TheHistory and Purpose of the Modern Corporation
Acorporation can either be a sole proprietorship, partnership, LimitedLiability Company or a private company. A corporation is alsoreferred to as a company or a limited company. Inthe1870s,individuals or group of people ran most businesses in America. Therewas a lot of revolution in America around the 19thcentury, from the time of civil war to the present, concerning theway people manage and run their businesses. Out of the various formsof business entities such as sole proprietorships and partnerships,the company always stood out due to its various advantages over theother two forms of businesses [ CITATION Mar04 p 392 l 1033 ].
Corporations became America’s economic key institutions that contributed in therapid development of the country (Coase 398). Though, it was observedas dangerous and only legitimate in specific businesses, it broughtsome changes and benefit to the country as a whole. There aredifferent reasons that led to the formation of corporations, whichbrought about several advantages, disadvantages, and impact on thedemocratic society of United States of America. While corporationshave a limited liability characteristic that expose the shareholdersand other investors to financial risk associated with the loss oftheir investment and in case a corporation is unable to pay itsdebts, the shareholders cannot be called upon to pay the debtsbecause the corporation is considered to be a separate legal personfrom its owners and renders the owners immunity against anywrongdoings, both illegal and criminal acts, Corporations arebeneficial and extremely relevant in the modern day businessenvironment and for economic development because it is easier for acorporation to raise capital compared to the other forms of businessentities through the issue of share capital as well as access debtcapital from the borrowing institutions since they have assets thatcan be used as loan collateral, in addition, it has the right totransfer shares freely therefore shareholders can easily dispose theshares in a corporation at any time depending on the marketconditions, and most importantly the limited liability clause in thatthe shareholders or owners of the business are not legallyresponsible for the debts of a corporation. Inthis paper, my discussion follows that corporations have a two-wayperspective. They reflect both advantages and disadvantages in termsof their operations alongside with the consequences that they pose todemocracy on the society. However, my conclusion ends by theassumption that these corporations are more of a disadvantage to thesociety, especially the North American society.
The emergence and history ofModern Corporation datesback to 200 years. The Dutch East India Company (VOC) is consideredto be the first modern corporation. Its charter,VereenigdeOost-Indische Compagnie datesback to 1602. However, the charter did not include all the legalpersonality features of a corporation [CITATION Gil01 p 329-357 l 1033 ].The British East IndiaCompany (EIC) and Dutch East India Company (VOC) contributedsignificantly to the growth of the modern corporations. In the 1870s,venture capitalists or some financial institutions financed manybusinesses such as sole proprietors or partnerships. Since duringthis era there were no big venture capitalists or large financialinstitutions such as banks that issue ready capital, prosperity wasonly for the lucky few who were born into wealthy families. Also, ifdebtors were unable to pay a debt, it was transferable to the otherfamily members or relatives. To add on in worse case scenarios, itled to the incarceration of relatives or family members, on behalf ofthe accused individual who failed to pay the debt.
Inthe mid-19th century, venture capitalists and financial institutionsfeared to invest in various businesses because the shares of thebusinesses were not transferable to the public since there werestrict rules once a person joined, regardless of whether the companywas poorly performing and the investor would prefer to invest inother profitable or high prospect businesses. However, in the lastyears of the19th century there were major transformations on theoperations and structures of businesses in America. There was theneed for businesses that the owners and the business were twoseparate entities, thereby the members or management was not liablefor the debts of the business. This moved encouraged numerousfinanciers to delve into investing in these corporations since theyknew their investment was to a large extent secure.
Variousreasons led to the emergence of modern corporations. To begin with,Modern Corporations were introduced to solve the problem of havingthe same people owning and managing the businesses. Early businessesonly employed a few people, but the owners themselves were in chargeof overseeing all the operations of the business. However, theformation of Modern Corporation led to business management done byqualified professional [ CITATION Wil81 p 1546 l 1033 ].
Theneed for honesty in a distant branch created the necessity for ModernCorporations. However, as big business continued to grow there was aneed for the use of bureaucratic hierarchies since the success of thebusiness relied on a centralized coordination. To be able to achievethese big businesses formed formal administrative businessstructures. There was the establishment of different manageriallevels. There was also the creation of understandably outlinedauthorities. There was formal use of rules to assist in thegovernance of the corporation operations. These helped in thecreation of “middleclass” level for corporation’s white-collaremployees, this was different from the tradition middle-class levelthat involved independent professionals, farmers, and shopkeepers [CITATION Wil81 p 1537-1568 l 1033 ].
