How and Why to Regulate the American Corporation

Most of the economic growth of the past few decades went primarily to corporate earnings. To the extent that working men and women enjoyed any benefit, it was not a permanent benefit and could never have been; premised as it was upon debt and consumption, it was fundamentally unsustainable. It is therefore important that any “economic recovery” we accomplish does not simply place us back into another period of unsustainable self-delusion.

As has been observed by many others, the “rising tide” of GDP and corporate earnings since the beginning of the Reagan era was not spread equally among the American population as a whole. Most wage-earners, including the middle class, has fallen behind in their spending and earning power where it matters the most; i.e., in housing, health care, and education. These changes have been largely hidden from the official, daily narrative of our economic lives by the government’s metrics; our inflation rates are low because everything that inflates (the cost of education, housing, and health care) is no longer included in the measurement. The lower consumer prices of televisions and laptops made overseas is scant compensation for these drastically rising costs, and the inability of the median wage to rise and meet them accordingly.

Our government’s current policy is still fundamentally a corporatist one. It is premised on the notion that large institutions are the bedrock of the economy, and that only by lending or, as is often the case, extra billions of dollars to keep them afloat, will businesses, large and small, begin to start hiring again. Having spent decades siphoning wealth from the general populace and re-distributing it amongst the top 1% of the wealthiest individuals, these companies have become so powerful that their tentacles are wrapped around every aspect of our lives, and we cannot seem to extricate ourselves.

Many on the left and right correctly criticize this pseudo-fascist economic model. However, the most vocal (or at least, the most publicized) anti-establishment movement – the Tea Party – fails to make a crucial distinction in its sweeping, anti-regulatory polemics. They think they are protecting workers and small business owners when they protest the regulation of Wall Street and big business. But the anti-regulatory impulse when applied to the corporation is fundamentally backwards. There is an essential difference between a private business and a corporation, one that justifies the heavy regulation of corporations even on libertarian grounds. However, we no longer are aware of the distinction because we have simply erased it from our consciousness and our political discourse.

This is partly due to a century of brainwashing by the corporatist agenda. From the dawn of the laissez-faire era, powerful elites propagated the social Darwinist notion that corporations and the wealth they accumulated were not the product of legal privilege, but rather natural selection. Their wealth was seen as precipitate of the productivity and skills of those who earned it. There was nothing coercive about how corporate wealth and power was earned, so the story goes, because it was obtained legally through the free exchange of labor contracts.

It is, of course, common for the ruling elites to justify themselves as part of the natural order. Once this concept is embedded in public consciousness, any kind of legal limitation on the corporate form faces a higher burden of justification than mere pragmatism, since it is the “natural order” itself that is being interfered with.

In fact, the corporate form traces its origins to late medieval church and government institutions. The term itself is a pseudo-mystical term referring to the “incorporation” of specific contractual arrangements into an “entity,” a whole which is greater than the sum of its parts, and which is, as a matter of legal convenience, believed to have a life (nowadays, an immortal life) above and apart from those who own and manage it. Thus, the procedural language itself invokes magical thinking and mysticism.

What this “entity” does, and why it is useful, is that it protects those who invest in it from financial liability for the decisions made by those who manage the company. You, British Petroleum stockholder, cannot be made to pay for the oil cleanup in the gulf. Even though your investment is what makes it possible for BP to raise capital in order to function and grow, you are only responsible for the loss of your stock value when your oil company blows a gasket in a big way. No one can make you pay for your company’s mistakes – even though you own part of it. This barrier is fundamentally unnatural, but it is why you, BP stockholder, are willing to buy the stock in the first place.

The “limited liability” of the corporate contract only exists to the extent it is condoned by the government. Contrary to assertions by some libertarian theorists, it is no more “natural,” or even possible, in a simple common-law scenario than, for instance, diplomatic immunity. Like any contractual delineation of personal responsibility, it only has meaning if the government is willing to enforce it. A contract that cannot be subject to lawsuit when it is violated is, by definition, not a contract. And the government does not enforce just any contract – it has always chosen, as a matter of public policy, what kinds of contracts are valid and which are not. The government cannot be made to pay for the enforcement of contracts it deems unreasonable or burdensome to the government or the people, or for contracts which break laws.

