Is the Corporation Obsolete?

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July/August 2001


Is the Corporation Obsolete?

Corporate irresponsibility? Predatory behavior? Blame the charter--and rewrite it

By Jonathan Rowe


Colossus: How the Corporation Changed America

By Jack Beatty
Bantam Doubleday

Click on the title to buy the book
It is a sign of immersion that the thing immersed doesn't notice. The fish, famously, is not aware of water. Dick Cheney and George W. Bush cannot see past their allegiance to the oil industry because it's all they know--their water.

So it is with the corporation. Over the last century and a half, the corporation has become the dominant institution of American life, the "envelope of existence," as one writer put it. It defines work, entertainment, politics, transportation, the way people think about their bodies and the world. Increasingly it dominates the cognitive environment of daily life. For all the kvetching about government, the corporation permeates our lives in much more basic ways.

Yet the more pervasive the corporation becomes, the less we seem to notice. It's just the way things are, the new normal, and rapidly it is becoming the norm for the entire world. This has been the subtext of recent trade agreements, and the implicit agenda that has inspired the opposition to the World Trade Organization. Protestors in Seattle and elsewhere have not been opposing trade per se. One might as well oppose the morning. The issue rather is who controls this trade, under what terms and to what ends.

As it has evolved over the last 150 years, the American corporation is more than just a mode of business. It is an agenda, the organizing principle for an entire society--the embedding in the institutional matrix of the single-minded quest for monetary gain. Apologists may protest to larger aims, or at least effects. But the soul of the corporation is the charter, and corporate charters speak for themselves. They say that the company exists to make money and for no other reason. The question today is whether that governing concern is large enough to serve as organizing principle for the entire world.

The question may seem eccentric, even na´ve, in these economically triumphant times. Yet back in the days when the corporation was still new and its impact clear, the question was of obsessive concern. President Lincoln expressed this in a 19th-century version of Eisenhower's military-industrial complex speech. "Corporations have been enthroned," Lincoln said. "An era of corruption in high places will follow...until wealth is aggregated in a few hands...and the Republic is destroyed."

Lincoln knew a thing or two about threats to the Republic. The question continued as farmer-populists and Progressives led the drive for regulations and restraints. Presidents Theodore Roosevelt, Taft, and Wilson all called for federal chartering of large corporations, as Madison, with unusual foresight, had urged at the Constitutional Convention. Roosevelt even created a Federal Bureau of Corporations because of these concerns.

But soon enough the corporate economy became simply "the economy" in the majestic singular. It was helped greatly by a fledgling advertising industry, which cast it in friendly and even patriotic terms, and by an economics profession which served as apologist and booster. Most important of all, prosperity had a quieting effect--the sedation of Huxley's Brave New World as opposed to the statist oppression of Orwell's 1984. The 1990s were such a time, of course. But as regularly happens, the wheel is turning once again. The stock market is no longer a money machine for the masses, and the jazzy new technology--the microchip--is becoming a bit old hat.

The energy situation, moreover, has brought dirty old industries such as oil and coal back to center stage. After Clinton's off-and-on embraces, the Bush administration has seized the role of Monica to the suits. At the same time, corporations are showing a degree of raw aggression that is unsettling to say the least. They are claiming new territory in virtually every dimension of existence, from the personal space that is assaulted by huckstering and cell phones to the Star Wars initiative which will stake a commercial claim to the furthest reaches of outer space. They are taking control of the quest for knowledge at universities, and are moving even to claim the gene pool and the processes of life itself.

Perhaps this helps explain why the looming invasion of oil companies into the nation's parks and wilderness areas has become so symbolically charged. It captures in a single image what is happening already in American life. Put all this together, and it is not surprising that there are efforts to revive the debate that was aborted a century ago and to inquire into the nature of the institution that the United States is seeking to launch into a global role. The issue here is not the market economy or the free enterprise system, though journalists inevitably will cast it that way. Rather, it is the institutional machinery the government has created to dominate that system.

