Chapter 13.
“The business of business is not business; it’s the future of life.” — Paul Polman
The Myth and Reality of Corporations
As pervasive entities in the modern world, corporations trace their origins to the collective enterprise and ventures of individuals and groups that have evolved into complex structures. As Yuval Noah Harari discusses in Sapiens: A Brief History of Humankind, corporations can be seen as a kind of useful idea. These entities exist primarily in our collective imagination; we believe in them and act as though they are real, enabling complex forms of cooperation. This shared belief does not make corporations any less real in their effects, as they have a tangible impact on the world.
A corporation is a legal entity that is separate and distinct from its owners. This provides key advantages like limited liability and the ability to exist in perpetuity. Corporations, like all human constructs, must be held to account for their externalities, whether environmental, social or political. The idea that corporations can grow forever ignores the limits of our planet. To address this, we need to limit corporate power, strengthen democratic control and redesign economic systems to be fairer.
The concept of the corporation has ancient origins. In Roman times, groups like religious organisations and municipalities were recognised as legal entities with certain rights and responsibilities. These early corporations, known as universitas, could own property, make contracts and sue or be sued.
Colonialism, Trade and the Rise of Corporate Power
The development of the modern corporation is closely linked to the expansion of trade and colonialism. During the 16th and 17th centuries, royal charters were granted to companies like the British East India Company. These charters gave them monopolies over trade routes and vast territories. These companies were, in effect, extensions of the state, wielding considerable power.
As colonial charters demonstrated the potential and peril of corporate power, the Industrial Revolution supercharged it. It turned corporations into engines of both progress and exploitation. Adam Smith was critical of these early corporations. He argued that they were inefficient and prone to mismanagement. Despite his reservations, the corporate form continued to evolve. This evolution was driven by the need for large scale capital investment in industrialising economies.
The Industrial Revolution Managerial Era
The Industrial Revolution brought about significant changes in business operations. The corporation became the dominant form of business organisation because of its ability to pool resources from many investors.
In the 19th century, general incorporation laws made it easier to form corporations. This facilitated the growth of large scale industrial enterprises like railroads and oil companies. The late 19th and early 20th centuries saw the managerial revolution. As described by Alfred Chandler in his book The Visible Hand: The Managerial Revolution in American Business, professional managers, rather than owner entrepreneurs, came to lead large corporations. They developed new organisational structures and management techniques.
Power, Abuse and the Rise of Regulation
The growth of large corporations also raised concerns about their potential for abusing power. Corporations often took advantage of weak regulations, using unfair practices to strengthen their power while harming workers and smaller businesses. This led governments to respond by passing antitrust laws, labour regulations and other measures to limit corporate power.
David Dayen’s Monopolized: Life in the Age of Corporate Power provides a contemporary analysis of how monopolies have come to dominate various aspects of our lives.
Globalisation and the Multinational Corporation
The 20th century witnessed the further expansion and globalisation of corporations. Multinational corporations (MNCs) emerged to operate across national borders. These corporations have played a major role in the growth of international trade, the spread of technology and the integration of the world economy.
The rise of MNCs has also raised new challenges and concerns. Critics argue that these corporations can exploit differences in labour standards and environmental regulations. This can lead to a race to the bottom. They also contend that MNCs can exert undue influence over governments and international organisations, undermining national sovereignty. John Mikler’s The Political Power of Global Corporations examines how global corporations act as political entities and influence state agendas.
Corporate Wealth and Political Influence
The sheer economic power of some corporations rivals that of nation states. Their revenues often exceed the GDP of many countries. This immense wealth provides corporations with significant influence in the global arena, particularly through lobbying.
Studies have shown a strong correlation between a multinational’s status and increased lobbying expenditures. This influence may not always align with the public interest. It can potentially lead to policies that favour corporate profits over the well-being of citizens.
Corporations and China’s Economic Transformation
The role of corporations in driving economic growth is exemplified by China’s experience following economic liberalisation in the late 1970s. Corporations, both domestic and foreign, played a crucial role in this transformation. They brought in new technologies, capital and management expertise.
