The Corporation: The Pathological Pursuit of Profit and Power

PRAISE FOR THE CORPORATION

A surprisingly rational and coherent attack on capitalism’s most important institution.

—The Economist

Bakan does such a good job of creating awareness that it can’t help but be a call to action.

—USA Today

Bakan . . . takes a powerful stab at the most influential institution of our time, the corporation. . . . [An] eye-opening look at a system ‘programmed to exploit others for profit.’

—Booklist (starred review)

Bakan’s analysis is strong on pinpointing problems with current business.

—Harvard Business Review

His prose is soothing, free of scholarly clottedness and leftist stridency. The reader is impressed—thrilled even—to watch him coolly denude the corporate person until it stands naked and vulnerable. . . .

—The Vancouver Sun

"All senior business executives should find the time to read this well-researched and well-written book. . . . The Corporation will force you to reflect on what really matters, both in one’s life and in one’s company."

—The Globe and Mail

Bakan is a first-rate storyteller, and his tales are compelling and even hair-raising.

—Dragonfly Review

Insightful. . . . Whether you’re pro-business or against . . . [Bakan’s] research gives the project weight and suggests constructive solutions.

—San Francisco Chronicle

The corporation, according to Joel Bakan, is the monster that can swallow civilization—greedy, exploitive, and unstoppable. We are all its potential victims, which is why we must all understand how the corporate form makes it so difficult to control its abuses.

—Alan M. Dershowitz, Felix Frankfurter Professor of Law, Harvard Law School

"Joel Bakan’s The Corporation is one of those rare books that opens up a new world. Its message is compelling—and more important now than ever. With exquisite historical evocations and incisive contemporary examples, the author challenges us to recognize the flaws inherent in the very nature of the corporation and the practical possibilities for reform. You will want to have the book at hand for frequent reference for many years to come."

—Robert A. G. Monks, Deputy Chairman of Hermes Focus Asset Management and corporate governance adviser

"Since Rachel Carson’s Silent Spring began to expose the abuses of the modern industrial system, there has been a growing awareness that profit at the expense of Earth—of individuals, society, and the environment—is unsustainable. Joel Bakan has performed a valuable service to corporations everywhere by holding up a mirror for them to see their destructive selves as others see them. The clarion call for change is here for all who would listen."

—Ray C. Anderson, Chairman and CEO of Interface, Inc.

This fine book was virtually begging to be written. With lucidity and verve, expert knowledge and incisive analysis, Joel Bakan unveils the history and the character of a devilish instrument that has been created and is nurtured by powerful modern states. They have endowed their creature with the rights of persons—and by now, rights far exceeding persons of flesh and blood—but a person that is pathological by nature and by law, and systematically crushes democracy, freedom, rights, and the natural human instincts on which a decent life and even human survival depends: the modern corporation. This incisive study should be read carefully, and pondered. And it should be a stimulus to constructive action—not at all beyond our means, as the author outlines.

—Noam Chomsky, Ph.D., Professor of Linguistics, Massachusetts Institute of Technology and author of 9-11

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Contents

Introduction

ONE The Corporation’s Rise to Dominance

TWO Business as Usual

THREE The Externalizing Machine

FOUR Democracy Ltd.

FIVE Corporations Unlimited

SIX Reckoning

Acknowledgments

About the Author

Notes

Selected Bibliography

Index

For Marlee

Introduction

As images of disgraced and handcuffed corporate executives parade across our television screens, pundits, politicians, and business leaders are quick to assure us that greedy and corrupt individuals, not the system as a whole, are to blame for Wall Street’s woes. Have we just been talking about some bad apples? Sam Donaldson recently asked former New York Stock Exchange chief Richard Grasso on ABC’s This Week, or is there something in the system that is broken? Well, Sam, Grasso explained, we’ve had some massive failures, and we’ve got to root out the bad people, the bad practices; and certainly, whether the number is one or fifteen, that’s in comparison to more than ten thousand publicly traded corporations—but one, Sam, just one WorldCom or one Enron, is one too many. Despite such assurances, citizens today—and many business leaders too—are concerned that the faults within the corporate system run much deeper than a few tremors on Wall Street would indicate. These larger concerns are the focus of this book.

