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#308 - Corporations Are Externalizing Machines, The Way Sharks Are Killing Machines, 20-Oct-1992

The modern corporation defines our world. The invention of the modern
corporation has allowed us to become the wealthiest people in all of
human history. It has also allowed us--in just 100 years of industrial
enterprise--to march to the brink of collapse, rapidly destroying the
planet as a place suitable for human habitation.

Today, when the top 2 percent of us hold as much wealth as the bottom
90 percent, it is an open question whether our democratic form of
government can survive in any meaningful way. Here again, corporations
are key. How to control the behavior of corporations has become the
central question we must all address.

A corporation is a group of people who have been granted a bundle of
rights and privileges guaranteed by the government. The government
grants those rights and privileges by issuing a piece of paper, a
certificate of authority called a corporate charter.

Before there was a United States of America, kings granted corporate
charters, creating organizations such as the East India Company and the
Hudson's Bay Company.

As American colonists fought to throw off the rule of English kings
beginning in 1776, and created the world's first constitutional
democracy in 1789, they carefully placed the right to charter
corporations in the hands of state legislatures. Today every state
legislature still has the power to grant, to amend, and to revoke,
corporate charters.

Corporations chartered in other states are called foreign corporations.
Corporations chartered in other nations are called alien corporations.
Legislatures allow foreign or alien corporations to go into business in
their states through the same chartering process.

An important new booklet,[1] published this month, describes some of
the changes that have taken place in corporate rights, privileges, and
behavior, during the last 200 years. Called TAKING CARE OF BUSINESS:
Frank T. Adams, the booklet describes how citizens controlled
corporations before the civil war of 1861. Up to that time corporations
were chartered for a specific limited purpose (for example, building a
toll road or canal) and for a specific, limited period of time (usually
20 or 30 years). At the end of the corporation's lifetime, its assets
were distributed among the shareholders and the corporation ceased to
exist. The number of owners was limited by the charter; the amount of
capital they could aggregate was limited. The owners were personally
responsible for any liabilities or debts the corporation incurred,
including wages owed to workers. Often profits were specifically
limited in the charter. Corporations were not established merely to
"make a profit." Each corporation was chartered to achieve a specific
social goal that a legislature decided was in the public interest.

Early Americans feared corporations as a threat to democracy and
freedom. They feared that owners (shareholders) would amass great
wealth, control jobs and production, buy the newspapers, dominate the
courts and control elections.

After the civil war, during the 1870s and 1880s, these fears began to
be realized. Owners and managers of corporations pressed relentlessly
to expand their powers, and the courts gave them what they wanted.
Perhaps the most important change occurred when the U.S. Supreme Court
granted corporations the full constitutional protections of an
individual citizen. Congress had written the 14th amendment to the
constitution to protect the rights of freed slaves, but the court in
1886 declared that no state shall deprive a corporation "of life,
liberty or property without due process of law." Now corporations had
real legal muscle.

By the early 20th century, courts had limited the liability of
shareholders; corporations had been given perpetual lifetimes; the
number of owners was no longer restricted; the capital they could
control was infinite. Some corporations were given the power of eminent
domain (the right to take another's private property with minimal
compensation to be determined by the courts). Of course a corporation
cannot be jailed. It cannot even be fined in any real sense; when a
fine is imposed, it is the shareholders who pay it and it becomes just
another cost of doing business.

With limits on liability, perpetual life, and the same rights as every
citizen, corporate growth was guaranteed.

A corporation brings together three groups of people--investors
(shareholders), who are the legal owners; labor; and management, which
includes a board of directors.