Corporations are therefore fundamentally unlike private businesses, which can theoretically exist in essentially the same form with little or no government action at all. The advantage of a private business is that its managers can act in their own interests exclusively, since they are not obliged to make the fortunes of shareholders. The disadvantage is that they will have greater difficulty raising their own multi-million fortunes in the long run; investors in the company are partners, and they are legally on the hook for everything done by every other partner. Not many are willing to take such risks. This is why only a corporation can grow as big as BP or Goldman Sachs – the limited liability of shareholders turns business ownership into a safe, transferable consumer product.

The important point here is: it’s a choice you form a corporation. You chose the additional obligations and responsibilities of the arrangement for the financial benefit brought by a state-created business form. And the state, after all, is paid for by the people. Corporations are therefore ultimately supported by the public and ostensibly exist with their consent.

This is why, for the first 100 years of American history, the right of the public to regulate the corporate form through their state governments was essentially unquestioned. Since they were then formed in the public trust and for public benefit (usually for public works, building infrastructure, or establishing banks), they were given precise boundaries within which to operate; their lifespan, their scope of activity, their location, all of this was placed under strict limitation and specifically enumerated in the corporate charter. One corporation could not buy another corporation simply because it could afford to do so, or extend itself into an economic activity outside its original purpose. Any alteration to its original charter or business purpose required state permission. This was not seen as a “limitation on business” to nineteenth century legislators and citizens, but rather as a common-sense limitation on the exploitation of public privilege.

Corporations are formed by government action at the state (rather than federal) level. As a result, the inter-state competition for corporate tax revenue, which began in the post-civil war industrial era, played out in what is often referred to as a “race to the bottom” as each state vied to establish the most permissive corporate environment, wooing potential business managers with increasingly liberal legal environments for corporate formation and operation. It soon became possible for corporations to list several “business purposes” in their charter as opposed to only one. Eventually, writing “any legal business purpose” into the charter at the time of formation was sufficient, and it remains so today. States also permitted corporations ever-greater flexibility in writing and amending their own bylaws – a flexibility not granted in other countries, where bylaws are more firmly standardized. Winning this “race” is how Delaware ended up with roughly 60% of Fortune 500 companies incorporated in its jurisdiction.

What this means is that, again contrary to the mainstream narrative of encroaching government limitation and regulation, corporations have experienced a steady increase in business freedom over the past century, with our present era being the freest of all. The alphabet soup of underfunded, understaffed federal regulatory agencies is barely a nuisance to these companies when compared to the historical growth in their legal privileges to self-create. This freedom is largely responsible, either directly or indirectly, for our present inability to prevent the bloated salaries of CEOs, the abuse of corporate “speech” to corrupt our media and political processes, and the multiple layers of ownership that powerful puppet-masters use to hide in the shadows. Ironically, greater “freedom of contract” requires more state support, because greater and more varied contractual forms require more statutory action and increased litigation.

And this is the fundamental conundrum that has passed from our consciousness – to be pro-corporate is to be pro-government, not the other way around. A state or a country with very little corporate freedom, with fewer and smaller such entities, actually requires less government involvement in business. When there are bright-line limitations on what corporations can do, there is less need for extensive regulation of how they do it. This is utterly anti-intuitive to today’s “conservatives” and yet, when our country was founded, it was common sense reality.

America needs to return to the notion of the corporation as a public trust, not a private business. When Americans are able to view the corporation as something whose very existence they pay for with their tax dollars whether they buy that company’s products or not, they will no longer view corporate regulation as a burden on free-enterprise, but rather as a limitation on a public privilege. The best, most efficient way to accomplish this is through the federalization of the laws of incorporation, as is done in many social democracies.

Currently, most American laws regarding corporate formation and operation are written at the state level. This means that in America there are 50 different, wholly distinct jurisdictions and regulatory regimes. Potential businesses have the freedom to “venue shop” for the environment which best suits their needs. Knowing this, states – because they must now compete for the corporate revenue – are loathe to regulate themselves out of needed tax dollars.

It is unlikely that state incorporation can be eliminated en masse; i.e., by suddenly transferring all corporations and the power to form them to the federal government exclusively. An attempt at such an usurpation of long-established state powers would make our current political conflicts seem like child’s play. But there is no reason why the federal government could not provide a regulatory baseline, such as a limit on the number of “business purposes” that any one corporation can pursue and a strict limit on how many subsidiaries a corporation can own.

