Wednesday, March 6, 2013

A Brief Look at the History of Corporations in America

History of Corporations in US
Where do you prefer to get your News? Me, I get my information from Yahoo home page and occasionally John Stewart's Daily Show. I figure if it gets mentioned there, it must be newsworthy. I even have friends that read a daily newspaper, can you believe it? Yes George G. I'm calling you out. No matter where you look, current events are littered with news about corporations lifting their veil of secrecy and revealing malfeasance, from the office of the CEO and disenfranchised Board of Directors to the unsupervised staff with the ability to lose billions of other people's money.

Corporations have been in existence for centuries starting from very humble beginnings. Religious orders and governments were the first to incorporate like the Benedictine Order of the Catholic Church, founded circa 529 AD identified as the oldest surviving corporation referenced by Bruce Brown in his book The History of the Corporation, Volume 1. Another thousand year continuously operated business was the Japanese temple construction company, Kongo Gumi, established in 578 AD that shut down in 2009 after a run of over 14 centuries. Image the CEO's decision knowing that he was responsible for the liquidation of that kind of dynasty. His parents must be proud but I guess building temples is a talent gone the way of the cooper. Kongo Gumi illustrates the primary need solved by incorporation.

Corporations were created as a means to outlive individual members of an organization.

While searching for a better understanding of the origins of corporations in America, I learned that as are typical with cycles, it appears the maturity of the large corporation has past its pinnacle of effectiveness and is in decline, being replaced by smaller agile disruptive businesses run by innovators. I hope you enjoy reading this as much as I enjoyed writing it. For more information please visit my long list of sources at the bottom of this blog entry.

For background, prior to the 1600s in European corporations were established for the public good and violation to the charters was punishable by law. In England a review by Parliament uncovered in 1721 systemic fraud perpetrated by the Directors of the South Sea Company.
South Sea Company
South Sea Company - 1721
http://www.tschoepe.de/auktion47/auktion47_england.htm
Parliament confiscated the estates of the Directors and used the proceeds as a payout to the victims. Also during the1600s the first notion of a For Profit company appeared as a way to build the economic power within Europe and finance colonial expansion. At its origin, people who wanted to create a company had to have at least three people working together to form a corporation. A single person corporation was not even envisioned by the early lawmakers as liability remained with the managers of the corporation.
  
Many safeguards were established intended to keep control over the influence of companies when corporations were reinvented in the United States after our independence was won. How much tea can you throw into the Boston harbor anyway? Initially, the privilege of incorporation within the United States was granted by a vote from the State Legislators.  In 1811, New York was the first state to sign a bill into law creating the first Corporate statute allowing some form of Limited Liability Corporations thereby reducing the risk to the individuals responsible for the actions of the corporation. Eastern states battled for years to be considered the friendliest state to establish or move businesses to their states hoping to claim a larger proportion of the exploding commerce brought about by the expansion of the railroads and commerce. These early company regulations were so restrictive that industry tycoons like Andrew Carnegie created his Steel Company using a Limited Partnership and John D. Rockefeller structured Standard Oil as a Corporate Trust.

During the early days, corporations were designed in silos and operated as a individual entities. Directorates were not permitted to participate on multiple boards which is common practice in today's chase for personal notoriety and a few dollars. As reported by 247wallst.com relying on a special screen generated by GMI Ratings, in 2011, the top 10 companies paid directors an average annual stipend in excess of $500,000. I imagine they also receive some pretty good travel and entertainment perks.  

Jane Anne Morris is a corporate anthropologist and creator of the Democracy Theme Park http://democracythemepark.org/. Her research into the history of the Wisconsin legislator found the following provisions:1
  • Corporations were required to have a clear purpose, to be fulfilled but not exceeded.
  • The state legislature could revoke a corporation’s charter if it misbehaved.
  • Corporations’ licenses to do business were revocable by the state legislature if they exceeded or did not fulfill their charter.
  • The act of incorporation did not relieve corporate management or stockholders/owners of responsibility or liability for corporate acts.
  • State (not federal) courts heard cases where corporations or their agents were accused of breaking the law or harming the public.
  • Directors of the corporation were required to come from among stockholders.
  • Corporations had to have their headquarters and meetings in the state where their principal place of business was located.
  • Corporation charters were granted for a specific period of time, such as twenty or thirty years.
  • Corporations were prohibited from owning stock in other corporations, to prevent them from extending their power inappropriately.
  • Corporations’ real estate holdings were limited to what was necessary to carry out their specific purpose(s).
  • Corporations were prohibited from making any political contributions, direct or indirect.
  • Corporations were prohibited from making charitable donations outside of their specific purposes.
  • State legislatures could set the rates that some monopoly corporations could charge for their products or services.
  • All corporation records and documents were open to the legislature or the state attorney general.
As an example of governmental control, in 1832, President Andrew Jackson refused to extend the charter of the Second Bank of the United States and the State of Pennsylvania revoked 10 banks’ charters. In 1819 in Trustees of Dartmouth College v. Woodward the U.S. the state attempted to remove the school's corporate status and failed. Supreme Court ruled in Dartmouth College's favor and upheld a contract issued by King George III in advance of the creation of the state. At its core, the decision was based on the fact that the contract did not allow for a termination by the state legislator. Citizen's in many states responded quickly viewing the verdict as an attack on state sovereignty. New laws were created or existing laws enhanced amending state constitutions allowing states to circumvent the (Dartmouth College v Woodward) ruling. By 1844, 19 states passed amendments making corporate charters subject to the whim of the state legislators.
 
