What is a Corporation?

By Norm Robins

In some quarters, capitalism is in bad odor. In others, it is not. The poster boy for capitalism is the corporation. What is a corporation or more specifically a joint-stock limited liability corporation? This does not include the non-profit corporation. It is owned by its shareholders. Typically, shares of ownership are bought and sold on public exchanges, the New York Stock Exchange (NYSE), the NASDAQ, or the London Stock Exchange (LSE) for example.

To understand a corporation more clearly it helps to go back into history and understand the corporation’s provenance. The history of the corporation can be traced back to ancient Rome and to ancient India, but for simplicity’s sake let’s start with the corporation’s opportunities in the ocean born traffic of the 17th Century. Let’s go back to Portugal, Holland, and England and look at why the corporation sprung into being, what it attempted to accomplish, and how.

Before refrigeration, food was preserved in salt, vinegar, or spices. The camel caravans had a lock on some of that trade. This made that trade expensive, dangerous, and subject to the whims of every potentate through whose territory the trade passed. Prince Henry the Navigator of Portugal found a way to end run those caravans and bring goods back to Europe in ships more efficiently and more safely. He was so successful the Dutch and then the British followed later to be joined by the Germans, Russians, and Japanese. Sea-born traffic took off.

Prince Henry had to solve a dangerous problem, but he had before him an enticing opportunity. The Cape of Good Hope, correctly named but mistaken for Cape Agulhas, at the southern tip of Africa was where the warm-water Agulhas current from the Indian Ocean met and mixed with the cold-water Benguela current from Antarctica and wrought havoc on the mariners who tried to navigate through it.

The opportunity came with the monsoon winds. These blow from the land to the sea in winter and then reverse directions in summer. They do so reliably each year. Thus, a ship could set sail from Europe and if it could successfully clear the southern tip of Africa and make it to the Indian Ocean it would have clear sailing east for the better part of half a year, and it could return in the better part of the other half year, reliably.

In the 17th Century, European manufactures could be traded for Indian tea, pepper from Indonesia’s spice islands (the Moluccas), Malay and Indonesian tin, and Chinese silk. But how to engage in this trade? No one person had the capital, the financial heft to finance such an adventure, as it was called then. It needed an expensive ship, a skilled captain and crew, provisions for the ship and an inventory to be traded.

But venture (or adventure) capital could be pooled into corporations, a word that derives from the Latin corpus, or body. Adventurers could pool their capital into a profit-making adventure (or venture) and distribute profits according to the share of capital owned. They needed one more thing. They needed their liability to be limited to the capital they put into the adventure. The adventurers, like the stock market investors of today, would only put their capital at risk if that capital at risk were limited to what they wanted to put in.

Corporations were formed under charter from the ruling authority. Capital was assembled, deployed, and off the adventurers sailed into the rising sun to profit and, with luck and a reliable wind in their sails, into the creation of more capital.

Corporations were recognized as persons and entitled to essentially the same rights. And why not? In the U.S. a visiting student, for example, has the protection of the law. He and the corporation can speak freely, spend money, buy, sell, sue, and be sued. But neither the student nor the corporation can vote. In the contemplation of the law both are persons but not citizens.

How does one legally—and ethically—become a stakeholder in such a venture? Then or now he does so by purchasing a stake in it. Centuries ago, he did so in an Amsterdam or a London coffee house. Today he does so at the NYSE, NASDAQ, or LSE.

The modern corporation has a board of directors at its top. They are responsible for protecting the interests of the owners. They hire an executive team, CEO, CFO, and so forth, who operate the business for the benefit of the owners. If the executive team fails in its duty to care for the interests of the owners, the board will replace them. If one wants to become a stake holder or stop being a stakeholder all he has to do is buy or sell shares.

What are the benefits to society of the corporation? The corporation can handle capital best. It can accumulate it, and it can deploy it. In contradistinction to the sole proprietor who retires at age 65, corporations don’t. In theory they have unlimited life. They can raise or borrow more capital as long as investors and creditors are convinced the corporation can use it productively. If more capital is raised more workers must be hired to use the capital. The profit from this increased productivity is split between the workers and the owners of that capital. Traditionally more has gone to workers than to capital owners. The best wages are paid to those who use a lot of capital in the production process, that is, by big corporations with a lot of capital. It is an old saying that the best friend of the worker is the capitalist and for this reason.

After the Civil War the U.S., having industrialized, was ready to burst out of its east of the Mississippi confines. It took a lot of capital to do that. That capital was not here in the United States, but the United Kingdom had an abundance of it looking for a home where it could be used. American corporations showed that they could deploy the capital productively, so the holders of capital were more than glad to invest it in opening up the West. The West was “won” with British capital and American ingenuity and derring-do.

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