Criticisms of Corporations

This is a new article branched out of the article on Corporations. It has yet to be organised
:"You never expected justice from a corporation did you? They have
neither a soul to lose nor a body to kick." - Lord Edward Thurlow
(1731-1806)
Adam Smith in the Wealth of Nations criticized the joint-stock company corporate form because of the separation of ownership and
management could lead to inefficient management.

The directors of such companies, however, being the
managers rather of other people’s money than of their own, it cannot well
be expected, that they should watch over it with the same anxious
vigilance with which the partners in a private copartnery frequently
watch over their own.... Negligence and profusion, therefore, must always
prevail, more or less, in the management of the affairs of such a
company.

The context for Adam Smith’s term for “companies” in the Wealth of Nations was the joint-stock company. In the 18th century, the
joint-stock company was a distinct entity created by the King of Great
Britain as Royal Charter trading companies. These entities were awarded
legal monopoly in designated regions of the world, such as the
British East India Company.
Furthermore the context of the quote points to the complications inherent
in chartered joint-stock companies. Each company had a Courts of
Governors and day-to-day duties were overseen by local managers.
Governor supervision of day-to-day operations was minimal and was
exacerbated by the geography of the 18th century.
The sailing time from India to Great Britain was many months and round
trip routes often took a year or longer. It was during the interim time
period that local managers took advantage of the time delay by plundering
the local population at the expense of the interests of shareholders.
Bribery and corruption were inherent in this type of corporate model as
the local managers sought to avoid close supervision by the Courts of
Governors, politicians, and Prime Ministers. In these circumstances,
Smith did not consider joint-stock company governance to be
honest. More importantly, the East India
Company demonstrated inherent flaws in the corporate form. The division
between owners and managers in a joint-stock company, and the limited
legal liability this division was based on guaranteed that stockholders
would be apathetic about a company's activities as long as the company
continued to be profitable. Just as problematic, the laws of agency upon which the corporate form was based allowed
for boards of directors to be so autonomous from and unconstrained by
stockholder wishes that directors became negligent and ultimately
self-interested in the management of the corporation.
Legal Scholar and Professor of Law at the University of British Columbia Joel Bakan describes the modern corporate entity as 'an
institutional psychopath' and a 'psychopathic creature.' In the
documentary The Corporation, Bakan claims that corporations, when
considered as natural living persons, exhibit the traits of antisocial personality disorder or psychopathy. Also in the film, Robert Monks, a former Republican Party
candidate for Senate from Maine, says:
"The corporation is an externalizing
machine (moving its operating costs to external organizations and
people), in the same way that a shark is a killing machine."
Noam Chomsky has criticized the legal decisions that led to the
creation of the modern corporation:

Corporations, which previously had been considered artificial entities
with no rights, were accorded all the rights of persons, and far more,
since they are "immortal persons", and "persons" of extraordinary wealth
and power. Furthermore, they were no longer bound to the specific
purposes designated by State charter, but could act as they choose, with
few constraints.

When the corporatization of the state capitalist societies took place a
century ago, in part in reaction to massive market failures,
conservatives--a breed that now scarcely exists--objected to this attack
on the fundamental principles of classical liberalism. And rightly so.
One may recall Adam Smith's critique of the "joint stock companies" of
his day, particularly if management is granted a degree of independence;
and his attitude toward the inherent corruption of private power,
probably a "conspiracy against the public" when businessmen meet for
lunch, in his acid view, let alone when they form collectivist legal
entities and alliances among them, with extraordinary rights granted,
backed, and enhanced by state power.

Influential scholars Frank Easterbrook and Daniel Fischel argue
that corporate law serves the general welfare by mimicking, without the
heavy cost of negotiation, the contractual agreements that would be
reached by shareholders, managers and employees. For example:

"Limited liability decreases the need to monitor agents. To protect
themselves , investors could monitor their agents more
closely. The more risk they bear, the more they will monitor. But beyond
a point extra monitoring is not worth the cost. Moreover, specialized
risk bearing implies that many investors will have diversified holdings.
Only a portion of their wealth will be invested in one firm. These
diversified investors have neither the expertise nor the incentive to
monitor the actions of more specialized agents. Limited liability makes
diversification and passivity a more rational strategy and so potentially
reduces the cost of operating the corporation."

Main Menu

See Also

Main Menu