In theory the shareholders are responsible for all decisions. But a
recent book on the modern corporation by Robert Monks and Nell Minow[1]
makes it clear that this theory has been an empty fiction for many
years. Ownership is now fragmented into shares so small that "the
concept of ownership has been diluted to the point of disappearance."
Increasing the number of shareholders reduces the incentive and ability
of each shareholder to gather information and monitor management's

Historically, labor has not sought control of decision-making, leaving
that to management. Instead, labor has settled for a growing share of
profits. In the past decade, labor's share and its power have steadily

The board of directors is appointed by management. Its compensation is
set by management. The average corporation director puts in less than
three weeks each year but draws compensation ranging from $20,000 to
$60,000 or more.

"Since they are selected by management, paid by management, and--
perhaps most important--informed by management, it is easy for
directors to become captive to management's perspective," say Monks and

Management has the Board of Directors in its pocket. This leaves but
one remaining check on management--the shareholders. Management is
directly accountable to the shareholders; at least that is what the
theory says. But the reality is quite different. Monks and Minow trace,
step by step, court case by court case, the disintegration of
accountability in the modern corporation. Particularly during the 1980s
(when Monks was a top Reagan appointee), corporate managers cut their
last remaining ties of accountability to shareholders.

People like to think that the power of management is balanced by the
power of shareholders. "This remembered sense of balance is so powerful
that it persists despite unmistakable proof that it no longer exists,"
say Monks and Minow. "Management accountability to shareholders is more
than an economically beneficial arrangement; it is the basis on which
we, as a matter of public policy, give legitimacy to the impact that
private entities have on our lives. We would no more create a private
entity without accountability than a public one; we don't want
corporate dictators any more than we want political ones. But today,
any remaining accountability is little more than a vestige of the
original contract, the last remaining trace of the myth that no one
seems to want to give up."

Monks and Minow describe in detail the tools that corporate managers
developed during the 1980s to diminish the decision-making power of
shareholders. They argue persuasively, and in detail, that today the
modern corporation is run by management chiefly for the benefit of
management. Though shareholders continue to benefit from profitable
decisions, shareholders no longer call the shots. Management rules the

But even management is not entirely in control. Monks and Minow argue
at length that the modern corporation has a life and a logic all its
own. The main goal of a corporation is to gather benefits for its
members, and to pass costs on to others--to "internalize" benefits and
to "externalize" costs.

"Despite attempts to provide balance and accountability, the
corporation as an entity became so powerful that it quickly outstripped
the limitations of accountability and became something of an
externalizing machine, in the same way that a shark is a killing
machine--no malevolence, no intentional harm, just something designed
with sublime efficiency for self-preservation, which it accomplishes
without any capacity to factor in the consequences to others."

What about government regulation? Monks and Minow argue that
governments do not have what it takes to control corporations. "In
fact, government is now as much a creation of business as the other way
around," they say. Historically, they argue, corporations have turned
government controls into corporate shields. And: "...the actual impact
of all the laws, all the regulations, and all the bureaucrats on large
corporations is surprisingly small."

What is left?

Grossman and Adams suggest that anyone concerned about justice--anyone
skirmishing with corporations to stop them from doing harm--should
focus attention on the corporate charter, the original source of
control created for us by the earliest Americans--a source of power
still available to us today, if we will only explore it and put it to

All state legislatures still have the right to grant, to amend, and to
revoke corporate charters. Legislatures are still responsible for
overseeing corporate activities through the chartering process.

Citizens can define and control corporations. It will require some
homework, examining state histories and precedents, examining the
charters of existing corporations, thinking creatively about how to
assert control, focusing, and organizing.

Grossman and Adams say, "Our right to charter corporations is as
crucial to self-government as our right to vote. Both are basic
franchises, essential tools of liberty."


--Peter Montague


[1] Richard Grossman and Frank T. Adams, TAKING CARE OF BUSINESS;
Charter, Inc., 1992). To inquire about copies, write: Charter, Inc.,
P.O. Box 805, Cambridge, MA [22140.]22140.

[2] Robert A.G. Monks and Nell Minow, POWER AND ACCOUNTABILITY (N.Y.:
HarperCollins, 1991).

Descriptor terms: corporations; corporate charters; shareholders;
labor; corporate accountablity;