A New Deal

One sign of the renewed debate is the recent book by Jack Beatty, called Colossus: How the Corporation Changed America. After a decade or more of how-to-make-a-million books, it is significant that someone of Beatty's stature has stepped back and attempted to put the corporation into a broader social and economic frame. Beatty is an editor at the Atlantic, and his work shows the best voice of that magazine--temperate, fair-minded, but with a strong ethical compass. Through anthology and essay, Beatty argues that a disposition toward worldly lucre runs deep in the United States. It took root here with the Puritan settlers and found ultimate expression in the modern corporation.

In the contest between God and Mammon, it wasn't even close. Yet as the vehicle for these pecuniary urgings, the corporation posed a big dilemma. On the one hand, it became a prodigious engine of "prosperity" as conventionally defined. Yet it also represented a concentration of power beyond anything the Founders envisioned--and power was the very thing they strove mightily to subdue. It was their demon, the thing they found "ultimately corrupting," as historian Bernard Bailyn put it.

Yet here it was, the thing Madison and the others dreaded most, arisen through the cracks in their own system and bearing gifts that the populace could not resist. The result was a bipolar national psyche, which Beatty illustrates through a host of contemporary accounts, from John D. Rockefeller's ruthless empire-building to the repercussions of the more recent leveraged buy-out craze. Beatty's answer is the one John Kenneth Galbraith formulated in the '50s: countervailing power. The centralized economic power of the corporation requires institutional counterweights in the form of a strong federal government, as well as labor unions and organized citizen groups.

Countervailing power is a brooding Madisonian concept that extends the constitutional principle of checks and balances to the unanticipated gap in the design. (Decades ago, a young Ralph Nader took the idea to heart.) As Beatty says, it is the missing element in debates over the global economy. Competition for global market share will not ensure that other needs are met; in fact, it practically ensures that they won't. If corporations are going to have free rein on a global level, then there must be a counter balance--a "New Deal for the global economy"--to protect the environment, establish labor standards, temper the rush toward genetic engineering, and so on.

This is a suggestive idea, and something like it is bound to come. Yet as Beatty himself points out, the New Deal served largely to save corporate capitalism from its own excesses. The World Trade Organization, which is run primarily for its corporate constituents, is the first step toward the new global order, and not exactly a promising one. Already Philip Morris has gotten behind the idea of a global treaty on tobacco marketing. One suspects its goal is not to put itself out of business.

There will always be a need for cops on the beat, for corporations as for real people. We can work for an arrangement that is more than a global version of the company town. There's a particular need to reestablish boundaries between corporations and the rest of life--to declare particular realms (such as childhood and aspects of the gene pool) off limits. But while we construct a system of external restraint, it would be well to inquire into the nature of the entity that requires all this policing.

The question requires a shift of mental gears. The corporation has attained an almost metaphysical stature in American life--an apotheosis of the market rather than just a contrivance of fallible humans. Yet the process by which the modern corporation came about does not square with this exalted status.

In fact, the story of the corporation is practically a primer of contemporary right-wing demonology. Outlandish public subsidy, industrial policy, judicial activism, revenue mongering by corrupt politicians--it's all here. As for unintended consequences, nothing the government has created has produced so many.

From Monastaries to Monopolies

The first corporations in the Western tradition were monasteries, boroughs, guilds, and the like. They were vehicles of community and social cohesion; they sought to restrain the tendencies toward self-seeking--not provide an institutional amplifier for them. By the time of the American Revolution, this form had evolved into a kind of franchise, chartered by the legislature to perform a specific public function, such as running a toll road or a bridge. These early business corporations were limited in size and scope; and there was little reason to suspect that such creatures of the state would one day become the dominant institutions in it.

Thus there is no provision in the Constitution for the large business corporation. The Founders thought they were dealing with a polity of individuals organized as interests. The corporation was an extension of the government, and thus would be restrained by the checks and balances by which they sought to hold institutional power in check. That assumption fell apart in the period that came to be described as "Jacksonian Democracy." The practice of granting charters one by one through legislation had given rise to corruption and abuse, and the Jacksonians opened up the corporate form to all comers, through general incorporation laws.

