasing impact on the lives of individuals all over the world.
The world now boasts a total of 37,000 transnational companies that control about a third of all private sector assets, and enjoy worldwide sales of about $5.5 trillion — slightly less than America’s GDP last year.6
In just over two centuries, the American corporation has gone from an enterprise strictly limited by the state in both its scope and duration to a perpetual entity that has been held by the Supreme Court to be a “person” with Constitutionally protected powers of speech. Yet many observers remain concerned that the centralization of vast power inherently threatens the freedom of individuals. “The large private corporation fits oddly into Democratic theory. Indeed, it does not fit.”7
By making ordinary business decisions [corporate managers now have more power than most sovereign governments to determine where people will live; what work they will do if any; what they will eat, drink, and wear; and what sorts of knowledge they will encourage; and what kind of society their children will inherit.8
Now, with multi-national corporations larger in assets and population than many countries, we have no clear answer to the question — to whom are those who control these great enterprises accountable? In theory, the owners, the holders of equity securities and the government, representing the society as a whole, play that role. The basic framework is a matter of the law established by the legislature of the company’s domicile. But the company’s managers can choose virtually any place for domicile no matter where the corporation actually resides or operates. An international “race to the bottom” is the result of competition for fees and taxes associated with corporate domicile, so that any attempt at accountability through chartering restraints on corporate power will ultimately be diluted to meaninglessness.