Forum Post: Corporations are Public Institutions and the Public's Power over Them Is Unfettered

What follows is a history lesson from Corporations and the Public Purpose: Restoring the Balance, available at: http://www.corporatepolicy.org/issues/corppurpose.pdf :

The United States grew partly from the efforts of British colonial companies chartered to grab the riches of the new worlds opened up by Europe’s great explorers; both the East India Company and the Virginia Company were chartered by the crown for the purposes of exploring the New World and extracting its wealth and natural resources. ...

Although the British charter companies anticipated the modem corporate structure, the simple structure of the early American economy meant that there was little demand for corporate charters for local enterprise until about 1780. The giant trading companies of that day were chartered by the King and functioned as extensions of his power. As a result, there was a general distrust of big trading companies. The Boston Tea Party was the signature event in an economic rebellion against the East India Company's attempt to monopolize American commodities markets. The Boston merchants were rebelling against a British corporation and British crown whose interests were intertwined.

After the Revolution, the Founding Fathers set upon the task of forming a new government. ... [T]he memories of exploitation by the large British trading companies made many early American leaders wary of business forms that would confer special privileges. In his famous treatise, The Wealth of Nations, Adam Smith, an economist and friend of some of America's early leaders, was highly critical of corporations for this very reason.

*”The pretense that corporations are necessary for the better government of the trade is without any foundation. The real and effectual discipline which is exercised over a workman, is not that of his corporation, but that of his customers. It is the fear of losing their employment which restrains his frauds and corrects his negligence. An exclusive corporation necessarily weakens the force of his discipline.

Smith was opposed to corporations because he believed they interfered with the "invisible hand" of the free market: "It is to prevent this reduction of price, and consequently of wages and profit, by restraining that free competition that would most certainly occasion it, that all corporations, and the greater part of corporation laws, have been established.” ...

Widespread public opposition to corporations led early legislatures to grant few charters, and usually only after much debate, but corporations did begin to proliferate by the end of the eighteenth century. ... These businesses were prohibited from taking any actions which the legislatures that incorporated them did not sanction in their charter. When a corporation caused harm to public interests or went beyond its mandate, its charter could be revoked.

Much of what we attempt to accomplish today through regulation was accomplished in early America through the chartering process that defined a corporation's purpose. ...

To keep corporations under control, legislatures placed limits on them through rules on capitalization, debt, land holdings, and profits. Some states also limited corporate charters to a set number of years, forcing their review and renewal when the charter expired. Unless a legislature renewed a charter, the corporation was dissolved and its assets divided among shareholders. Legal rules limited the issuance of stock, clarified shareholder voting rules, and determined procedures for record keeping and disclosure of corporate information.

As additional mechanisms of control, specific rules written into corporate charters gave equal voting rights to large and small investors, outlawed interlocking directorates, and limited capitalization and debts. Under the ultra vires doctrine, corporations were prohibited from doing anything that was not specifically authorized in their charters. Companies were required to surrender their accounting books to the state legislature upon request. ...

In 1800, the vast majority of the 334 corporations that existed in the United States were chartered to accomplish tasks that could rightly be considered the public's business. Sixty-five percent of these corporations were involved in building turnpikes, bridges, and canals. Another 20 percent were involved in banking and insurance. Only eight corporations were involved in manufacturing. Henry Carter Adams described corporations as agencies of the state, saying: "They were created for the purpose of enabling the public to realize some social or national end without involving the necessity of direct government administration. They were in reality arms of the state ... .” ...

Early government Attorney General Roger B. Taney observed: “It is a fixed principle of our political institutions to guard against the unnecessary accumulation of power over persons and property in any hands. And no hands are less worthy to be trusted with it than those of a moneyed corporation.” ...