A key premise is that the corporation is an institution—a unique structure and set of imperatives that direct the actions of people within it. It is also a legal institution, one whose existence and capacity to operate depend upon the law. The corporation’s legally defined mandate is to pursue, relentlessly and without exception, its own self-interest, regardless of the often harmful consequences it might cause to others. As a result, I argue, the corporation is a pathological institution, a dangerous possessor of the great power it wields over people and societies. That raises a number of questions, which I address in subsequent chapters. How did the corporation become what it is today (Chapter 1)? What is the nature, and what are the implications, of its pathological character (Chapters 2 and 3) and of its power over society (Chapters 4 and 5)? And what should and can be done to mitigate its potential to cause harm (Chapter 6)? These are the central questions that inform the book. By revealing the institutional imperatives common to all corporations and their implications for society, I hope to provide a crucial and missing link in people’s attempts to understand and do something about some of the most pressing issues of our time.

Peter Drucker, perhaps the world’s leading management thinker, was one of the first to analyze the corporation as an institution in his groundbreaking 1946 work, Concept of the Corporation. It was Drucker who thought it significant that all corporations have the same institutional order and purpose. For most of us, however, the daily details of corporate life tend to obscure the bigger picture. Like Pfizer CEO Hank McKinnell, we have great difficulty thinking of corporations as an institution. We understand them, instead, mainly in terms of how they differ from one another—transnational versus local, high-tech versus smokestack, progressive versus traditional, cool versus stodgy, blue-chip versus risky, brand name versus no-name, good versus bad—and miss the fact that all corporations, at least all publicly traded ones, share a common institutional structure; that it makes sense to talk about the corporation, as well as corporations. As veteran Harvard Business School scholar Joe Badaracco remarked when asked the simple question What is a corporation?: It’s funny that I’ve taught in a business school for as long as I have without ever having been asked so pointedly to say what I think a corporation is.1

The purpose of this book is to explore what the corporation, as an institution, truly is. Institutions are, of course, composed of people, and much of what follows is based upon original interviews with players from the corporate world, pundits who analyze it, and critics who highlight its dangers and propose solutions.2 As for the style and tone of the book, I have sought to avoid unduly academic and technical jargon. My objective has been to make it accessible to the lay reader and the professional, without compromising its grounding in rigorous research and in my knowledge and insight as a legal scholar. Throughout the book I use the word corporation to describe the large Anglo-American publicly traded business corporation, as opposed to small incorporated businesses, or small and large not-for-profit or privately owned ones. As for the focus on the Anglo-American corporation, the world’s largest and most powerful corporations are based in the United States, and economic globalization has extended their influence beyond national borders. Elements of the Anglo-American model also increasingly shape its counterparts in other countries, especially in European nations and Japan.3 For these reasons, the analyses and arguments presented in this book have important implications for the rest of the world.

1

The Corporation’s Rise to Dominance

Over the last 150 years the corporation has risen from relative obscurity to become the world’s dominant economic institution. Today, corporations govern our lives. They determine what we eat, what we watch, what we wear, where we work, and what we do. We are inescapably surrounded by their culture, iconography, and ideology. And, like the church and the monarchy in other times, they posture as infallible and omnipotent, glorifying themselves in imposing buildings and elaborate displays. Increasingly, corporations dictate the decisions of their supposed overseers in government and control domains of society once firmly embedded within the public sphere. The corporation’s dramatic rise to dominance is one of the remarkable events of modern history, not least because of the institution’s inauspicious beginnings.

Long before Enron’s scandalous collapse, the corporation, a fledgling institution, was engulfed in corruption and fraud. Throughout the late seventeenth and early eighteenth centuries, stockbrokers, known as jobbers, prowled the infamous coffee shops of London’s Exchange Alley, a maze of lanes between Lombard Street, Cornhill, and Birchin Lane, in search of credulous investors to whom they could sell shares in bogus companies. Such companies flourished briefly, nourished by speculation, and then quickly collapsed. Ninety-three of them traded between 1690 and 1695. By 1698, only twenty were left. In 1696 the commissioners of trade for England reported that the corporate form had been wholly perverted by the sale of company stock to ignorant men, drawn in by the reputation, falsely raised and artfully spread, concerning the thriving state of [the] stock.1 Though the commissioners were appalled, they likely were not surprised.