Mostof the earlier business transactions were done within one localityfor example a town, and from a single factory or office. Therefore,town residents were their main customers. However, there was the needfor growth of businesses to other localities hence the formation ofnew corporation business in geographical scale and size. This meantthat their transactions were scattered widely indifferent locations.
Mostof the early businesses specialized in a single kind of businessoperations for example if someone was a merchant, manufacturer orwholesaler they would only handle that particular field or productthat they have. However, with the introduction of the ModernCorporation businesses were involved in several kinds of businessoperations. For example, the operations of a USA steel company wasmining from the ground their own ore, then take it to its mill,process it to steel, then to any desired finished product, and thentransport the finished products to wholesalers.
In conclusion, the thesis will besupported by the fact that these corporations have severaldisadvantages and how they have changed the lives of North Americansfor worse. One of the major disadvantage comes in terms of theirlimited liability characteristics that expose the shareholders andother investors to financial risk associated with the loss of theirinvestment. In case a corporation is unable to pay its debts, theshareholders cannot be called upon to pay the debts because thecorporation is considered to be a separate legal person from itsowners. However, the investments made by the shareholders will belost if the corporation is liquidated. A corporation is considered tobe an “invisible friend” capable of owning property. The legalstatus of a corporation renders the owners immunity against anywrongdoings, both illegal and criminal acts. Corporations lead to thecreation of “legally irresponsible profit-maximizers” (Grant927). The owners have no concern on how the corporation generatesprofits.
Theright to transfer shares freely can be abused by persons intending totake over the corporation. Theshareholders may threaten the corporation with a forced take over toa competitor corporation through transfer of shares to thecompetitor.
Agencytheory is a main disadvantage of corporations.Public companies practice stewardship accounting. In stewardshipaccounting, the shareholders provide resources to an organization.The management of the public company should invest in projects thatare going to maximize on shareholders’ wealth. The separation ofownership and management may create conflict between the shareholdersand the management. The management may undertake unprofitableinvestments. The management may also indulge in fraudulent practicessuch as altering the financial statements to conceal errors andfrauds.
EnronCorporation, for example, was the sixth largest energy company in theworld. However, the company collapsed as a result of fraudulentactivities by the top executives. The corporation’s earnings hadbeen overstated. The top executive disposed their investments inEnron before its downfall. Most of the top executives were jailedafter the investigations [ CITATION Mar02 p 4 l 1033 ].
The corporate form of business hadvarious impacts to the democratic society. A democratic society aimsat ensuring equal rights, freedom of speech and tolerance views ofthe minorities. The emergence of corporations can be engines ofpositive change or negative change in the democratic society. Theeffect can be on general populations through advertising in themainstream media, on public policy and government and internationalinstitutions. Corporations have major influences on our lives. Out ofthe 100 largest economies, for example, 51 are corporations and 49are countries [ CITATION Anu02 l 1033 ].
Theemergence of corporations has led to the “corporate libertarianism”where the rights and freedoms of the corporations were above those ofindividuals. Corporations are prone to evildoing to the democraticsociety. The cases of McDonald, AH Robins, and British AmericanTobacco explains some of the evils committed against the democraticsociety. Corporations promote criminal behavior amongst thedemocratic society. As discussed, the corporate owners will indulgein any activity at the expense of human life so as to make profit.The corporation can be viewed as a source of evil. In most cases, thelaw provides for penalizing the offenders without criminalizing them.The wealth owners of the corporations hide behind the corporate veil.
Thecorporate form has led to wealth-owners having a strong influence inthe state affairs regardless of their impacts on the ordinary citizen[CITATION HJG02 p 90 l 1033 ].Thecorporate form has had an impact on the cultural, physical andpolitical environments across the globe. Thecorporations have claimed the individuals` human right of freespeech.Before the 1886 ruling, corporations were not allowed to give moneyto either the politicians or political parties. The corporationscouldn’t influence elections.
However,after the ruling, corporations took control of the political partiesand financed politicians. Corporations have more rights than commonmasses. The increasing size and wealth of the corporations have asignificant influence on the economic and political power denying thepublic the privilege they had before. In most cases, the ordinarycitizens normally enjoy the economic policies that are favored by thecorporations [ CITATION Kay57 p 316 l 1033 ].Thereforecorporations are bad because their legal protections, politicalinfluence and wealth accretion have exceeded those availableto citizens. Also, the corporations have grabbed citizens’ contractwith their nominated legislatures so the government mainly serve theinterests of the corporate rather than those of the people.
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