But their aim was to bust up monopolies, not to absolve corporations of the responsibilities that came with the license to operate in that form. A corporate charter bestows an extraordinary privilege--exemption from common law rules of personal responsibility. It enables the owners of the corporation to say in effect, "I didn't do it, your honor. The corporation did." People still believed that those so privileged owed something to society in return. "While the rights of private property are sacredly guarded," wrote Jacksonian Chief Justice Roger Taney in 1837, "we must not forget that the community also has rights."

Accordingly, free incorporation laws typically included limits on the size and scope of the corporation. Some expired after a given period, like broadcast licenses today. The existence of such charter restrictions was why Rockefeller and others resorted to secret trust agreements to construct their corporate empires; their charters wouldn't let them purchase stock in other companies.

That's where things stood until a New Jersey governor by the name of Leon Abbett came on the scene. Abbett was what rightward polemicists today would call a "revenue-hungry politician." Where others saw dangerous agglomerations of economic power, he saw money for the state's coffers--along with under-the-table emoluments for himself. Abbett proceeded to rewrite New Jersey's corporate charter laws to make them a little like a Liberian flag of convenience. Pay the fee and you could do pretty much whatever you wanted. By 1900, New Jersey chartered some 95 percent of the nation's major corporations.

More than one could play this game, however. Delaware soon outbid New Jersey--in part by insulating managers from pesky shareholders--and ultimately won the ensuing race to the bottom. Today, a fair portion of the world's largest corporations exist in file drawers in law offices in Wilmington. This means that the ground rules for the major players in the global economy have been constructed largely to fill the revenue needs of one of the nation's smallest state--and were drafted by corporate lawyers for the benefit of their clients. (In Delaware, for example, corporate officers are fully indemnified for all court costs and settlements and thus are insulated from civil and criminal responsibility.)

Meanwhile the visible hand of government was providing subsidies on a scale that would cause the most prolific pork-barreler of today to blush. The first truly national corporations were the railroads, and they began with the help of large government land grants, along with capital infusions, free surveying, and federal troops dispatched to rout the natives when necessary. An activist Supreme Court played a big role as well. In Santa Clara County vs. Southern Pacific Railroad Company, decided in 1886, the court declared that corporations are "persons" within the terms of the 14th Amendment and thus are entitled to full constitutional protection.

The court cited no precedent for this assertion, nor even justification. It did "not wish to hear argument on the question," it said. Some 50 years later, Justice Hugo Black observed that "Neither the history nor the language of the 14th Amendment justify the belief that corporations are included within its protection." Nevertheless, a constitutional provision designed to ensure the rights of the most vulnerable citizens--former slaves--became a protection to the most powerful instead.

Among other things, this left states helpless to counter the charter-mongering of New Jersey. Absent Santa Clara, other states might conceivably have refused to honor the degraded New Jersey charters. But since corporations were now "persons," the court eventually held that other states didn't have that choice. The only alternative was to try to curb the worst abuses of these new juggernauts. Thus was born the federal regulatory apparatus--antitrust laws, the Interstate Commerce Commission, pure food and drug laws, and the rest. In other words, the federal regulatory state didn't leap unbidden from the imaginations of statist schemers. It was largely a response to the corporate economy, and to the urbanization that came with it. Then, as now, a corporate economy and a centralized state go hand in hand.

Charting a New Course

There's a case to be made that the emergence of the current form of corporation, while not pretty, served a useful end. It mobilized the entrepreneurial and managerial energies that filled a sprawling continent and tapped its vast resources. The job could have been done better and with more attention to long-term implications. Still, it did get done; and given the circumstances of the 19th century, perhaps it was better to err on the side of permissiveness.

