This Thinkpiece looks at advantages and disadvantages of a certain type of business organization, the Capital Corporation, whose one-dimensional purpose of maximum profit with minimum liability is contrasted with other forms of Business Enterprise where multi-dimensional purposes play a role. Capital Corporations are significant because they are powerful privately-owned institutions that continually shape and reshape society.
What is a Capital Corporation
Capital Corporations are business entities whose prime purpose is to make profit for public shareholders. Business Enterprises, on the other hand, are owned by their founders, managers or private investors: most, but not all, are small and mid-size enterprises, family firms, mutuals, co-operatives, non-profit organizations, social enterprises, community-owned firms, employee-owned trust firms, municipality-owned entities, that have purposes beyond profit.
Capital Corporations are legally separate and distinct from their owners and distanced and disengaged from community and society. Their shareholder owners benefit from dividends and rising stock prices but are not personally liable for misdemeanors or debts of their firm. Corporate managers and shareholders with political influence have perverted the traditional understanding of private property rights by instigating laws that serve their corporations above all else: the limited liability law is the best example.
Governments Created the Capital Corporation with Limited Liability
To correct a common misunderstanding, Capital Corporations did not make the Industrial Revolution. The Industrial Revolution in Britain from 1750 to 1850 was financed privately by partnerships with unlimited liability, before Capital Corporations were granted unrestricted access to Limited Liability by UK government law in 1855.
In fact, a nationwide canal network was built in Britain between 1770 and 1835. This gigantic capital investment, triggering a Canal Mania, was financed by partnerships with each partner taking personal financial liability. At that time, joint-stock Capital Corporations were still virtually illegal. Earlier such forms of business had a history of speculation, deception, corruption and misuse of funds. Adam Smith, a moral philosopher, wrote in Wealth of Nations (1776) that public corporate activity could never be as good as private entrepreneurship, because it put people, strangers, managers, "in charge of other people's money".
Until the mid-19th century, business owners were personally responsible for the debts of their business if it failed. At that time, most British bankers aggressively opposed Corporate Limited Liability as an immoral business method. The moral code until then was that as an honest and respectable businessperson – if you pocket your profits, you pay your debts. However, as more stock-exchanges appeared, so did company promoters who wanted to sell gain without pain. And so, aided by political friends, new unrestricted Limited Liability laws were enacted. The last US state to pass such a law was California in 1931.
Paddy Ireland, University of Bristol, says of the Capital Corporation, "There has long been a tendency to see the corporate legal form as presently constituted as economically determined, as the more or less inevitable product of the demands of advanced technology and economic efficiency … the corporate legal form was, and is, in large part a political construct developed to accommodate and protect the rentier investor.”
Capital Corporations and the Common Good
Capital Corporations are significant because they are social institutions that shape society (people, families, communities). Their behavior is intrinsically amoral, which is why Capital Corporations have low social acceptance worldwide and why their overall contribution to the common good is questioned. There is no scientific proof that major Capital Corporations are of better economic or commercial benefit to society than other forms of business. In fact, there is no scientific proof that Capital Corporations better serve capital investors than other forms of business organization.
Karl Polanyi, Austrian political economist (1886–1964) argued in The Great Transformation that business entities should be embedded in the society and community they operate within. If not, they will likely cause common harm as well as common good.
In a Harvard University interview, Prof. Colin Mayer of the Business School at Oxford University said, “The driving force behind capitalism, profit, has got out of line with what we as individuals, society, and the natural world need.” However, this fault can be fixed if the declared purpose of a business organization is redefined – To solve problems for customers, without creating new problems for others (externalizing costs).
Given that Limited Liability can encourage shareholders and corporate managers to take excessive commercial and financial risks, what could possibly go wrong? Such risk-taking Capital Corporations can go bankrupt and trigger a domino-effect of serial failures, which often happens. Even worse, when risk-taking corporate investment banks and similar collapse the impact is huge (the economic multiplier and accelerator effect). The latest such event was the Financial Crisis of 2008-2009. These economic depressions would not happen if the owners of corporations, including investment banks, were personally liable and corporate managers accountable. They both would, out of legal and financial self-interest, act prudently and not take irresponsible risks for short-term profit and big executive bonuses
The American Impact on Corporate Management and Governance
Ever since the 1970s, American management theories have infiltrated Western corporations. Profit Maximization was one idea that originated in the U.S. and Shareholder Value another that spread worldwide via US business schools and Management Consultants, although now both ideas are derated. According to those creeds, the only rightful purpose of corporate management is maximum wealth extraction for shareholders, with or without wealth creation.
Private Equity Funds (“Pure” Capital Corporations)
Today money is increasingly invested in Private Equity firms (pseudo-private), which are essentially capital holding firms. These Private Equity firms are, in both monetary value and commercial influence, much more powerful than traditional Capital Corporations, and are the true hidden masters of the economy. Their chosen ‘private’ legal form means they can avoid certain societal regulations, auditing rules, public transparency, and so on, unlike traditional public-listed Capital Corporations. In 2020, there were 5,000 Private Equity corporations in the U.S. and 18,000 Private Equity-backed firms. In July 2024, the largest of these equity fund corporations, Blackstone, announced it had over $1 trillion in assets under management. And yet, as Alexander Lundqvist concluded in a CFA Institute Research Foundation 2024 report on Private Equity funds, “Even if Private Equity funds create value for their investors this need not imply that Private Equity funds create social value for the economy.”
