Corporations and the Public Interest

A look at how the originally purpose behind corporate charters has been lost

One of the articles in Business On A Small Planet (IC#41)
Originally published in Summer 1995 on page 26
Copyright (c)1995, 1997 by Context Institute

When people talk about "the market" they usually confuse two totally different things. One is the enterprise economy of small-scale business. The other is the corporate economy of hulking bureaucratic institutions.

Most of us love markets in the former sense. We love farmers’ markets, flea markets, New York-style street fairs, and classified ads. When we go to Washington, DC, we generally don’t eat in government cafeterias. We head over to the neat little restaurants in DuPont Circle or Adams Morgan – a "market" experience. When I was in Warsaw not long after the fall of the communist regime, the new outdoor markets really did feel like seedlings breaking through the concrete.

These are the kinds of markets the founders of the United States had in mind when they drafted the Constitution. The corporation in its modern form did not exist when the basic concepts of our economic and political structures were wrought. The founders omitted it from the elegant scheme of checks and balances by which they hoped to hold institutional power under control. (Jefferson was particularly wary of the dangers of centralized economic power.)

Individual enterprises are also the kind Adam Smith thought he was writing about – the ghost that inhabits economic theory. Adam Smith didn’t take sprawling corporate agglomerations of capital into account when he worked out his notion of a benign mechanism that harmonizes the activities of individuals pursuing their own entrepreneurial ends.

Little wonder, then, that the corporation has come to dominate both our economics and our politics. It wasn’t part of the legal and conceptual framework that was supposed to govern these. The term "market" has become a mythological gloss for a legal invention that has overrun the society that bore it.

Business and Community Life

Enterprise has a social dimension that economists are trained to overlook. It determines much of the flow of social interaction in daily life. Jane Jacobs got at this in The Death and Life of American Cities – the way, for example, that street-level enterprise promotes pedestrian traffic, which in turn deters crime. Such enterprise also can promote a kind of informal safety net.

I have a close friend, for example, whose father owned a pharmacy on the declining Main Street in a small city in upstate New York. He was always involved in improvement and clean-up campaigns, took great pride in his Christmas decorations. His business was strangled slowly by the discount chains in the shopping centers that sprang up outside of town.

I think too of the Regal Coffee Shop on Eighth Avenue near 23rd Street in Manhattan. In the morning, the Regal serves as an all-purpose social center for the troubled souls in the neighborhood. The waitresses talk with them, humor them, make them feel included. The kindly Greek woman who owns the shop with her husband, is as much a mother as a manager. By contrast, at the McDonald’s a few blocks away I’ve seen the manager kick these same people out. Or else they sit there staring into space, alone and forlorn.

The corporatized version of the market has done much to undermine this social dimension of enterprise. When McDonald’s supplants the Regal, part of the informal safety net frays. When the shopping malls replace Main Street, and when multinational enterprise replaces local, it frays yet more.

In the town I grew up in, the merchants knew the kids and often their parents too. We knew we were watched, and generally acted accordingly. At the malls, kids don’t have that feeling. They float in a virtual reality of market culture that is totally detached from any process of community life.

The Steel Barons

Drive through what is now the "Rust Belt" in Western Pennsylvania, West Virginia and Ohio. Many of the steel towns there bear the monuments of first generation entrepreneurs who had roots in their localities. Libraries, schools, community centers, hospitals, museums – all bear the names of the entrepreneurs who contributed generously from their earnings. Paternalistic? Probably. But at least there was a sense of individual connection and responsibility that provided glue for a community and enabled it to function.

I don’t want to romanticize those early steel barons. They tended to occupy the big houses up on the hill, out of reach of the smoke and soot, and this was symbolic. But at least they had a redeeming side that is almost totally lacking in the footloose and rootless corporate enterprise of today.

This social role for enterprise, a residue of pre-market society, acted as a necessary ballast and brake to the market. The dispersal of this ballast – including the physical setting of enterprise, the old Main Streets – has helped bring about the growing social chaos.

Passing the Bucks

Market ideology today conveniently sweeps these distinctions under the rug. At a very basic level, it has become a form of cosmological buck-passing that blames abstract "market forces" for the behavior of individuals. The corporation is the institutionalized form of this shirking of responsibility. The primary purpose of the corporate form is to insulate a certain class of people from responsibility for actions taken on their behalf.

When I was a law student in Philadelphia, I was hired by the owner of a small local radio station to look into the original corporate charters of the Penn Central Railroad (originally the Pennsylvania Railroad). The Penn Central was in the process of ending its passenger service, and the man who hired me wondered if the railroad didn’t have a legal duty of some kind to continue it. What I found truly surprised me. The charter spelled out clearly that the corporation had an obligation to serve the public by providing passenger service. That was the condition for the privilege of operating in the corporate form, and also for the generous grants of land it received from the legislature.

Origin of the Corporation

This was true of the early corporations generally. Their charters asserted that they existed first and foremost to serve the public. That was their reason for being.

In fact, the first corporations in the Anglo-American tradition had nothing to do with profits. Much as it might cause free market fundamentalists to squirm, the original corporations were actually regulatory agencies, such as guilds, or local governments such as townships. (In New England, when you drive from one town into another you pass a sign that announces the year in which the town you are entering was "incorporated.")

Later, the British Crown adapted the corporate form to what we would call today a "public-private partnership." The Queen wanted to lay claim to the New World, but such ventures required huge amounts of capital, and were risky in the extreme. To amass the capital, there was a need to insulate investors from responsibility for the undertaking, beyond the amount of their investment. Thus the "joint stock company" was born.

Individual responsibility is one of the bedrock principles of common law. To dilute this principle was an extraordinary step, one that was conceivable only for a mission that presumably served the public good. In other words, there was a direct link between the exemption from individual responsibility for corporate investors (and later officers), and the public good that the corporation was chartered to carry out.