But the corporate form that emerged from the 19th century is essentially an engine of appetite. It takes the romantic individualism of that era and transplants it into an institutional machinery geared exclusively to self-enhancement, without regard to implications for the context in which it grows. That is a definition of a cancer; and while it didn't seem to matter much in the 19th century--so much space to conquer, so many resources to tap--today that is no longer the case. Where once there was an abundance of social and environmental space to absorb the side effects of large-scale enterprise, today the sponge is getting full. A cell-phone purchase may bring happiness (or whatever) to the purchaser but misery to many others who must share the coffee shop or subway car while the caller yaks. The purchaser of the SUV might get to feel like a suburban cowpoke, but everyone else gets less space on the road, more brutal crashes, and tighter gas supplies as well.

On a larger scale, the implications of genetic engineering, global warming and the rest push the boundaries of human life itself. In conventional economic terms, the externalities of corporate enterprise are starting to outweigh the internalities--the negative side-effects of production and consumption are becoming larger than the presumed benefits to the parties immediately involved. Yet the corporation has evolved to maximize such externalities; when it shifts costs onto the social structure or the environment, then it's own bottom line increases.

In a global economy, this chain of unintended consequence extends to all corners. The organizing principle of the corporation becomes the mode of governance of human life itself. So it is not extraordinary to ask whether the version of the corporation that emerged in 19th-century America, with the help of activist judges and pork-barreling, revenue hungry politicians, is adequate to the challenges of the 21st. To put this another way, if the government is as stupid as our friends on the right contend, then might it not have made a few mistakes in the form of corporation that it launched upon the world?

There are people who dispute the premise of the question, of course. Milton Friedman and others contend that corporations should not concern themselves with anything besides making money. They serve humanity best when they serve themselves most. Most of us probably have known people like that, and they weren't the kind we'd want to fill the world with--especially if they were the size of Exxon or Microsoft. A more serious objection is that corporations can do ample good already, given enlightened management (which is no small given). Yes, the corporate responsibility movement is to be applauded. But it is vulnerable in the extreme--to Wall Street pressures, the passing of an inspired leader, corporate takeovers, the downward pull of less conscientious competitors. When competitors move production to low-wage sweatshops abroad, even the most well-meaning maker of dungarees or sneakers eventually has to follow.

In this world the wicked often do prosper. As long as the corporate charter says that making money is the corporation's only objective, a CEO invites shareholder lawsuits if he or she pursues other goals. By contrast, if we built a larger mission right into the governing document--the corporate soul--as in the old days, then the good guys would have a stronger hand. When broadcasters were held to a community-service standard as a condition of their licenses, news departments flourished. A more permissive regime has enabled broadcast corporations to score financially, especially in radio. Public service has not fared as well.

Perhaps the answer lies in different kinds of corporations--new institutional tools designed for different tasks. There could be one type for small start-up firms that need lots of room for experiment and risk. As a company grew larger the society could expect more of it. Concerns for the environment, workers, local communities, and the rest could become warp and woof of the charter--the basic contract with the community--so that CEOs would not be dragged constantly down to the lowest common denominator.

In this approach, we could do away with much bureaucratic regulation, such as the mountainous economic sophistry that attends antitrust litigation today. If the charter said a company could grow only so big, or control only so much market share, that's how big it could grow. Moreover, if the charter required corporations to take responsibility for some of the costs they now "externalize" upon the rest of us, they could use their own ingenuity to meet those responsibilities in the most efficient manner. Entrepreneurial energies would still prevail, only in more directions. Already, such measures as pollution taxes and fees turn environmental clean-up into a bottom-line mandate. Charter revision could accomplish the same thing on a larger scale.

Whatever the exact approach, it is time for the corporation to grow up. If it is to keep the legal status of a person, then it should accept the responsibilities that we expect of persons as they mature. A corporation, declared Chief Justice John Marshall, is but "an artificial being, invisible, intangible, existing only in contemplation of law." It is a social creation, a projection of the society's values and aspirations. As the creator, so the creation--and the time is long overdue to ask whether the two still match.

Jonathan Rowe is a fellow at the Tamales Bay Institute and a contributing editor of The Washington Monthly.

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