PART I
THE CORPORATE CENTURY IN AMERICA CHAPTER 1
CORPORATIONS IN AMERICA AND AROUND THE WORLD
WE LIVE OUR lives surrounded by corporations and their products. At home, at work, in public places, we see their brands (Coca-Cola), eat their food (McDonalds), use their products (Apple), track their share prices, and use their names as verbs (Google, Xerox). It seems that corporations rule the world.
This book makes a surprising claim: Corporations are in decline, and are reaching the end of their reign in the United States. This is surprising for many reasons. Public corporations (those that sell shares on the stock market) have been the most important institutions in the American economy for more than a century.1 Corporations are the biggest employers and produce the biggest part of our economic output. Most American households own shares in American corporations, and many depend on these investments to fund their retirement and their childrenâs college expenses.2 Corporations are also deeply involved in the American political system, using their economic power to promote policies that favor their interests. Love them or hate them, public corporations seem indispensable.
We tend to think of corporations as a permanent part of the landscape, like a mountain range that has always been there. But corporations are more like the palace at Versailles where King Louis held court. The monarchy in France seemed eternal, endowed by God with the authority to rule. Yet over the course of a few months during the French Revolution, the monarchy and its associated institutions fell. Things that had been taken for granted for generationsâeven the names of the months and the units of measureâwere up for grabs.
I argue in this book that we are in a situation like that now. Corporations in many domains have outlived their usefulness, and their decline will bring about major shifts in American life, from how we earn a living to how we get health care to whether we can afford to retire.
This chapter provides the background for the rest of the book by explaining what a corporation is, why it looks different in different countries, and why they are changing. Although many people think of âcorporateâ as a synonym for âbusiness,â the corporation is a very specific way of doing business, and the public corporation is a special type of corporation. We want to be clear on our terms before we dive in too far.
What is a corporation?
THE WORD âCORPORATIONâ calls to mind images of hierarchy, money, and power. If asked to draw a corporation, many people would sketch an organization chart shaped like a steeply pitched pyramid. At the apex would be a middle-aged white guy with a thick head of hair, clad in an expensive suit, looking something like Alec Baldwin without the smirk.
For Americans, General Motors in its heyday might serve as an appropriate stand-in for the corporation. At its peak GM had nearly a million employees, from the vast unionized workforce operating its countless factories to an enormous white-collar office staff occupying its headquarters tower in Detroit. GM was the worldâs largest manufacturer, with outposts around the world making cars around the clock. When the first Fortune 500 list was published in 1955, GM was at the top. In Modern Times, Charlie Chaplin provided an indelible image of the industrial worker at a company like GM, trapped in the gears of the corporation both physically and metaphorically.
Most of us think of the corporation as a specific kind of organization. When presidential candidate Mitt Romney told a heckler that âcorporations are people, my friend,â he expressed the sense that corporations are simply a group of peopleâsometimes very largeâtrying to do business together.3
If you ask a lawyer, however, you will learn that a corporation is simply a legal device with a few features that are useful for contracts and financing. Corporations generally have limited liability, legal âpersonality,â and unlimited lifespan. Limited liability means that when people do business with a corporation, such as lending it money, they understand that it is the corporation as an entity that owes them money, not the corporationâs owners or managers. If the company goes bust, lenders canât show up at the shareholdersâ houses and start carting away their furniture. However, limited liability does not mean that corporations or their owners and employees are not legally liable for their actions. An executive who commits a crime in the name of the corporation is still a criminal.
Legal personality means that the corporation can âsignâ contracts and own things, just like a person. The corporation is not just a group of people, but has its own peculiar existence separate from them. Legal personality does not mean that corporations have rights identical to actual human beings.
Unlimited lifespan means that corporations can be maintained by different people and can last indefinitely. All of a corporationâs employees and shareholders can change, but it is still the same corporation.
Corporations are useful for many purposes, not just business. Nonprofit organizations and municipalities are often legally organized as corporations. One of the most famous legal cases in history, Trustees of Dartmouth College v. Woodward, decided by the US Supreme Court in 1819, laid out the legal status of the corporationâin this case, Dartmouth College and the sanctity of its contracts.4 A change in personnel does not automatically mean a change in the corporationâs status or contractual obligations.
Corporations differ from other kinds of organizations and legal entities in important ways. The things that distinguish corporations determine very practical matters, such as who or what pays the taxes and who/what is financially liable or is being lent to.
In spite of their special legal status, corporations are easy to create and destroy. You can create a corporation right now by visiting the Liberian Corporate Registry at the website http://liberiancorporations.com/corporate-entities/corporation/forms/. You would not be alone in âvirtual Liberiaâ: Miami-based Royal Caribbean Cruises is incorporated in Liberia, as are a number of other companies that reside physically in America, which find substantial tax advantages in maintaining Liberian citizenship.5
Some big businesses are not âcorporationsâ at all. After it was sold by Daimler, automaker Chryslerâwith $50 billion in revenues and 72,000 employeesâwas an LLC, not an Inc. An LLC is a âlimited liability company,â which is a sort of legal mash-up between a corporation and a partnership. The LLC has grown to be perhaps the most widely used legal form of business organization in the US (and can be owned by parent corporations, such as Amazon Services, LLC, owned by Amazon.com, Inc.). The late legal scholar Larry Ribstein labeled the LLC and other formats âuncorporationsâ to distinguish them from traditional corporations and partnerships. LLCs are typically cheaper to establish than a corporation (in some states as low as $50), highly flexible, and have certain tax advantages, as well as offering limited liability to their owners.
