The Vanishing American Corporation

Navigating the Hazards of a New Economy

Gerald F. Davis

• Publisher: Berrett-Koehler Publishers
• Year: 2016
• ISBN:
  9781626562813
• Edition: 1
• Topic: Economics
• Subtopic: Economic History
• Index: Economics

It may be hard to believe in an era of Walmart, Citizens United, and the Koch brothers, but corporations are on the decline. The number of American companies listed on the stock market dropped by half between 1996 and 2012. In recent years we've seen some of the most storied corporations go bankrupt (General Motors, Chrysler, Eastman Kodak) or disappear entirely (Bethlehem Steel, Lehman Brothers, Borders). Gerald Davis argues this is a root cause of the income inequality and social instability we face today. Corporations were once an integral part of building the middle class. He points out that in their heyday they offered millions of people lifetime employment, a stable career path, health insurance, and retirement pensions. They were like small private welfare states. The businesses that are replacing them will not fill the same role. For one thing, they employ far fewer people—the combined global workforces of Facebook, Yelp, Zynga, LinkedIn, Zillow, Tableau, Zulily, and Box are smaller than the number of people who lost their jobs when Circuit City was liquidated in 2009. And in the "sharing economy, " companies have no obligation to most of the people who work for them—at the end of 2014 Uber had over 160, 000 "driver-partners" in the United States but recognized only about 2, 000 people as actual employees.Davis tracks the rise of the large American corporation and the economic, social, and technological developments that have led to its decline. The future could see either increasing economic polarization, as careers turn into jobs and jobs turn into tasks, or a more democratic economy built from the grass roots. It's up to us.

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 children’s 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 generations—even the names of the months and the units of measure—were 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 “corporate” as a synonym for “business,” 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 “CORPORATION” 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 world’s 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 “corporations are people, my friend,” he expressed the sense that corporations are simply a group of people—sometimes very large—trying 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 “personality,” 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 corporation’s owners or managers. If the company goes bust, lenders can’t show up at the shareholders’ 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 “sign” 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 corporation’s 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 corporation—in this case, Dartmouth College and the sanctity of its contracts.⁴ A change in personnel does not automatically mean a change in the corporation’s 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 “virtual Liberia”: 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 “corporations” at all. After it was sold by Daimler, automaker Chrysler—with $50 billion in revenues and 72,000 employees—was an LLC, not an Inc. An LLC is a “limited liability company,” 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 “uncorporations” 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 “corporation” and an “LLC” 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 “conflict minerals” 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 “public corporations,” 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 “owned by the broad public” (like a national park) but “having ownership shares traded on stock markets.” It is “public” in the sense that the public can buy and sell shares (in contrast to, say, a partnership or family-owned company). When companies “go public” or make an “initial public offering” (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.

“Corporation” and “business” are not the same thing

IN EVERYDAY USAGE, “corporate” 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 McDonald’s 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 “gone corporate,” 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. “Corporate” is the antonym of “indie” or “alt.”

But it is worth being precise when talking about corporations. When commentators worry about “corporate money” 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 Industries—the source of their wealth—is 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 England’s 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, “breakfast” seems to mean wildly different things around the world. Calling a meal “breakfast” 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 world’s 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 world’s largest corporations. Yet in the US, a corporate board typically contains roughly 10 members—the Chief Executive Officer, Chief Financial Officer, and eight unaffiliated outsiders. For instance, GM’s 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 China’s Geely Automotive board includes eight executive and six nonexecutive directors.¹³

In short, even among the world’s 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...