More on owning the corporation

Josh Fersee continues the discussion of whether shareholder own the corporation with this observation:

I view shareholders as having “an ownership interest” in the corporation, an interest that is, I admit, often quite limited. I think comparing shareholders to those who own homes (or condos) with a restrictive homeowners’ association (HOA) as an apt analogy. When owning a home governed by an HOA, the homeowner gives up a number of rights often attributed to ownership — such as limits on exterior modifications or choice of color. However, just because those rights (and the related decision-making ability) were ceded to the HOA board, we don’t tend to think that means there is a lack of ownership.

Well, yes, but. A home is a thing. It is capable of being owned. But when we speak of the corporation, what is the res; i.e., the thing capable of being owned? I contend that there is no such thing:

In order for shareholders to own the corporation, the corporation would have to be a thing capable of being owned. It is not. The corporation is just a legal fiction, albeit a highly useful one, for the nexus of explicit and implicit contracts between a wide array of stakeholders, of whom shareholders are but one among many. [FN8] Employees provide labor. Creditors provide debt capital. Shareholders initially provide equity capital and subsequently bear the risk of losses and monitor the performance of management. Management monitors the performance of employees and coordinates the activities of all the firm's inputs. The corporation is a legal fiction representing the complex set of contractual relationships between these inputs.

[To be sure,] traditionalists reify the corporation: They treat the firm as an entity separate from its various constituents. Nexus of contracts theory rejects this basic proposition. Because shareholders are simply one of the many stakeholders bound together by this web of voluntary agreements, ownership is not a meaningful concept in contractarian theory. Someone owns each input, but no one owns the totality. Instead, the corporation is an aggregation of people bound together by a complex web of contractual relationships. (The validity of this insight becomes apparent when one recognizes that buying a few shares of IBM stock does not entitle me to trespass on IBM's property--I do not own the land or even have any ownership-like right to enter.)

Comments

[David Welker]

What about intellectual property? Is it owned?

What about the conception of ownership itself. Isn't that a legal fiction? Isn't it the case that something you "own" is not physically attached to you, but rather is a psychological attached to you in a way that is recognized and respected by society?

If ownership itself is "psychological" rather than "real" why does it matter whether the thing it is attached to is psychological or physical? If intellectual property rights are "intellectual constructs" rather than "physical things" that doesn't tell us much about what rights an individual does or should have in intellectual property, does it?

Further, if someone owns a "bomb" versus a "laptop," we might rationally have different policies with respect to what a person might be able to do with that property, right? So, for example, we might even rationally deprive a person of control of their bomb, even absent evidence of criminal intent or a crime, even though it would generally be an unjust to seize their laptop.

Just because a thing is "physical" that this does not tell us what rights we should allow others to exercise with respect to that thing, does it?

I am genuinely curious. If your argument is that merely saying that the baggage associated with the term "ownership" should not dictate what rights shareholders have in the corporation, I would definitely agree. But, are you going farther and saying that the term should dictate rights in other contexts? That we must treat "ownership" of a bomb exactly like "ownership" of a laptop? Or that we must treat "ownership" of intellectual property exactly like "ownership" of physical property?

It seems to me that your argument that shareholders don't "own" the corporation isn't really getting you anywhere. The issue of whether X "owns" copyright in Y is a separate issue from the precise rights that such ownership implies. I don't think the physicality or not of a thing should necessarily dictate the rights that one may exercise in that thing. Is it really your argument that it should? After all, rights themselves are not physical.

I am not saying that physical attributes are irrelevant. We would be reasonable to treat a bomb differently than a laptop precisely because of differences in the physical attributes of the two things. But, I don't see that something is not physical is a compelling justification for treating it differently from something that is physical, except insofar as you can make a specific connection between specific physical attributes and the rights that should exist in that physical thing. But, shouldn't the real issue be exactly what rights we want to vest in a thing, physical or non-physical, based on its specific attributes, rather than a more generalized distinction based on mere physicality or non-physicality?

I am not seeing that it is really is necessary for your argument to say that shareholders don't "own" the corporation. All you need to say is that ownership has its limits, and those limits vary for different sorts of things. i.e. Ownership of copyright does not give you the right to prevent fair use for artistic purpose, while ownership of physical property usually does give you the right to absolutely exclude someone from using your physical property for artistic purposes if you want to.

What do you gain by saying that shareholders don't "own" the corporation. I agree that people try to attach baggage to the word "ownership." This occurs in the copyright context, when "copyright infringement" is inaccurately said to be theft, as if it were the intentional and permanent physical deprivation of physical objects that another has an ownership right in. Don't get me wrong. Intentional copyright infringement is wrong and it is a crime. But it is more accurately referred to as copyright infringement rather than theft.

I think your real issue is to try to combat the idea that "ownership" implies the exact same bundle of rights in all contexts, rather than argue that shareholders don't "really" own the corporation. Why am I wrong?

[David Welker]

I just wanted to clarify. When I wrote this:

"Ownership of copyright does not give you the right to prevent fair use for artistic purpose, while ownership of physical property usually does give you the right to absolutely exclude someone from using your physical property for artistic purposes if you want to."

I should have been more clear.

I mean "using" in the sense of taking exclusive physical control. Obviously, if are out in public and someone takes a photo that happens to include your shirt, you can't prevent the publication of that photo for artistic purposes based on your physical ownership of the shirt. The artist may be said to "using" your shirt in some sense, but he isn't taking exclusive physical control of it.

[tomhynes]

Even if you bought 100% of IBM's stock, you would not have the right to trespass on IBM property without permission of management. You can eventually replace the board and then management, but they can keep you out for a year or two.

[brewitt]

My only concern with not describing stock as property is that it seems the so called progressive corporate scholars are moving toward multi-fiduciary regimes that seem to give property-like rights to various constituencies. For example, Greenfield wants to force division corporate profits "fairly" and distribute it to the workers and force workers to be adequately represented on the board of directors. It seems like it is the progressive strategy to peck away at the existing system and the first step would be to say that stock is not property. This becomes the beginning premise.

To concede that stock is not property, doesn't it concede an argument to the progressives? The nexus of contracts makes sense, but if you enter into a contract aren't you disposing of your soverign right to that property?