Aug 31, 2025 By Kent James 6 min read

Editor’s note: This is the second of two parts about corporations. The first appeared Aug. 11.

American corporations have been an integral part of the world economy since the Industrial Revolution.

In the 1970s, Milton Friedman convinced them that they should focus exclusively on profits for shareholders, which has created some issues. Following Friedman’s advice, people who became known as “corporate raiders” would buy enough shares of a company to be able to control its board and dramatically change its operations. While some investors took struggling companies and revamped them, others would take profitable companies that the stock market undervalued and break them up to sell off the parts for a quick profit.

In the 1980s, investors used the companies’ own assets to take them over, by way of a leveraged buyout (LBO). In those cases, the investors would borrow money, using the company’s assets as collateral to purchase the company. These investors’ money was highly leveraged so that they could earn a very high rate of return, but it left little room for error. Essentially the purchaser was betting the company would have a return at least as great as the interest on the loans, but if the company could not generate that return, the company would be forced into bankruptcy (importantly, this was after the investors had taken their fees).

Corporate greed, driven by the omnipresent demand for high profits, was a major factor in the Great Recession that began in 2007-08 with the near collapse of the banking system. Mortgage brokers were giving unqualified buyers mortgages because they knew investment bankers would buy them, put them in a bond issue and sell them as if they were very safe investments (as mortgages historically had been). When the buyers began to default, suddenly investors realized they had no idea of the quality of the mortgages in many of the bond issues, which led to questions about the financial stability of banks that were holding those bonds. The federal government had to step in to restore faith in the banking system.

Corporate critics are not wrong when they point out soulless corporations focused on maximizing profit have some downsides. Corporate structure allows companies to get bigger, but that’s not always better. Starting in the 1960s many corporations thought diversity would assure financial stability (U.S. Steel bought Marathon Oil as part of that trend), but sometimes that just meant companies were running businesses they weren’t very good at. The shift away from stakeholder capitalism was felt especially acutely in the Pittsburgh region as the steel industry closed mill after mill and moved production to newer plants without consideration for how these actions devastated communities that had been built alongside the plants.

While the corporate structure can create efficiencies, companies such as Walmart and Amazon can be so efficient locally owned stores cannot compete and are forced to close. In those cases, company profits that would have stayed in the community with the mom-and-pop owners are now siphoned off to distant shareholders, so not only does the community lose the store itself, but the profits it would have generated leave as well.

While the corporate structure theoretically allows shareholders a voice in how the corporation is run, that’s a lot to ask of most shareholders. Knowing who to vote for on a board of directors for a company, especially when people who own stock usually have diversified investment portfolios that might hold shares in mutual funds with a lot of different stocks, is difficult. The large mutual fund companies (Vanguard, Fidelity) can vote for the shares they manage, but shareholders may have different investment goals than their financial managers.

Large German companies are required to have labor represented on the board of directors so corporate decisions have labor input. Having representatives from the community or consumer groups on boards would recreate the successful stakeholder model, even if they could not vote.

President G.W. Bush tried to implement the “ownership society” to undermine leftists who argue workers and owners will always be enemies. If workers had stock in the company, they might have a stake in improving the company’s performance (although employees should have a diversified stock portfolio to avoid financial ruin if the company fails, as was painfully demonstrated by the failure of Enron). Perhaps employees could get a share of the dividends every quarter as an incentive to make the company profitable, but that requires paying workers well enough that they can invest.

To improve governance, it might be good to limit the number of corporate boards an individual can be on, so that they have the time to know about the company they are governing. A more radical proposal would allow shareholders to transfer their votes to an entity that reflected the goal of their investments but would have time to know about the issues facing the corporation. For example, an environmentalist might let the Sierra Club vote their shares.

Corporations can become so large that they have an unhealthy amount of power. Anti-trust enforcement, like the aggressive approach Lena Kahn at the Federal Trade Commission took before Donald Trump fired her, is required. Corporations should also be prohibited from making political donations.

Conservatives have tried for a long time to get rid of the corporate income tax (Trump did dramatically reduce it). While there is a coherent argument for doing so, getting rid of it would reduce the tax burden on foreigners and shift that to Americans (according to Brookings, about 40% of stock was held by foreigners in 2019). But it might be worth restructuring the tax.

Since corporate size increases corporate power (and theoretically, profitability), the tax rate could be higher on the largest corporations. Or perhaps the corporate tax rate could be higher on companies that make “excessive” profits, so that corporations who are flush can share the wealth they’ve generated.

Corporations have been impressive drivers of America’s economy for a long time, but we need to tweak the system to reduce the harm they can cause.