Businessmen and politicians had been suspicious of the corporation from the time it first emerged in the late sixteenth century. Unlike the prevailing partnership form, in which relatively small groups of men, bonded together by personal loyalties and mutual trust, pooled their resources to set up businesses they ran as well as owned, the corporation separated ownership from management—one group of people, directors and managers, ran the firm, while another group, shareholders, owned it. That unique design was believed by many to be a recipe for corruption and scandal. Adam Smith warned in The Wealth of Nations that because managers could not be trusted to steward other people’s money, negligence and profusion would inevitably result when businesses organized as corporations. Indeed, by the time he wrote those words in 1776, the corporation had been banned in England for more than fifty years. In 1720, the English Parliament, fed up with the epidemic of corporate high jinks plaguing Exchange Alley, had outlawed the corporation (though with some exceptions). It was the notorious collapse of the South Sea Company that had prompted it to act.

Formed in 1710 to carry on exclusive trade, including trade in slaves, with the Spanish colonies of South America, the South Sea Company was a scam from the very start. Its directors, some of the leading lights of political society, knew little about South America, had only the scantiest connection to the continent (apparently, one of them had a cousin who lived in Buenos Aires), and must have known that the King of Spain would refuse to grant them the necessary rights to trade in his South American colonies. As one director conceded, unless the Spaniards are to be divested of common sense . . . abandoning their own commerce, throwing away the only valuable stake they have left in the world, and, in short, bent on their own ruin, they would never part with the exclusive power to trade in their own colonies. Yet the directors of the South Sea Company promised potential investors fabulous profits and mountains of gold and silver in exchange for common British exports, such as Cheshire cheese, sealing wax, and pickles.2

Investors flocked to buy the company’s stock, which rose dramatically, by sixfold in one year, and then quickly plummeted as shareholders, realizing that the company was worthless, panicked and sold. In 1720—the year a major plague hit Europe, public anxiety about which was heightened, according to one historian, by a superstitious fear that it had been sent as a judgment on human materialism3—the South Sea Company collapsed. Fortunes were lost, lives were ruined, one of the company’s directors, John Blunt, was shot by an angry shareholder, mobs crowded Westminster, and the king hastened back to London from his country retreat to deal with the crisis.4 The directors of the South Sea Company were called before Parliament, where they were fined, and some of them jailed, for notorious fraud and breach of trust.5 Though one parliamentarian demanded they be sewn up in sacks, along with snakes and monies, and then drowned, they were, for the most part, spared harsh punishment.6 As for the corporation itself, in 1720 Parliament passed the Bubble Act, which made it a criminal offense to create a company presuming to be a corporate body, and to issue transferable stocks without legal authority.

Today, in the wake of corporate scandals similar to and every bit as nefarious as the South Sea bubble, it is unthinkable that a government would ban the corporate form. Even modest reforms—such as, for example, a law requiring companies to list employee stock options as expenses in their financial reports, which might avoid the kind of misleadingly rosy financial statements that have fueled recent scandals7—seem unlikely from a U.S. federal government that has failed to match its strong words at the time of the scandals with equally strong actions. Though the Sarbanes-Oxley Act, signed into law in 2002 to redress some of the more blatant problems of corporate governance and accounting, provides welcome remedies, at least on paper,8 the federal government’s general response to corporate scandals has been sluggish and timid at best. What is revealed by comparing that response to the English Parliament’s swift and draconian measures of 1720 is the fact that, over the last three hundred years, corporations have amassed such great power as to weaken government’s ability to control them. A fledgling institution that could be banned with the stroke of a legislative pen in 1720, the corporation now dominates society and government.

How did it become so powerful?

The genius of the corporation as a business form, and the reason for its remarkable rise over the last three centuries, was—and is—its capacity to combine the capital, and thus the economic power, of unlimited numbers of people. Joint-stock companies emerged in the sixteenth century, by which time it was clear that partnerships, limited to drawing capital from the relatively few people who could practicably run a business together, were inadequate for financing the new, though still rare, large-scale enterprises of nascent industrialization. In 1564 the Company of the Mines Royal was created as a joint-stock company, financed by twenty-four shares sold for £1,200 each; in 1565, the Company of Mineral and Battery Works raised its capital by making calls on thirty-six shares it had previously issued. The New River Company was formed as a joint-stock company in 1606 to transport fresh water to London, as were a number of other utilities.9 Fifteen joint-stock companies were operating in England in 1688, though none with more than a few hundred members. Corporations began to proliferate during the final decade of the seventeenth century, and the total amount of investment in joint-stock companies doubled as the business form became a popular vehicle for financing colonial enterprises. The partnership still remained the dominant form for organizing businesses, however, though the corporation would steadily gain on it and then overtake it.

