In Defense of the Corporation

In Defense of the Corporation, by Robert Hessen, Stanford, Calif.: Hoover Institution Press, 1979, 116 pp., $7.95.

Ralph Nader has recently fallen on hard times. It is clear that he no longer commands the knee-jerk allegiance of either the press or the Congress. Perhaps his most revealing reversal, though, has been with the public at large. "Recall Ralph Nader" bumper stickers are currently as popular as the Corvair that Nader helped destroy a decade ago.

In one sense this decline in public esteem is remarkable when one considers that there have been few substantive criticisms of Nader's ideas. Most of the critical writing on Nader has tended to fault his character or his political style or the fact that, although well-intentioned, he has sought to go too far too fast. But his ideas and his ideology have managed to escape serious challenge. Thus while Nader's personal influence might have declined, the statist intellectual position that he often champions has yet to be officially discredited.

Robert Hessen's In Defense of the Corporation may well discredit what still remains of the Nader myth. In this hard-hitting but scholarly account, Hessen wields a rapier that slashes deeply into Nader's theory of incorporation and his proposal for federal chartering of large corporations. Hessen has adopted a thoroughly direct methodology—meet argument with argument, fact with fact, and analysis with analysis—and there is little to salvage of the Nader position when he is through operating.

There are important stylistic virtues in this book that contribute to its overall effectiveness. Hessen has taken an entrepreneurial risk by choosing to write a short book rather than a long, exhaustive treatise. In my opinion, this decision was an eminently sensible one. In Defense of the Corporation is a slim volume (116 pages of text) but extremely literate and well organized. We get the Nader position and we get the Hessen analysis; period. There is no getting off the track, no meandering about, no filler, no wasted space. Hessen knows where he is going, and he goes there without delay. This is efficient and sensible writing at its very best.

What Hessen says is also perfectly sensible—so sensible that one wonders why anyone has taken Nader's views on corporations seriously. Nader et al. share a common conception of the corporation that Hessen labels the "concession" theory. According to this notion, corporations are "creatures of the State" with State-created privileges and immunities not available to noncorporations. The alleged quid pro quo for these privileges is that corporations "consent" to be regulated by the State in the public interest. Further, Nader has contended that all large corporations are run by a self-perpetuating management "autocracy" that runs roughshod over legitimate stockholder interests. Nader would remedy this situation by mandating shareholder participation in all important managerial decisions. Finally, under federal chartering, corporations that sell more than 12 percent of a market for more than five years might be divested in order to restore "competition."

Perhaps the most interesting and innovative aspect of Hessen's analysis is his historical treatment of the concession theory. Most of the corporate critics see the corporation as an artificial entity with privileges from the State that require some quid pro quo. Hessen argues that this concessionary view cannot be logically or historically applied to the modern business corporation. Since the enactment of general incorporation statutes (Connecticut, 1837), corporations have simply been voluntarily formed organizations created through freedom of contract and association. The State's role is thus seen as purely procedural and the corporate charter itself as purely informational. If he follows the rules, anyone can form a corporation; the State then records that information as it would a birth or a marriage. Finally, according to Hessen, the organization formed has no more rights—and no fewer—than those of the individuals that formed it.

Hessen strongly disagrees with the notion that the corporation must be seen as some special "entity" with an existence apart from those who own or manage it. He also strongly opposes the idea that the special features of incorporation are "privileges" in the usual sense. Indeed, Hessen maintains, entity (legal) status, "perpetual life," and limited liability could be achieved—and historically have been achieved—through voluntary contract without the State.

Hessen prefers to treat these features as legal conveniences rather than as grants of privilege from the State. It is legally convenient for purposes of business that the corporation be treated as a single legal entity—but this is not unique to corporations. It is legally convenient that the articles of incorporation not be renewed, but certainly this cannot be construed as a governmental privilege. And finally, limited liability is a legal convenience that could be accomplished without the State; each corporation would place a clause in every contract limiting the right of recovery to some designated fund—and not the shareholders' individual property.

Limited liability for torts, on the other hand, is seen as a privilege, and the law should be amended:

The proper principle of liability should be that whoever controls a business, regardless of its legal form, should be personally liable for the torts of its agents and employees.…The safeguards open to general partners and corporate officers would include more careful selection and closer supervision of personnel and the purchase of larger amounts of liability insurance.

I would make two specific criticisms of Hessen's book. The first is that his "inherence" theory of incorporation—that corporations are legitimate since they are created and sustained by an "exercise of individual rights"—is, itself, nowhere defended. It is asserted (or taken for granted) that individuals have natural rights, but nowhere is it argued or demonstrated that they do. This failure to provide justification for a theory of rights is, of course, crucial, since it can always be maintained (by the statists, to whom the argument in this book is presumably directed) that no such natural rights exist or that we are simply talking "religion."

A second criticism is that the author may not have marshaled all of the intellectual support for some of his positions that he might have. For example, economists such as Harold Demsetz, Yale Brozen, John McGee, and Robert Bork have written eloquently on the efficiency of industrial concentration and upon the nonsense of forced deconcentration; yet these heavyweights do not appear (even in a footnote) in Hessen's chapter "Breaking Up Big Business." This is a solid chapter, and Hessen's arguments are valid; but why make a less effective case against the likes of Robert Dahl and Willard Mueller than is possible?

These minor caveats, however, cannot subtract from the overall effectiveness of this monograph. It is powerful reading and deserves to be well received.

D.T. Armentano is the author of The Myths of Antitrust. He teaches economics at the University of Hartford.