This legal tradition carried over to the American colonies. It gave rise to the corporate charters that the state legislatures bestowed one by one, and only for specific undertakings. (Think of Amtrak as a rough modern-day equivalent, including the subsidy.) This was the form of corporation the framers of the Constitution had experienced. It was totally a state matter, and nothing for the new federal Congress to worry about.

Predictably, there was a lot of patronage and corruption in the granting of charters, which in effect were private monopolies. There also were boondoggles of the first order, the railroad land grants being a prime example.

By the middle years of the 19th century, the nation’s commerce was bursting at the seams. What historians now call "Jacksonian Democracy" gave political expression to these impulses – the resentment of special privilege and the explosive growth of commerce. Corporations became a prime target of political attack; not to curtail or abolish them, or to reinforce the original bargain, but rather to extend the privileges of incorporation to everyone.

Up close, this Jacksonian Democracy could look a lot like an S&L convention in the ’80s. One after another, the state legislatures enacted "free incorporation laws," which democratized the corporate form. No longer did legislatures have to charter corporations by special act. No longer were corporations limited to specific activities that served the public. Now anyone could form one, to do anything they wished. Market ideology said that simply seeking gain would, under the dispensation of the Invisible Hand, serve the public good.

Thus US Steel and Standard Oil and the like were born on a wave of what might be called today "liberal permissiveness." Several decades later, the Supreme Court completed the coup by declaring, with little basis in law or history, that the Fourteenth Amendment applied equally to corporations, making them legal "persons" with all the Constitutional rights and privileges of human beings.

The important point is that the free incorporation laws tore up the original bargain that was the basis of the corporate form. Corporations no longer had to serve the public. They could do anything they wanted. But they still enjoyed the extraordinary exemption from individual responsibility that they had obtained historically only because they would serve the public.

Then, the Supreme Court decision had the truly ironic effect of turning all human citizens, white as well as black, into second class citizens. Corporations enjoy all the Constitutional protections of human beings, plus exemptions from responsibility that humans don’t enjoy. Plus, of course, they can live forever, which humans can’t do either.

Profit Machines

It gets even weirder. The modern corporation actually can be incapable of commitment to a community or any other realm of concern that might diminish its profits. Individual entrepreneurs, including the owners of small and family-held corporations, can express their conscience through their enterprise. They can choose to make less money for the sake of a larger good.

The publicly-held corporation, by contrast, generally cannot. Officers are subject to shareholder suits if they do not put shareholders – i.e. profits – first. The corporation becomes a greed machine, an engine of acquisition that is not subject to the urgings of individual conscience and responsibility.

Free market fundamentalists such as Professor Milton Friedman argue that it is wrong in principle to distract the corporation with any such extraneous concerns as conscience or the need to help the society survive. For the corporation to pursue any goal besides the maximization of monetary profit, he says, would disrupt the cosmic market scheme.

If that’s true, it means the largest and most powerful "persons" in America are exempt from any standards of individual responsibility and from any obligation to help solve problems in voluntary and nongovernmental ways.

It’s time to rethink the bargain. If individual responsibility is to be the guiding principle of social policy, a first priority needs to be to do away with this built-in exemption for the most powerful "persons." Here are some ways we could do that:

Individual Responsibility: Executives of large publicly-held corporations should not be able to hide behind the corporate veil. They should be held personally responsible for their actions, and for actions taken in their behalf, to the same extent you or I would be. In France, for example, managers are held to such a standard. A French court recently fined an executive of Disneyland Paris over 8,000 francs (roughly $1000) for a dress code that was found to violate the rights of its workers.

Three Strikes and You’re Out: Corporations should be treated exactly the same as everyone else when they break the law. A corporation convicted of three major felonies should get in effect a life sentence, and be out of business. There should also be a corporate death penalty for crimes that would bring this penalty upon an individual.

Three Score and Ten: If corporations are to be treated as persons under the Fourteenth Amendment, then they should have the burdens of actual persons as well, including that of mortality. Nothing would do more for our commerce than to clear the decks regularly and let a whole new generation of entrepreneurs rise to the top. If pro athletes played forever, then a Michael Jordan or a Magic Johnson might never have had a chance. The same is true in business. Each generation should give way to the next.

Empowerment: This has become a Washington mantra; but the politicians are talking only about a shopping mall version, the ability to make buying choices between the products the corporate economy chooses to offer. The greater need is to empower individuals and communities to hold corporations accountable for their actions. An example is customer and community representation on corporate boards.

At the same time we need to empower individuals in the political process by curbing the influence of corporations. At the very least, corporations should have to disclose all political donations; this would empower customers to make informed decisions in the market regarding the companies whose political activities they want to support.

Such proposals are radical only in the way the Founding Fathers themselves were radical. The founders tried to craft a political structure that kept institutional power in check. They left out the corporation because it didn’t exist in its present form; and the need today is to repair this omission in the original scheme.

A reporter once asked Gandhi what he thought of Western Civilization. "It would be a wonderful idea," Gandhi replied. We could say the same about the concept of individual responsibility as it applies to the economy. It would be a wonderful idea. With some changes in the state-created structure called the corporation, we could begin to make it real.

Jonathan Rowe is program director of Redefining Progress, based in San Francisco, co-author with Edgar Cahn of Time Dollars, Rodale, 1992, and a contributing editor at the Washington Monthly.


Corporate Charters

The pamphlet Taking Care of Business: Citizenship and the Charter of Incorporation, by Richard Grossman and Frank Adams, looks at how corporations can be returned to their original purposes – acting in the public interest. It can be ordered from Charter Ink, Box 806, Cambridge, MA 02140. Contact Richard Grossman at the same address for updates on related activities in your area.

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