2.7 A short history of the corporation  (Page 3/7)

Organizational structure that subordinate and synthesize the actions of human agents

Negatively , the development of the modern corporation was facilitated by creating a shield that limited the liability of owners and managers. Liability for owners was limited legally to the amount invested. Liability for managers required proving that they failed to remain faithful to the interests of the stockholders, the principals or originators of their actions. This broke down into demonstrating failure to exercise "sound business judgment" by, among other things, allowing outside, competing interests to corrupt their business judgment. Positively , the corporation emerged out of a series of legal innovations designed to establish and then control the collective power of corporate organizations. Complex organizational structures were created that designed differentiated roles filled by employees. These structures served to channel the activities of employees toward corporate ends. The investor role stabilized into that of stockholders who owned or held shares of the corporation. To promote their interests and to establish the cardinal or fundamental objectives of the corporation, the stockholders elected representatives to serve on a board of directors. The directors then appointed managers responsible for running the corporation and realizing the interests and objectives of the stockholders. Managers, in turn, hired and supervised employees who executed the company's day to day operations ( line employees) and provided expert advice ( staff employees). These roles (and the individuals who occupied them) were related to one another through complex decision-making hierarchies. Davis (1999) in his discussion of the Hitachi Report shows how many modern companies have dropped or deemphasized the staff-line distinction. Others (Stone, Nader) cite instances where managers have become so powerful that they have supplanted the directorial role. (They hand pick the directors and carefully filter the information made available to stockholders.) But these two distinctions (staff v. line and owner v. operator) remain essential for understanding and classifying modern corporations. (See Fisse, Stone, and Nader.)

Profile of the modern corporation

Corporations became full blown legal persons. They acquired legal standing (can sue and be sued), have been endowed with legal rights (due process, equal protection, and free speech), and have acquired legal duties (such as tax liabilities). (See table below for the common law decisions through which these corporate powers and rights have been established.) The powers of the corporation were regulated by the state through founding charters which served roughly the same function for a corporation as a constitution did for a state. Initially, charters limited corporate powers to specific economic activities. Railroad companies, for example, had charters that restricted their legitimate operations to building and operating railroads. When they sought to expand their operations to other activities they had to relate these to the powers authorized in the founding charter. If a charter did not specifically allow an operation or function, then it was literally ultra vires , i.e., beyond the power of the corporation (Stone: 21-22). This method of control gradually disappeared as states, competing to attract business concerns to incorporate within their boarders, began to loosen charter restrictions and broaden legitimate corporate powers in a process called "charter mongering." Eventually charters defined the legitimate powers of corporations so broadly that they ceased to be effective regulatory vehicles.