Over time, companies gathered greater resources and began chipping away at the restrictive statutes placed on them at the creation of their charter. Back across the pond, an 1844, British law allowed companies to define their own reason for existence. Eleven years later, managers within corporations were awarded material limited liability from their corporate actions. From that date, personal property owned by company executives were protected from the consequences of their corporate behavior. Back in America, the turning point was the Civil War. This was a time where companies could exert significant influence in the political process as the Union was in desperate need of goods and services. Laws restricting trade with the confederacy were ignored if it helped with the war effort. Wm. Seligman & Co. and J. Seligman & Co. had many Union contracts producing uniforms, chevrons, and shoulder boards to designate rank. Seligman had existing relationships with cotton producers in the south that supplied raw cotton for their Dry Goods store, J. & H. Seligman. After the war broke out, Seligman continued with those relationships engaged in very risky arrangements and successfully delivered on the government contracts generating proceeds of $1,437,483.61 between August 1861 and July 1862.Abraham Lincoln wrote,
Abraham Lincoln
 "I see in the near future a crisis approaching that unnerves me and causes me to tremble for the safety of my country. . . corporations have been enthroned and an era of corruption in high places will follow, and the money power of the country will endeavor to prolong its reign by working upon the prejudices of the people until all wealth is aggregated in a few hands and the Republic is destroyed."
Although debated as a fictitious entry attributed to Abe, research conducted by Rick Crawford, crawford@cs.ucdavis.edu found the full entry in a letter from Lincoln to (Col.) William F. Elkins, Nov. 21, 1864.

The legal case in the United States that set corporations on the path to untouchable status arose out of the 1886 Supreme Court case between Santa Clara County v. Southern Pacific Railroad. Based on misleading summary notes of a court reporter, the documents from the decision subsequently were used as precedent to hold that a corporation was a "natural person." From there, companies used the newly drafted 14th Amendment enacted to protect the rights of freed slaves as leverage to grant corporations constitutional "person hood".

Since then, Justices have eliminated hundreds of local, state and federal laws enacted to protect people from corporate harm based on this illegitimate premise. Armed with this new status, corporations increased control over all of the areas that they were once prohibited including free speech, protection from illegal searches and seizures and free from discrimination just like a real person, Geppetto would be proud. This trend continues to this day. A 2013 Montana Legislature HOUSE BILL NO. 486 was introduced by Montana state Rep. Steve Lavin that would give corporations the right to vote in municipal elections. His response "I made a mistake of not paying enough attention to this bill," Lavin said. "It came through with that in there. This kind of surprised me in a way..." To the committee's credit, the bill was tabled shortly after it was submitted and is unlikely to ever become law. This type of political fodder would be comical if not for the careless nature of public concern by our elected officials.8

Once the camel's nose was under the proverbial tent, other rights and restrictions built into corporate charters continued to erode faster than a Russian Polecat racing down the Ural Mountains the morning of February 15, 2013.

New Jersey was the first state, in 1889, to allow one company to own the assets of another. From there, the rules on the books were erased at an even faster rate. New Jersey continued to lead the country in legislation when, in 1896, the “General Revision Act” was passed removing the restrictions on company size and market share, creating perpetual corporate charters, reducing shareholder powers, and allowing any purchase, mergers or acquisition demanded by a company. As if it were a competition, Delaware first got into the game in 1883 and, with indecision from New Jersey, passed the “General Incorporation Law” in 1899 setting the standard for companies to establish their own rules of governance held to this day as the friendliest state to businesses. 