This corporate led growth propelled China to become the world’s second largest economy. China’s experience highlights a global contradiction. Corporations are praised for driving economic growth but are also seen as threats to stability. This tension is especially clear in democracies, where weak regulations often fail to control corporate influence. The Chinese Communist Party (CCP) has also demonstrated its willingness to intervene and crack down on corporations when they are perceived to be gaining excessive power. It also acts when corporations behave in ways that could undermine the Party’s control. These actions often reflect the CCP’s concern over maintaining social stability. This complex dynamic highlights the ongoing tension between economic growth driven by corporations and the political imperatives of the ruling party.
The Shareholder vs. Stakeholder Debate
The nature of the corporation has continued to evolve. The rise of the shareholder value concept, popularised by economist Milton Friedman, has emphasised that the primary goal of a corporation is to maximise profits for its shareholders. The shareholder value concept is the belief that a company’s only goal should be to maximise profits for its owners. This has led to increased pressure to focus on short term financial performance.
Joel Bakan’s The Corporation: The Pathological Pursuit of Profit and Power critically examines this nature of the modern corporation. Yet stakeholder capitalism, while promising, often remains aspirational. Stakeholder capitalism is the idea that corporations should serve all groups affected by their actions, not just shareholders. Without binding regulations, even well-intentioned corporations may prioritise shareholder returns when pressed. This reveals the limits of voluntary ethics in a profit-driven system.
The Rise of Stakeholder Capitalism
In response, there has been a growing movement towards stakeholder capitalism. This approach argues that corporations should consider the interests of all stakeholders. This includes employees, customers, suppliers and the communities in which they operate. This approach recognises that corporations are not only accountable to their shareholders. They also have a broader responsibility to contribute to the well-being of society.
Klaus Schwab, the founder and executive chairman of the World Economic Forum, has been a prominent advocate for this approach in his book Stakeholder Capitalism: A Global Economy That Works for Progress, People and Planet. Schwab contends that by considering the needs of all stakeholders, corporations can create more sustainable and inclusive business models. This can lead to greater resilience and shared prosperity.
Stakeholder Capitalism and Resilience
It is important to note that the link between stakeholder capitalism and resilience is complex. Companies that prioritise strong relationships with their stakeholders often foster greater trust. This can be invaluable during challenging times.
A stakeholder focused approach encourages a long term perspective. It allows companies to gain valuable insights into changing market conditions, enhancing their adaptability. This provides a buffer during crises. For example, companies like Mars, Incorporated and Patagonia appear to benefit from enhanced resilience. While other factors also play significant roles, considering the interests of a broad range of stakeholders can contribute to a company’s long term health and ability to navigate challenges.
The Future of Corporate Responsibility
The story of corporations is the story of power. It is about who holds it, who benefits and who pays the price. As with wealth, the concentration of corporate power demands structural change, not just moral appeals. The debate over the role and responsibilities of corporations is likely to continue. As corporations become increasingly powerful in an interconnected world, it is essential to consider how they can be governed and regulated. This will ensure they serve the public interest and contribute to a more just and sustainable society.
If corporations are indeed useful ideas, how can we rewrite their charters to serve not just shareholders, but the societies that grant them life?
Next Chapter: Economics: A Social Science
Bibliography:
Bakan, Joel. The Corporation: The Pathological Pursuit of Profit and Power. Free Press. 2004
Chandler, Alfred D. The Visible Hand: The Managerial Revolution in American Business. Belknap Press. 1977
Dayen, David. Monopolized: Life in the Age of Corporate Power. The New Press. 2020
Harari, Yuval Noah. Sapiens: A Brief History of Humankind. Harper. 2014
Mikler, John. The Political Power of Global Corporations. Polity Press. 2018
Oxfam. Various reports and publications on corporate wealth, inequality, and lobbying.
Peterson Institute for International Economics (PIIE). Various reports and analyses on China’s economic policies and corporate crackdowns.
Schwab, Klaus. Stakeholder Capitalism: A Global Economy That Works for Progress, People and Planet. Currency. 2021
Smith, Adam. The Wealth of Nations. 1776