Original sins: incorporation

corporate (adj.): early 15c., "united in one body, constituted as a legal corporation," as a number of individuals empowered to do business as an individual, in early use often of municipalities, from Latin corporatus, past participle of corporare "make or fashion into a body, furnish with a body," also "to make into a corpse, kill" -

https://www.etymonline.com/

When Kate and I started this exploration it didn’t take us long to wonder if perhaps we should look back to the origins of the corporation to see if there were some ‘original sins’ that could help explain why organisations are universally weird.

We identified three fundamental elements of the modern company that we think bear closer inspection; incorporation, limited liability and legal personhood.

Over the next three posts we will be exploring them, starting with incorporation.

Incorporation is essentially a charter granted by the state to a group of individuals which enables them to gather private funds for a specific purpose. It allows them to pool resources to achieve shared goals that would be unattainable by a person acting alone, and to collectively undertake tasks that might take longer than an individual’s lifetime.

Up until the 16-17th centuries corporations were created in Europe as not-for-profit entities chartered to perform specific domestic public functions such as building hospitals, universities, bridges and canals. Their charters typically lasted between 10 and 40 years, requiring the termination of the corporation on completion of its task, setting limits on commercial interests, and prohibiting any corporate participation in the political process. So the origins of the modern corporation were that they were a heavily regulated privilege granted by the state to deliver a ‘public good’. 

So far so benign …. 

In the 1600s all that changed when the British Crown began granting trading monopolies to groups of investors willing to develop new trades in goods that were sourced from overseas. These monopolies took the form of “joint-stock” companies; businesses owned by their investors, with each investor owning a share of the company based on the amount that they've invested. Crucially investors were able to sell their shares, enabling ownership to change hands with limited impact on the underlying business, and making the investor’s interest primarily about financial return rather than any wider purpose, or even interest in the workings of the company. 

The infamous East India Company was granted a Royal Charter in 1600. It expanded into a vast enterprise, conquering India with its own army, a total monopoly on trade and all the territorial powers of a government. Oppression, exploitation and corruption under the colonial capitalists led to the Indian Rebellion of 1857 after which Britain reined in the Company, dissolving its territorial power and making India the responsibility of the British Crown. But capitalists are gonna capitalist and the Company continued trading opium to China, leading to the Opium Wars of the 19th century. Other notable “joint-stock” companies included the Virginia Company, which was instrumental in British control of North America, the growth of plantation capitalism and the Atlantic slave trade, and the and the Royal African Company which was granted a monopoly on the slave trade between Africa and the West Indies.

Today we recognise the role of the joint stock companies in the exploitation and oppression of whole continents and people’s by force, violence, displacement, and enslavement. However from the perspective of the British state at the time they were still delivering domestic ‘public goods’ in terms of material goods, trade, employment and economic growth. 

Throughout the 1800s things began to shift away from this relationship between incorporation, state charter, and the delivery of ‘public goods’. An 1844 Act allowed corporations to define their own purpose. The power to control them passed from the government to the courts, the link between incorporation and social purpose was broken, and the legal framework for the modern corporation was born. 

A key aspect of incorporation is that it separates the ownership of the company by its investors from its management. The breaking of the social purpose of the corporation meant that the sole purpose became one of providing a financial return to those owners, something made explicit by a US court ruling against Ford Motors in 1919. Henry Ford has stopped paying dividends to investors “to employ still more men, to spread the benefits of this industrial system to the greatest possible number, [and] to help them build up their lives and their homes.” The court held that the profits of a corporation could not be withheld from stockholders for the benefit of the general public and that a dividend must be reinstated. 

As someone who set up a social purpose organisation that operates within this corporate legal framework and within a capitalist context, I’m interested in this because I can see the value of the corporate form. 

I think it is important that we understand the harms that it has enabled and continues to cause, but also to understand that it was originally a privilege under the control and regulation of the state and that it was designed to deliver public benefit - although whether it did so very much depended on which public you were part of. 

I also think it is interesting that whilst incorporation was explicitly about enabling the undertaking of long term projects corporations were also often time limited entities.

In the world we currently live in, the capitalist view is that incorporation is a right, the purpose can only be to deliver shareholder value, the state should get out of the way, and that they should last forever if they are able to. The idea of a joint enterprise sharing risk and reward to deliver a defined public good has been lost. Even in the social sector the idea that a funder is a partner in the delivery of shared purpose seems remote.

I also think it is important to recognise that this is an ever changing relationship, one with a history of regulation, deregulation, and corporate overreach leading to social turmoil and correction. Whilst the nature and purpose and regulation of the corporate form has changed over time, I find it useful to understand that its origins were in the delivery of public goods and believe that we can change it again. Perhaps the first steps in such a change are to restore the link to social purpose, and the recognition that incorporation is a privilege granted for the delivery of that purpose and not a right to enable a financial return.

Next week Kate will be exploring the concept of limited liability, and after that I’ll be back to delve into the weirdness that is legal personhood. Join us!


If you have experience of incorporation - or any other organisational weirdness - you’d like us to include in our forthcoming podcast, please drop us a voicenote here. We’d love to hear from you!