Democracy and Corporations
Introduction – Democracy & Corporations
Corporations clearly play important roles in defining the relationships between business and the environment. As we have discussed in class, corporations exert influence over the wages that we earn, over the ways that we consume (through marketing, for example), over the revenues that our government collects etc.
Corporations are also pretty much taken for granted in our vision of the business world. As students of management we usually assume that corporations exist, that they function the way that they do, that they have the kind of influence that they do, etc. We tend to focus more on strategies for corporate success than on the basic idea of corporations themselves.
In this way the actions and theories associated with corporations can be thought of as an organizing pattern or paradigm that we consider “normal”. However, corporations have not always existed and they have not always functioned as they do now. Understanding some the historical and legal background of corporations is important – I would argue – to help you think through a wide range of issues, from taxation to accountability and political power. The goal of this assignment is to help you to understand some of that background. The Berle and Means reading is a chapter from their book, The Modern Corporation and Private Property, first published in 1931. Berle and Means were two legal scholars and professors of law. Berle was the better known of the two. He was a member of F. Roosevelt’s administration and was Assistant Secretary of State from 1938-1944. It is important to consider the context that Berle and Means were writing in. In the first quarter of the 20th century the corporate form of business became dominant in the U.S. And then in 1929 the stock market crash set off the Great Depression. The repercussions were indescribably powerful. The focus of Berle and Means’ book is the relationship between owners (shareholders) and managers (who they identify with “control”).
The excerpt outlines the history of that relationship. When corporations first were formed, managers simply acted in the interests of owners and the relationship was seen as a form of contract. The corporation was originally an organizational form – a kind of privilege – that was authorized by the state to serve the interests of owners and society. In a democracy such as the one we have in the U.S., the state is understood to represent the interests of the majority, including, but not limited to the shareholders.
Society has an interest in having corporations around to do those things. As a result a sort of a bargain is established by the state (the representative of the people). The bargain runs something like this: “you guys get to form a corporation, with all the special protections not usually granted to smaller, non-corporate businesses) of limited liability, the ability to raise capital through equity, etc.in order to get those big, socially important jobs done”. This is the rationale behind the state’s authority to grant charters of incorporation. That authority assumes a) that the state represents the interests of the majority; b) that the interests of the majority are supreme (this is the connection to the basic principles of democracy) and, therefore; c) that corporations should be subservient to the state (otherwise there wouldn’t be any requirement of soliciting a charter). By the 1930s Berle and Means were concerned about what they saw as a trend of granting more powers to managers to the detriment of owners (and by extension the larger society). The arguments that they made influenced the development of legislation to provide oversight of corporations for most of the rest of the 20th century.
Although Berle and Means wrote 70 years ago, the issues that they were concerned with are still part of the very active current debates about the role of managers in corporations, about corporate responsibility to the larger society, etc. Starting in 2001 (and predating 9/11), there have been almost continuous revelations of “corporate wrongdoing” among the country’s biggest corporations, (including Enron, Worldcom, HealthSouth), accounting (Arthur Anderson) and investment firms (almost all of the major ones) and then, in 2007, the Big One – the sub-prime mortgage and derivative mess that brought the U.S. economy to its knees. The financial repercussions of the implosion of all kinds of dubious and outright illegal actions by these firms have been immeasurable. The damage has rippled throughout the economy.
Some people feel that there is a need for more substantial actions to address problems in corporate governance. One such group is the Program on Corporations, Law & Democracy (POCLAD). I have asked you to read part of one of their publications outlining their arguments (and assumptions?). Some arguments against regulation of corporate activities (or for minimal regulation) are based on the assumption that the more income and wealth corporations can generate, the more taxes they will pay and the better off the whole society will be. The third and final reading from the Institute on Taxation and Economic Policy documents corporate income tax payment 2008-2010 (look at first 20 pages).
Read the Berle & Means excerpt and the other materials (from POCLAD and Harvard Business School).
WATCH “Bigger Than Enron” on Youtube (50 minutes) at:
summarize the principle issues that Berle and Means were most concerned about in terms of the relationship between corporations and other sectors of society and internally, in terms of the different groups of people who make up a corporation. Then explain – with reference to Enron case and other indicators (from readings in the session and current events you’re aware of) the relevance of these concerns to our society today.