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REVIEW OF CHAPTER: WHAT IS A CORPORATION?

HASSAN KHALID Hailey College of Commerce, Quaid-e-Azam Campus, University of the Punjab, Lahore, Pakistan

Book: Edition: Authors:

Corporate Governance Third Robert A.G. Monks; & Nell Minow

From the very beginning of this introductory chapter the authors start by talking about the unpredictable nature of a corporation. Each definition presented defines a different role of corporation, with the notable features being that a corporation is constituted under law by the persons (people) who founded it and who will be its members till its existence (Blackstone), but the corporation itself is a single artificial person or individual, having separate legal entity and rights, privileges and liabilities distinct (American Heritage Dictionary) from its owners (shareholders), and operates to enhance its own profit and the gains of its owners (Melvin Aron Eisenberg). By presenting a different definition at the end, as given by Ambrose Bierce in the Devils Dictionary, the authors completely change the view of their discussion. Here they go on to discuss about other constituents related to a corporation its directors, managers,

employees, shareholders, customers, creditors and suppliers, as well as the members of the community and the government. On one hand where corporation has rights, privileges and liabilities distinct from its owners, these constituents too have limited liability and involvement towards the corporation. The corporations were developed to meet particular needs that were not being met by earlier forms available to business. The corporate structure evolved and each development made it stronger, more able to recover from difficult conditions, and not able to be affected by the control of outsiders. At first the corporates were granted powers freely seeing that it would produce some specific benefit for the community otherwise unattainable. But over

2 time the law enforcing bodies did not realize that corporation domination had been overcome. Legislators started believing it is futile to impose strict requirements on corporations because local restriction would be circumvented by foreign incorporation. The characteristics of the corporate form were so important to people in business that legislators recognized that they might as well join them, or at least permit and then tax them. The most appealing features of a corporation are: 1. Limited liability for investors; this attracts and encourages many investors to invest in stock and corporations are able to build a large pool of capital. Yet it allows corporations to keep the authority of shareholders limited and conduct any actions it deem fit for its survival; 2. Free transferability of investor interests; 3. Legal personality, through this feature a corporation can hold property, its members are not legally held punishable for acts they conduct as part of corporation, neither do corporation is held liable to its members even for any immoral act it may conduct (e.g. use investors money to promote political campaign without their consent); and 4. Centralized management by which business corporations were permitted to organize for any lawful purpose, without requiring the prior approval of the government. As corporations grew in size and age, their ownership became increasingly fractionated and markets developed to assure almost total immediate liquidity. This increased their strength and scope, but it reduced their accountability. Corporations provide a platform for various people to invest their money, skills, experiences and talents, accumulating into a larger pool of financial and human capital, allowing them to have greater efficiency and effectiveness and to create reasonable wealth for a better fulfillment of ones self and family members satisfaction. Corporations do this by providing the required goods and services to the society and at the same time earning wealth for themselves. This forms the very basis of the society. Keeping in view the age of globalization and free market economy, the author rightly mentions the corporations having the characteristics of ubiquity and flexibility. A corporation has apparently worldwide existence. These can enter into new businesses anywhere easily, thanks to the countries anti-takeover and other protection laws offering ever deceasing trade restrictions to big companies (Multi/Trans National Corporations, MNCs/TNCs) because these create job opportunities there. Corporations can re-incorporate and relocate their head offices and manufacturing facilities at their leisure anytime. Corporations can go any far for their profit maximization. They can at their own will, choose not to constitute costs as part of the pricing structure of their products, can make pass legislations that increase barriers to entry for its competitors, or limit its liabilities. In fact

3 corporations can do anything for them for not being held accountable or liable to any legitimacy. Corporations form and modify their behavior themselves. In this section the authors also give comments that the external threats are actually opportunities for gaining strength for corporations. Next the authors discuss that the odd and absurd behavior of organizations has made it difficult for common people to think of corporations as a moral person. Where on one hand the use of luxurious goods is seen as an undesirable act in a society the corporation attaches with their promotion a cause of social concern, which also makes the price of product too high to be affordable for many customers. Many (not all, a few exceptional good cases are there) corporations just dramatize themselves as being adhering to corporate social responsibility, which is not just only following law, and this all is done with the support of some influential people of the society. Though the corporations are seen as source of welfare in the society, the reality is not entirely true. In reality, whenever corporations can persuade the government to protect them from the free market, by legislating barriers to competition or limiting their liability, they do so. Corporations are governed by two inter-connected sets of laws. One is comprised of the laws imposed by the legislature and the other is private law established in agreements between the corporation and its employees, customers, suppliers, investors, and community. Many of the laws that govern corporations are designed to make it possible for them to externalize their costs and for determined investors and managers can get round many of these rules. If providers of capital are able to communicate their concerns by directing their funds to enterprises governed by more investor-friendly laws, competition for capital could turn the race to the bottom into a race to the top. No matter where a company is located and what it produces, laws of the marketplace affect, even determine, every decision made by its directors and officers. But when a large corporation, on which the economy of a entire state is dependent, makes a strategic decision such as relocation, it becomes an law of economics, and since it is affected by the corporation, it may be called law of capitalism. We cannot tell what the future impact of corporate strategy will be on shareholder value. Will spoiling the customers produce devoted loyalty or will it drive up prices too high? Will a long-term research and development project pay off ? Will cost-cutting measures expose the company to future liability claims? Will the acquisition of a new business provide synergy or cause loss of focus? These traditionally include balance sheets and earnings statements prepared according to Generally Accepted Accounting Principles (GAAP), the

4 availability of cash to meet corporate needs, and the ability to raise new cash from outside sources. But even in the presence of such principles, corporation had been involved in questionable practices: big bath restructuring charges, creative acquisition accounting, cookie jar reserves, immaterial misapplications of accounting principles, and the premature recognition of revenue. Throughout the introductory chapter the authors have tried to establish the notion that corporations have deep-rootedly been involved in exploiting and spoiling the society through the political and legal affairs of the state, hand-in-hand with the influential people.