OP-ED: Corporations played integral role in history
As a progressive Democrat, to fulfill an ideological stereotype, I should consider corporations to be evil exploiters of the oppressed. While some certainly are, corporations, like labor, are an important component of the American economy and have played an integral role in American history.
The ingenious innovation that the corporate model created was that it limited the liability of investors to the amount they invested. In other words, regardless of what went wrong, the most investors could lose would be what they had invested. It separated business from personal liability, so that a failure in a business venture would not spread to personal bankruptcy. While some might argue that this structure allows malevolent investors to avoid personal responsibility for corporations they run (and they would have a point), the benefits outweigh the costs, because the structure allowed individuals to invest as much of their savings as they were willing to lose, knowing that would be the limit of their losses.
The other important characteristics of a corporation are that it created a relatively simple mechanism for many people to become business owners (through stock ownership). The other ownership structures, proprietorships and partnerships, work well when there are relatively few owners, but become increasingly unwieldy as the number of owners increase. By selling shares that can be easily bought and sold, with relatively low transaction costs, corporations allow a much greater share of existing capital to be put to good use. In other words, it democratized capitalism, allowing people who had extra cash, but not enough to start a business with, to invest in an existing business. It also meant that people without the time, expertise, or commitment to run a business could invest. Finally, corporations allow a business to continue to function after the death of the founder, which can present problems for companies owned by sole proprietors.
Initially, corporate charters were granted by state legislatures; corporations are creatures of state government (which explains why many corporations are formed in some surprising states, such as Delaware and South Dakota, where they are governed by corporate-friendly laws and low taxes). People who wanted to form a corporation had to petition their state legislature; usually they were seeking permission to have a monopoly on a specific aspect of the economy. The East India Tea Co. was granted a corporate charter to monopolize the trade between Great Britain and India, for example. In the U.S., many early corporate charters were granted for the construction of transportation infrastructure; a turnpike or toll bridge, the exclusive right to operate a ferry between two points, and eventually, railroads. The monopoly aspect of the charters protected the company’s investment; companies did not want to invest a lot of money in infrastructure that could quickly have its revenues dramatically reduced by competitors copying their investment once they had created the market.
By the 1830s, as corporations became more common, state legislatures were overwhelmed by having to consider each applicant, and they set up regulations that would allow the government to grant charters without the legislative oversight. As the transportation network grew, its costs grew proportionately, with investments in canals in the 1820s to the 1840s, and railroads starting in the 1830s. The development of steam power and economies of scale, as well as the demand for iron (and then steel), created the need for much larger capital investments. While some individuals, such as Andrew Carnegie and John D. Rockefeller, were initially able to grow their fortunes as private companies, as businesses grew, the demands for both capital and management encouraged them to become corporate entities (U.S. Steel and Standard Oil). Corporations were a vital component of the industrial revolution in the U.S. Their growing power sparked a backlash, as corruption gave big business undue influence in government; the Senate (whose members were appointed by state legislatures at the time rather than elected) was dominated by “the Trusts.” The Progressive movement of the early 1900s reined in corporate power by breaking up monopolies (though not always successfully).
By the 1950s, the American economy, powered by corporate investment, was the most productive in the world. In 1953, Charles Wilson, CEO of General Motors (and the newly appointed Defense Secretary), declared that “what’s good for GM is good for the U.S.” While critics showed this demonstrated the subservience of everything to the needs of a large corporation, he was trying to say that the interests of the company and the country were the same. It was also during this time that corporations were generally run on the “stakeholder” model, where corporate boards tried to consider the interests of all the stakeholders – investors, workers, customers, and the communities in which their facilities operated – when making corporate decisions.
In the early 1970s, Milton Friedman argued that the stakeholder model was obsolete; corporations had no business thinking about anything other than maximizing value for their shareholders. Using company resources to subsidize less efficient plants to preserve jobs was essentially taxing the shareholders to help non-shareholders, which was not the role of the company. He argued that not maximizing shareholder value also opened up space for conflicts of interest, and the corporate board’s motivations for actions would be less clear. Critics of this view argue that maximizing shareholder value can mean different things to different shareholders; long-term investors are willing to forego profits in the short term to maximize profits over time, while hedge funds and other speculative investors may only be looking for short-term profits. Some investors may prefer a steady flow of dividends, whereas others can tolerate volatility if it provides a greater return overall. But since the 1970s, most corporate boards have operated by Friedman’s maxim.
This change has encouraged a focus on short-term profits that has not been beneficial. I’ll address that in the second part of this essay.
Kent James, of East Washington, has a doctorate in history and policy from Carnegie Mellon University.