Capital Corporations can build Corporate-State Complexes
Many transnational corporations are bigger than most national economies, and more powerful than most national governments. Martin Wolf, chief commentator, Financial Times, wrote “Given their scale, the notion of corporations as price-takers is absurd. … corporations are not rule-takers but rather rule-makers. They play games whose rules they have a big role in creating, via politics.” Within the Corporate-State complex, the tail is wagging the dog.
Capital Corporations become too big to succeed
Leopold Kohr, Austrian economist and political scientist (1909–1994), described how growth eventually leads to over-complexity, which sets a natural limit to the size of organizations. This is also true for Capital Corporations, which due to over-growth and over-reaching often suffer from ‘bad management’. Capital Corporations often grow until their management loses control and they fail: consider GM, GE, Lehman Brothers, Kodak, Xerox, Motorola, Nokia, IBM, Philips, Boeing, VW, and many more.
Capital Corporations monopolize markets
That was the finding of Austrian economists Joseph Schumpeter and Karl Polanyi over half a century ago. Shareholders demand that managers continually deliver ever higher profits. To do so, corporate managers must constantly increase market share, also by mergers and acquisitions, and will eventually create oligopolies and monopolies, at least in unregulated markets. After all, a competitive free market with strong competitors and disruptive newcomers is not what executives of Capital Corporations want.
Business Enterprises and the Common Good
Business Enterprises are generally smaller than most Capital Corporations, which are often transnational conglomerates. Business Enterprises tend to have owners who are less growth and profit focused, unlike speculating shareholders or profit-chasing equity funds who drive many Capital Corporations.
In 2023, according to the Small Business Administration, more than 33 million or 99.9 per cent of US firms are small businesses and employ around 62 million employees or 46 per cent of all private sector employees. Major listed Capital Corporations have always been a minority of all business entities and have always employed a minority of all employees. But media reporting is mostly concerned with corporations, capital finance and share prices, and not business firms and industries as such. This explains why Business Enterprises, and the best of them, are still the Hidden Champions of the economy.
It is reasonable to assume that most smaller Business Enterprises are well integrated in their communities, at least outside great conurbations, because their business and reputation can depend upon it. Their defining characteristics will include long-term sustainability and robustness, given a longer-term commitment by owners and stakeholders. Here moral values, ethics, of all stakeholders can play a bigger role, and not only profit.
Business Ownership and Purpose
The right of ownership of shareholders in limited liability Capital Corporations was considered by Adolf A. Berle (1895-1971) in Property, Production and Revolution. What is the purpose of shareholders after initial funding has been obtained? “What contribution do they make, entitling them to heirship of half the profits of the industrial system, receivable partly in the form of dividends, and partly in the form of increased market values resulting from undistributed corporate gains? Stockholders toil not, … to earn that reward. They are beneficiaries by position only. Justification for their inheritance must be sought outside classic economic reasoning.”
More capital funding programs are needed to finance growing Business Enterprises without the need for stock issuance. Also, if anti-competition and anti-monopoly rules were strictly enforced on Capital Corporations, there would be less need for Business Enterprises to finance growth to survive.
Business ownership should be not just a bundle of rights but also a set of obligations and duties to society. Adam Smith criticized the dark-side of private ownership of business firms, “… the vile maxim of the masters of mankind – All for ourselves and nothing for anybody else.” He also accepted ‘government interference’ in the market. Smith believed that the political economy should be organized to benefit all not a few, and that business enterprises should be embedded in society and community, not rule over it.
Ownership of a business should encourage a relationship of engagement and trust that is beneficial to society. Until the mid to late 19th century, many large Business Enterprises were still directed by their owners: in other words, the purpose of the business was determined by the purpose of its owners: that could be one-dimensional private profit of the notorious “Robber Barons” in the USA, or multi-dimensional and philanthropic purposes, for example, Christian factory-owners in Britain.
Profit has seldom been the only motive for founding a business enterprise. However, that is almost always the purpose of founding a Capital Corporation. Of course, the declared or actual purpose of a business entity can change over time, but when a business is subservient to speculating shareholders or profit-chasing private-equity funds, that purpose is not the common good.
Conclusion
Capital Corporations can have so much political influence over governments that a corporate-state complex emerges. Limits should be placed on the power and influence of Capital Corporations, especially Corporate Investment Banks, also for a stable and sustainable economy. Personal liability and accountability for owners and managers should be revived. Size and complexity make some Capital Corporations unmanageable, so that sub-dividing capital conglomerates seems fitting. Capital Corporations are also the source of Managerism and managerial self-privilege. Stock ownership rights and duties of shareholders should be reformed with more rights for other stakeholders.
Business Enterprises are generally integrated within markets, community and society, and so create fewer problems and less harm for others, and so better serve the common good.
Capital Corporations, especially transnationals, conglomerates and banks, should be politically discouraged. Business Enterprises, on the other hand, especially stakeholder-respecting and community-embedded, should be encouraged.
LITERATURE
- William Magnuson (2022), FOR PROFIT – History of Corporations, Basic Books, New York.
- Colin Mayer (2013), FIRM Commitment, Oxford University Press, Oxford.
- Colin Mayer (2018), PROSPERITY – Better Business Makes the Greater Good, Oxford University Press, Oxford.
- Kate Raworth (2017), DOUGHNUT ECONOMICS – Seven Ways to Think Like a 21st-Century Economist, Penguin Random House, London.
- Managerism Website (English) https://www.managerism.org/
Managerismus Website (deutsch) https://managerismus.com/