Issue #9
May 2002
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Rethinking the Corporation by David Katz Headline news in recent months has often been made by the spectacular failures, pecuniations and misbehavior of American corporations. Fraud, predatory behavior, flight to escape laws and regulations, tax evasion and monopolistic actions have had serious effects on our communities, our government and our labor force, not to mention our consumers. In each case, the private, market and governmental mechanisms that should have been able to ensure the public good have failed, sometimes spectacularly. Perhaps it is not our protective mechanisms that are at fault; perhaps it is time to rethink the concept of the corporation.
Originally designed to limit the liability of merchant adventurers to the investment made in a single voyage or trading expedition, the corporation is now our dominant form of company structure, both domestic and foreign. Far outweighing partnerships and sole-proprietorships in power, visibility and financial resources, corporations dominate every aspect of our economic life. Fifty years ago, corporations were the structure of choice for manufacturing, distribution, retail and transportation firms. Brokerage houses, advertising agencies, medical practices and law firms were partnerships, with the general partners controlling the firm and bearing unlimited liability. Most corporations were national or local in scope; only a few were truly international, and those were heavily controlled by the nation in which their headquarters was domiciled. The situation today is radically different.
In the United States, corporations are chartered by a state. Incorporation results in the creation of a fictional person, with most of the rights of real people; the fictional person, however, is immortal. A corporation is, in theory, owned by its shareholders, whose interests are protected by a Board of Directors. The day-to-day management of the firm is handled by the officers of the corporation, who serve at the pleasure of the Board of Directors. The corporation has special responsibilities in the state of incorporation and in the other states in which it does business. These include paying state, local and federal taxes; obeying state, local and federal health, safety and employment laws; and reporting accurate financial figures to its shareholders and the general public, as specified by the SEC (in the case of publicly-traded companies), state laws and generally accepted accounting principles.
The reality, especially for our largest and most important companies, is vastly different. Corporate officers run the company for their own benefit, with only the most cursory thought for their responsibilities to shareholders. Boards of Directors are often chosen by senior management, and are, too often, no more than rubber stamps for senior management decisions. Outside directors often have ties to company management and are not truly independent watchdogs for shareholders' interests. Many companies are international or global in scope. Corporate headquarters is often a mail drop in a tax-free island with no regulatory laws or structure. Costs and revenues are shifted from country to country, minimizing profits in countries (and states) that impose fair taxation, and maximizing profits in countries (or states) with light tax burdens. Laws meant to protect workers and the general public are evaded by moving manufacturing, assembly and even administrative functions to low-wage, union-free places where there are no environmental controls. To support stock prices, accounting procedures are adopted that obscure and falsify the true financial state of the company, misleading both present shareholders and potential stock purchasers. Senior management, through salaries, stock options and other financial perks, are remunerated at rates that are four to five hundred times as high as the average worker (way out of line with their European or Asian counterparts), whether the company has been profitable or not; shareholders have little say in the looting of corporate profits by management compensation.
How can we return corporations to being responsible citizens? Here are some ideas (some good, some not so good - they are offered for debate) for increasing shareholder control, reducing management absolutism, and discouraging corporate flight:
1. Put teeth into the concept that senior management and the Board of Directors have fiduciary responsibilities to shareholders. In many European countries, managers and directors are not only financially liable for the discharge of their responsibilities, they are criminally liable as well. Enron management and directors would be in jail now (regardless of whether or not they defrauded California power customers) if they were Swiss or German and destroyed their company in one of those countries.
2. Forbid the re-incorporation of companies outside their country of origin. Require that the CEO, CFO and other senior officers be domiciled in the country of incorporation, and require that they spend at least 180 days of each year in residence there.
3. Through international treaty, require multinational corporations to incorporate through an international commerce commission, with strict world-wide reporting, labor and environmental requirements, strict rules governing the transfer of assets and liabilities from country to country, and a yearly, mandatory, international audit conducted by commission auditors, or private auditors selected by the commission.
4. Limit corporate life to 50 years. At the end of the 50 year period, require reincorporation in the original jurisdiction, subject to public comment and governmental approval. Companies whose reincorporation is refused continue as public trusts until they are dissolved and the assets are sold and distribution of cash made to the shareholders after satisfaction of all liabilities.
The establishment of a corporation is a grant of special privileges by the people to the owners of the corporation. It is time that corporations were made to earn those privileges, and return to a degree of accountability that globalization, technology and monopoly power have undermined.
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