How Corporations Work: Part 3

The first corporation to have our modern corporate structure, including the issuing of corporate stock, was the Dutch East India Company, not to be confused with the “East India Company”, the British company responsible for the Opium wars in China. The Dutch East India company was a merchant company, focused on the buying and selling of goods in order to make a profit. In order to gain financing, it started issuing shares that were eventually actively traded in the public sphere.

 

Nowadays, people often think the purpose of buying shares is in order to buy them today, and hopefully sell them off in the future at a higher price in order to make a profit. However, this mindset misses the original point of shares. The primary purpose of shares is to obtain dividends. Dividends are a portion of the company’s profits that are given to shareholders of the stock. For example, if I buy a share for $100 today, owning the stock could give me a dividend of $5 per year as long as I own the dividend. In the course of 20 years, I would break even. Oftentimes though, exact dividends are not expected for shareholder stock. In theory, the price of a stock should represent the present value of the expected amount of dividends to be generated in the future.

 

The name corporation comes from the latin term “corpus”, which means body. In effect, this means that a corporation is an “artificial person”. Such “artificial persons” could therefore own property, sue or be sued, or make contracts. In the U.S. however, corporations are a little bit more people than that, and are protected under the First Amendment. In Citizens United vs. FEC, Citizens United, a conservative organization, aired a commercial advertising a movie critical of Hillary Clinton during her 2008 run for president. The commercial was banned from airing by federal law, stating that corporations could not air campaign material 30 days before a primary election, or 60 days before a general election. Citizens United challenged this law, stating that corporations were protected under the First Amendment, and had the right to free speech. In a 5-4 Supreme Court vote, it was decided that Citizens United was right, and since then corporations are protected under the First Amendment by precedent.

 

Artificial personhood means that corporations could be sued. However, pre-2008, it was more popular for individuals to be charged, rather than corporations. In the infamous Enron case, Enron, an energy company, was found to have misrepresented financial data in its accounting books to shareholders and the public. However, instead of charging the company, prosecutors preferred to charge the heads of the accounting fraud operation: Kenneth Lay and Jeff Skilling (the highest ranking Enron officials). This line of reasoning made a lot of sense. Corporations could not go to jail, and it was typically executives (who had the manpower and resources to cause material fraud) that were the ones committing crimes. The only reasonable punishment for prosecuting a corporation rather than an individual was a fine. However, this was unfair to the shareholders. Shareholders would already be suffering from breaches made by employees, and a fine would only cause them to lose more money. Therefore, it made more sense to go after the individuals who commit the crime.

 

This rationale however, was subject to a shift during Obama’s presidency. His new cabinet sought systematic fixes within the financial systems, and attempted to pass top-down laws that would attempt to disincentivize corporate fraud. However, this paradigm shift meant that corporations became the subject of prosecution more-so than individuals, as the SEC wanted quicker wins.

 

The business landscape of corporations is constantly shifting. In the future, new corporate structures may arise that overtake our current set-up, and new ways of holding corporations accountable for public good may also be implemented as well. The best way to approach this situation is to realize that definition of corporations is always fluid, and corporations are neither inherently good nor bad, but defined by the influence they enact on the world.

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