No one can deny that we live in an era with many social issues and ills, not least of which is wealth inequality and the adverse social and economic problems that flow from it. But can those of us who toil in the corporate law and governance do much to solve those problems.
But first we have to identify the problem.
Is the Problem that Corporations are Fundamentally Undemocratic?
Some commentators contend that corporations and corporate wealth benefit a narrow slice at the top of society and that the benefits of the corporate form need to be more widely available?
But share ownership is already broadly distributed: Since 2009, an average of 55% of Americans annually reported owning stock. Although only about 15% directly hold stocks, mutual funds and ETFs have democratized investing. As a result, today, American families hold an average of $40,000 worth of stocks. His hypothetical financial intermediaries already exist in the form of ESOPs and 401(k)s.
Moreover, access to the corporate form is widely and easily available to impecunious entrepreneurs. In most states today, it is possible to form a corporation with no requirement for a minimum amount of capital, using low cost forms widely available from online vendors, and with payment of a modest franchise tax. The problem thus is not that we need to “extend to all people the competitive market opportunity to acquire an interest in corporate capital acquisition with the future earnings of that capital in amounts that are not limited in proportion to their (meager or negative) existing wealth.”
The inequality of which Professor Ashford writes exists not because of the corporate form and what he repeatedly refers to as its legislated advantages. In preparing its annual billionaires list, Forbes gives each member of the list a self-made score from 1 to 10, with scores of 6 and higher going to those who built their business on their own without inherited wealth.
Well over half (238) of the top 400 billionaires scored 8 or higher. The top three Americans on the most recent list—Jeff Bezos, Mark Zuckerberg, and Elon Musk—all scored 8. I would argue that part of what enabled these folks to start from more or less nothing and achieve great wealth was the ready availability of the corporate form.
Is the Problem that the Corporate Form is Unfit for Purpose?
Instructively, the corporate form historically has been embraced—albeit sometimes grudgingly—by populists.
During the early 1800s Massachusetts corporations did not get the benefit of limited liability but Maine and New Hampshire corporations did. In Massachusetts a public debate over limited liability broke out during the 1820s, in which “Jacksonian liberals” contended that capital was fleeing Massachusetts for those neighboring states.
Moving forward, populists of the late 1800s and early to mid-1900s tended to focus on abuses of the corporate form rather than the corporate form itself. To be sure, some populists were simply doubtful of the corporation’s fitness for purpose, disputing its utility as a way of organizing production. In time, however, most populists came to recognize that the problem was not the corporate form as such because they recognized that even locally owned and operated business could advantageously use the corporate form.
What is the Problem of the Corporation?
If there is problem with “the corporation” today, it is not with that there is some intrinsic flaw with the form itself. It is not with the legal rules that require boards and officers to maximize shareholder value.
Instead, the populists correctly identified that problem: Size.
Size and the resulting potential for concentrated economic power are the chief recurring themes in the populist critique of the corporation. Late nineteenth century populists thought that the growing power of corporations was a significant threat to their economic and even political liberty. The Southern Agrarians likewise believed, as Lyle Lanier observed, that “the corporate form of our economic system makes possible a scale of exploitation unheard of in history.” They argued that workers toiled under dehumanizing conditions. The Southern Agrarians further believed that the concentration of economic power in large corporations had created “a plutocratic corporate capitalist class” that effectively ruled the country and thus stood ready to fully exploit their power over farmers and workers.
Size is not something corporate governance can do much, if anything about. Neither shareholder nor stakeholder capitalism addresses size and power issues in any meaningful or useful sense; nor, it seems to me, does inclusive capitalism.