I found the following paragraph on the web and like the way it describes the events around the errant 1886 legal decision. Excerpted from Culture Jam: The Uncooling of America (Kalle Lasn, William Morrow/Eaglebrook, 1999) 
“This 1886 decision ostensibly gave corporations the same powers as private citizens. But considering their vast financial resources, corporations thereafter actually had far more power than any private citizen. They could defend and exploit their rights and freedoms more vigorously than any individual and therefore they were more free. In a single legal stroke, the whole intent of the American Constitution -- that all citizens have one vote, and exercise an equal voice in public debates -- had been undermined. Sixty years after it was inked, Supreme Court Justice William O. Douglas concluded of Santa Clara that it "could not be supported by history, logic or reason." One of the great legal blunders of the nineteenth century changed the whole idea of democratic government.”3
Except for a temporary reprieve during Roosevelt's New Deal, the United States has since been governed by big business. Post-World War II corporations continued to build on the gains of the past. They evolved into mega global conglomerates exceeding the economical power of many third world countries. Gradually, many of the ideals created by the founding fathers were simply eliminated and soon forgotten.

Recent news of rogue trades and Ponzi schemes in the financial services industry have left their mark on the global economy. Again confirming the generally accepted principle that, left unattended, corporations lack basic morality and ethics in the constant search for greater profits answering only to shareholders. These executives are blinded by the idea of a higher stock price as their quest tied to their legacy as business magnates.

So today there are many different types of corporate structures in the United States. Popular company forms include the C-Corp, S-Corp, Limited Liability Corporation (LLC), Limited Liability Partnership (LLP) and a newly designed Benefit Corporation “B Corp” created in New Jersey in November 2011 and now available in five other states. Although they all serve a specific purpose, perhaps the B Corps are the most interesting. These companies harness the power of business resources to solve social and environmental problems. Perhaps the creation of this type of corporation and Occupy Wall Street activism are positive signs that the old ideas of corporate immunity and single minded profit goals have come full circle as the pendulum of reasonableness has return.

Contemporary business leaders are beginning to see the benefits of the balanced approach to profits with an eye towards a positive corporate citizenship.

Enron & Worldcom“As corporate citizens of the world, it is our responsibility – our duty – to serve communities where we do business … by helping to improve, for example, the quality of citizens’ education, employment, health care, safety, and overall daily life, plus future prospects,”5 CEO of Starbucks, Howard Schultz

Can the problem of corporations betraying the public trust placing profits ahead of humanity be solved and if so where should society's resources be focused creating the largest impact of change and accountability?

I humbly suggest that the simple, grass roots efforts akin to Occupy Wall Street do not have the necessary leverage or long term effect necessary to bring about this cataclysmic change. Others suggest the complete removal of PACs and special interest groups used to finance legislation reversing the cycle promoting the good for the few at the cost of the many. An idea of broad based incentive programs placed in the proper hands would level the democratic playing field. I am interested to hear other thoughts how today's capitalism can return to our version invented by early pioneers, industrialist and politicians using corporations to enhance our quality of life in this decade. When I write my blog entries I receive insight and guidance from a number of people. For this perspective on the history of corporations in the United States, I would like to thank my long-time friend, Steven Miyao - CEO and founder of kasina for an alternative point of view and for providing a perfect sounding board.

kasina is a trusted advisor to the leaders of the asset management and insurance industries. They are innovators in the distribution of Financial Services products through consulting, research, and benchmarking data. www.kasina.com7

My research continues. Check back soon.

Sources:
http://en.wikipedia.org/wiki/Kong%C5%8D_Gumi
The History of the Corporation, Volume 1 by Bruce Brown
http://www.citizenworks.org/corp/dg/s2r1.pdf
http://doge.us/govecon/AShortHistoryCorporations.pdf
http://reclaimdemocracy.org/personhood/hidden_history.html
http://data.opi.mt.gov/bills/2013/billhtml/HB0486.htm
p. 40 of The Lincoln Encyclopedia, by Archer H. Shaw (Macmillan, 1950, NY). That traces the quote's lineage to p. 954 of Abraham Lincoln: A New Portrait, (Vol. 2) by Emanuel Hertz (Horace Liveright Inc, 1931, NY).
1. Jane Anne Morris “Fixing Corporations: The Legacy of the Founding Parents” at http://www.populist.com/6.96.Fixing.Corps.html.
2 .Unequal Protection: The Early Role of Corporations in America by: Thom Hartmann, Berrett-Koehler Publishers | Serialized Book
3. Excerpted from Culture Jam: The Uncooling of America (Kalle Lasn,William Morrow/Eaglebrook, 1999)
4. Rick Crawford, crawford@cs.ucdavis.edu letter from Lincoln to (Col.) William F. Elkins, Nov. 21, 1864.

5. Nicholas Confessore, New York Times - Policy-Making Billionaires Published: November 26, 2011 http://www.nytimes.com/2011/11/27/sunday-review/policy-making-billionaires.html?pagewanted=all
6. Ross L Muir and Carl J. White, Over the Long Term... the Story of J. & W. Seligman & Co. 1964
7. http://www.kasina.com
8. http://www.huffingtonpost.com/2013/02/25/montana-corporations-vote_n_2761209.html