Federalized laws of incorporation and strictly standardized bylaws are the norm in many European countries and in Japan. Because government regulators establish a greater foothold from the get-go, the result is sounder environmental policy, better working conditions, and a drastically reduced wealth imbalance between CEO’s and their underlings, as well as throughout society in general.

If putting the corporate form under direct federal control seems like a move towards “bigness” – the last thing we want – again, our intuitions are leading us in the direction opposite the truth. The power and abuses of the corporate form are a direct consequence of the inability of a state government like Delaware to stand up to a multi-national corporate power, upon whose good graces its state budget heavily depends. Corporations are already big, and it takes a big government to reign them in. The happy irony here is that, in doing so, it can place effective and permanent limits on their size and power, thus ultimately reducing their cost to society in the form of regulatory support and imbalances of wealth. Corporations that are smaller and more horizontally arranged can be regulated more efficiently and effectively. They will also likely function more efficiently and effectively, making better products at less cost to the environment.

And this, ultimately, is the change our society must go through. Now, America is a nation of powerful corporate interests who are able to leverage its many fractious jurisdictions to solidify and centralize their power and strength. Under a nationally consistent regulatory regime, “too big to fail” can be a thing of the past. Even more importantly, modestly sized corporations can be more easily prevented from outsourcing their labor force (saving American jobs), and from corrupting the political process (in the form of lobbyists). The result is a chance for a permanent fix to the worst of our economic woes – a decentralized, more democratic economy which is more egalitarian and fair. In this case, to be anti-corporate is to be pro-business.

Andrew S. Taylor writes fiction, political essays, and book reviews. Read other articles by Andrew, or visit Andrew's website.

5 comments on this article so far ...

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  1. bozh said on September 11th, 2010 at 9:50am #

    As i see it, the writer explains correctly just one artifice. Alas, only one among many.
    In a world in which events are connected and history being a flowing whole; events causng events, elementalistic thinking cannot elucidate the situation.

    Casting widest look possible and seeing the connect between events; with effect becoming cause and cause becoming effect, only cld bring us necessary elucidation; which the ruling class fears more than anything else.

    Exploitation, massive lying-deceiving, slavery, CIA terror, drugs, diktats, cults to just mention few of the events, dont just like shit happen.
    All are engineered. And all for one and solely one purpose. And by some people and not majority of them. tnx

  2. bozh said on September 11th, 2010 at 9:54am #

    hey, folks, don’t blame me if u still believe that santa and sam-sarah wld visit every igloo, shed, home of the homeless.
    Almost all pieces on internet and MSM tacitly posit these notions. tnx for the ear.

  3. jlohman said on September 11th, 2010 at 11:02am #

    Guys, they have won. They have the left battling the right on issues of ideology, when the Fat Cats who control our politicians — R’s and D’s alike — have but one issue: profits and high bonuses. And they are willing to share their booty with the politicians that made it happen.

    We are at the mercy of corporations run for profits, enabled by a privatized congress that shares in those profits. Our problem is NOT government, and it is not R’s or D’s. It *IS* that government is owned by the special interests that want in the taxpayer’s pockets.

    As a former CEO my company would not have survived if I had a board of directors who took money on the side and gave away company assets in return. Our country can’t survive this corruption either.

    Nothing is going to change until we have public funding of campaigns. What is it about political bribes do we not understand? They BUY political spending, which leads to deficits and high taxes.

    If politicians are going to be beholden to their funders, those funders should be the taxpayers. And at $5 per taxpayer per year it would be a bargain. Even at 100 times that. We MUST lobby our senators and representative to co-sponsor the bill at:

    Jack Lohman …

  4. teafoe2 said on September 11th, 2010 at 3:41pm #

    fee fye ho hum, I smell the ink of a simbleton:)

  5. bozh said on September 12th, 2010 at 7:16am #

    Fair selection and grooming of politicians from age 5 appears more, much more important, than a ‘fair’ [it means u never ever had one in US] election.
    An elightening education wld solve all the major problems in the world and not just US.
    But it is the greatest criminal minds who control ‘education’ and thus are able to manufacture mns of lesser criminal minds.

    So, the root cause for all evil appears lying to and deceiving-cowing of about 98% of people in any country and not just in US.
    And people even kill people to defend the root of all evil! Now u understand what the Greatness of America and God Bless America mean! tnx