The distinction between a âcorporationâ and an âLLCâ or other legal form may seem trivial, but there are good reasons why LLCs have become so popular and corporations are in decline. One is regulation: When Congress wants business to behave, it often does so by passing securities laws that are only relevant for corporations listed on the stock market. The Foreign Corrupt Practices Act (aimed at preventing companies from paying bribes) and the Dodd-Frank Act (which requires companies to disclose if their products contain âconflict mineralsâ that could fund atrocities in the Democratic Republic of Congo) are examples that apply to listed corporations but not (in general) to LLCs. Although we will not focus on LLCs in this book, their popularity makes it clear that there are a lot of legal formats for business that are not corporations.6
The corporations that we will be concerned with in this book are âpublic corporations,â the biggest and most visible form of organization. Most of the companies that people call to mind when they think of business are public corporations: GM, Apple, Walmart, Exxon, Coca-Cola. Public is a slightly confusing term here, because it does not mean âowned by the broad publicâ (like a national park) but âhaving ownership shares traded on stock markets.â It is âpublicâ in the sense that the public can buy and sell shares (in contrast to, say, a partnership or family-owned company). When companies âgo publicâ or make an âinitial public offeringâ (IPO), they are making shares available for purchase on a stock market. At this point, if they are American companies, they are almost inevitably organized as corporations under the laws of one of the 50 states (usually Delaware, for reasons to be explained later).
For almost the entire 20th century, public corporations such as AT&T and General Motors controlled the bulk of economic activity in America. The decline of these corporations is the topic of this book.
âCorporationâ and âbusinessâ are not the same thing
IN EVERYDAY USAGE, âcorporateâ often refers to anything having to do with business, finance, or money. Almost any business larger than a mom-and-pop store will be regarded as corporate, even if (as in the case of most McDonaldâs outlets in the US) it is a partnership, family-owned business, or other form.7 Perhaps due to the widespread corporatization of the economy for much of the 20th century, commerce is seen as corporate unless proved otherwise.
Corporate is often used as an epithet. When we say someone has âgone corporate,â we mean that they have started wearing a suit, greeting people with a handshake, and nattering on about value added and leveraging and core competences. Music is corporate when it is soulless, slick, and overproduced. âCorporateâ is the antonym of âindieâ or âalt.â
But it is worth being precise when talking about corporations. When commentators worry about âcorporate moneyâ dominating politics, they often mean that wealthy people (and the shadowy organizations that they fund) have too much influence. The Koch Brothers often serve as poster children for corporate influence, even though Koch Industriesâthe source of their wealthâis a privately owned business, not a public corporation.8
Does it really matter if a hedge-fund billionaire gains his or her wealth through an LLC chartered in the Cayman Islands rather than through a Delaware corporation traded on the New York Stock Exchange? The answer is yes. Corporations, particularly those listed on stock markets, really are different in essential ways from other ways of doing business, from how they are funded and taxed to whom they owe obligations and legal responsibilities. This is why Michael Dell and his colleagues were willing to go to great expense to take Dell Computer private (that is, to buy out all its shares and de-list it from the stock market).9 Public corporations face greater scrutiny and more extensive regulation than other kinds of business. Companies that need to undergo substantial restructurings, or want to avoid scrutiny, have reasons to avoid being public. Put another way, it is often easier for the government to shape the actions of public corporations than private companies. This matters for public policy and our ability as a nation to guide corporations to behave themselves.
Corporations look different around the world
HOW IS THE corporation like breakfast? The question sounds cryptic, but consider the range of foods that count as breakfast around the world. In Sweden, it might be smoked fish and dark bread. In Korea, soup and rice. In France, a croissant with preserves. In Israel, fresh salads and fish. In Switzerland, muesli and yogurt. In Canada, pancakes and maple syrup. And Englandâs hapless citizens are forced to eat sausages, eggs, and baked beans first thing in the morning.
Other than being the first meal of the day, âbreakfastâ seems to mean wildly different things around the world. Calling a meal âbreakfastâ provides surprisingly little information about what kind of food will be served, and only slightly more information about when it will be served. The same is true of the corporation. Although we might expect some basic similarities among the worldâs corporations, we would be wrong, as even the most successful industrial economies host quite different kinds of corporations.
Start at the top: What should the board of directors look like? Boards of directors oversee the broad operations of the corporation and are ultimately responsible for its activities and performance. Given the globalization of financial markets, one might expect best practices in corporate governance to be fairly standardized for the worldâs largest corporations. Yet in the US, a corporate board typically contains roughly 10 membersâthe Chief Executive Officer, Chief Financial Officer, and eight unaffiliated outsiders. For instance, GMâs board has only one insider and eleven outsiders, comprised largely of retired CEOs.10 In Japan, a board might have twice as many members as in the US, with a large majority being company insiders. At Toyota 12 of the 15 directors are current or former executives of the company.11 German corporations are legally required to have half of their supervisory board elected by the employees, to ensure that labor is represented in corporate decision making. This is true at Daimler, where 10 of the 20 board members are elected by employees.12 And Chinaâs Geely Automotive board includes eight executive and six nonexecutive directors.13
In short, even among the worldâs four largest and most successful economies, there is no shared standard for how the board of directors should look, even within the same industry. The same is true all the way down: Like breakfast, corporations look very different around the world.
Countries also differ greatly in their number of stock market-listed companies, and even in whether they have corporations at a...