In 1712, Thomas Newcomen invented a steam-driven machine to pump water out of a coal mine and unwittingly started the industrial revolution. Over the next century, steam power fueled the development of large-scale industry in England and the United States, expanding the scope of operations in mines, textiles (and the associated trades of bleaching, calico printing, dyeing, and calendaring), mills, breweries, and distilleries.10 Corporations multiplied as these new larger-scale undertakings demanded significantly more capital investment than partnerships could raise. In postrevolutionary America, between 1781 and 1790, the number of corporations grew tenfold, from 33 to 328.11

In England too, with the Bubble Act’s repeal in 1825 and incorporation once again legally permitted, the number of corporations grew dramatically, and shady dealing and bubbles were once again rife in the business world. Joint-stock companies quickly became the fashion of the age, as the novelist Sir Walter Scott observed at the time, and as such were fitting subjects for satire. Scott wryly pointed out that, as a shareholder in a corporation, an investor could make money by spending it (indeed, he likened the corporation to a machine that could fuel its operations with its own waste):

Such a person [an investor] buys his bread from his own Baking Company, his milk and cheese from his own Dairy Company . . . drinks an additional bottle of wine for the benefit of the General Wine Importation Company, of which he is himself a member. Every act, which would otherwise be one of mere extravagance, is, to such a person . . . reconciled to prudence. Even if the price of the article consumed be extravagant, and the quality indifferent, the person, who is in a manner his own customer, is only imposed upon for his own benefit. Nay, if the Joint-stock Company of Undertakers shall unite with the medical faculty . . . under the firm of Death and the Doctor, the shareholder might contrive to secure his heirs a handsome slice of his own death-bed and funeral expenses.12

At the moment Scott was satirizing it, however, the corporation was poised to begin its ascent to dominance over the economy and society. And it would do so with the help of a new kind of steam-driven engine: the steam locomotive.13

America’s nineteenth-century railroad barons, men lionized by some and vilified by others, were the true creators of the modern corporate era. Because railways were mammoth undertakings requiring huge amounts of capital investment—to lay track, manufacture rolling stock, and operate and maintain systems—the industry quickly came to rely on the corporate form for financing its operations. In the United States, railway construction boomed during the 1850s and then exploded again after the Civil War, with more than one hundred thousand miles of track laid between 1865 and 1885. As the industry grew, so did the number of corporations.14 The same was true in England, where, between 1825 and 1849, the amount of capital raised by railways, mainly through joint-stock companies, increased from £200,000 to £230 million, more than one thousand–fold.15

One of the most important by-products of the introduction and extension of the railway system, observed M. C. Reed in Railways and the Growth of the Capital Market, was the part it played in assisting the development of a national market for company securities.16 Railways, in both the United States and England, demanded more capital investment than could be provided by the relatively small coterie of wealthy men who invested in corporations at the start of the nineteenth century. By the middle of the century, with railway stocks flooding markets in both countries, middle-class people began, for the first time, to invest in corporate shares. As The Economist pronounced at the time, everyone was in the stocks now . . . needy clerks, poor tradesman’s apprentices, discarded service men and bankrupts—all have entered the ranks of the great monied interest.17

One barrier remained to broader public participation in stock markets, however: no matter how much, or how little, a person had invested in a company, he or she was personally liable, without limit, for the company’s debts. Investors’ homes, savings, and other personal assets would be exposed to claims by creditors if a company failed, meaning that a person risked financial ruin simply by owning shares in a company. Stockholding could not become a truly attractive option for the general public until that risk was removed, which it soon was. By the middle of the nineteenth century, business leaders and politicians broadly advocated changing the law to limit the liability of shareholders to the amounts they had invested in a company. If a person bought $100 worth of shares, they reasoned, he or she should be immune to liability for anything beyond that, regardless of what happened to