Money: Corporations

"Privateness" and legitimacy

Liberal intellectuals, in concert with activist lawyers, are waging an important conceptual assault on the American business corporation. This assault is so fundamental in its character that its significance may not be perceived by many within the free market community. These intellectuals are asserting that the American business corporation is not really a "private" entity at all, but actually a governmental (or "quasi-governmental") entity, exercising powers granted by the state over "social" assets.

The consequences that are urged to follow from this conceptualization of the American business corporation include, inter alia:

1. Participation of various groups representing the wider community, e.g., workers, local residents, government agencies, "the public," etc., in formal corporate decision making.

2. Opening of corporate deliberations and decision-making to public view.

3. Application of doctrines of due process, fair hearing, right of counsel, and all relevant Bill of Rights freedoms (e.g., free speech) to persons employed by or dealing with a corporation. For example, a customer would be entitled to a hearing before service was terminated for nonpayment of account; an employee would have full free speech guarantees against corporate action in criticizing his employer.

4. Corporate shareholders would be recognized as only one, and not necessarily the most important, constituent to be considered in corporate action; i.e., social responsibility would be recognized as a direct and legitimate corporate obligation, and not simply a matter of good business or personal conscience.

Some of these claims have already arisen in court cases. Perhaps most significant of these have been the attempts to apply due process rules to corporate actions because, implicit in such an application, there follows judicial review. In each of these "due process" cases of which this writer is aware, the defendant corporations were utilities, a class of defendant favored by activists. Thus far the courts have decided that a customer need not be afforded a hearing before discontinuing electric service for nonpayment but must receive such a hearing in the case of gas or water service. The litigating strategy here is to attempt to establish a precedent against a "soft" defendant such as a utility (whose expenses of compliance can simply be added to its rate base) and then later try to expand the precedent to apply to wholly private firms.

This assault on the corporation, of which Ralph Nader's recent book on Federal chartering, Taming the Giant Corporation, is merely the most obvious manifestation, seeks to totally politicize and, hence, socialize private corporate wealth through the formation of a climate of informed opinion which accepts the notion that the American business corporation is not really a private entity at all but really a type of public instrumentality, exercising governmental powers over social property that has somehow been taken over by private interests and which ought properly be returned to public accountability. It is an attempt to acquire control of the wealth represented by American corporations by changing the conception of what a corporation is.

The modern business corporation is not only a major pool of private wealth but, perhaps even more important, it is the primary vehicle of private social action. The organization of human endeavors in the marketplace relies more than anything else on the vehicle of the corporation.

The marketplace's superiority over government in the provision of food, clothing, shelter, health care, education, transportation, security, and any of the myriad of human wants depends on the freely functioning instrumentality of the private business corporation. So long as such an institution exists with substantial freedom from government control, the liberals' dreams of total social power will be frustrated and the performance of their existing schemes exposed as failures in comparison to the productivity and vitality of the free market.

To counter this fundamental challenge to the major institution of private capitalism, positive economic arguments are peripheral. It is necessary to join the debate on the conceptual issue of the privateness of the corporation. Nader, for example, points to the existence of the state charter, the legal entity of the corporation, limited shareholder liability, and perpetual life as indicative of the governmental nature of the corporation. To meet this argument, it may be necessary to offer a "private corporation" model which is both historically and analytically consistent.

There are at least two major free market-oriented scholars whose work challenges the conceptual attack of the Naderites. Professor Henry Manne, of the Law and Economics Center of the University of Miami, has produced important challenges of what he refers to as the "higher criticism" of the corporation. Exciting new work is also being done by Professor Robert Hessen, of the Hoover Institution at Stanford. Hessen is working on a major study of the American business corporation entitled In Defense of the Corporation which may prove a seminal work in modern thinking about the nature of the corporation. Hessen, for example, provided an excellent refutation of Nader's above-cited arguments about state charters, etc., in an editorial in Barron's, May 24, 1976.

There are, in addition, other problems that need to be faced, such as normative issues of the "rights" of persons acting through a corporation or the problem of "doing justice" to a corporation which has undergone a significant change in ownership.

Ideas have consequences, particularly as they mold our view of the world. Whether a judge or decision maker believes that the business corporation is essentially a private organization of individuals exercising their personal rights in the disposition of their own property, or believes instead that it is a quasi-governmental agency created by the State for public purposes, can be of profound significance in shaping the future of the private sector.

© 1976 Davis E. Keeler