There is almost nothing we do in our everyday lives that does not involve corporations or companies. From small family companies to global corporations which are larger than the economies of some countries, corporations dominate our lives. In this episode we look at what a corporation is. We focus on a subset of corporations; companies with a share capital which operate a business for profit.
In future episodes we will look at some of the issues surrounding “limited liability” and at businesses behaving badly. This episode sets the scene for those, offering a legal primer on what corporations are.
TRANSCRIPT
Stephen Parker
So far in this series we’ve focused on public sites of power – the courts, parliament, and the executive branch of government. But in modern society so much of what we do in our daily lives is determined or shaped by corporations. So in this episode we look at corporations: what they are, the power they wield, and what role the law plays in creating and regulating them. Indeed, the role of corporations in modern society is so pervasive that I’m sorry to say this will be just the first of a number of episodes on the topic.
Excellent!!!
Stephen Parker
Just so that we’re clear at the beginning, ‘what is a corporation’?
Stephen Bottomley
To a lawyer, a corporation is an entity that is created by the law and which has specified legal characteristics. There are different types of corporation. Some are created by a specific Act of Parliament – this includes universities, and government agencies such as the Australian Securities and Investments Commission. Co-operatives are another type of corporation.
Stephen Parker
But the type of corporation with which both of our listeners will likely be familiar is the company, the most common example of which is the company with a share capital that operates a business for profit.
Stephen Bottomley
In Australia, all companies are incorporated under the Corporations Act. That Act recognises two types of company with share capital. One is the proprietary company; in the UK they are called private companies. Typically these are small business operations – but not always – some can be very large. The other type of company is the public company. Unlike a proprietary company, a public company can have its shares traded publicly, usually on the stock market. You can identify these two company types by their name: a proprietary company has the letters Pty Ltd – proprietary limited – at the end of its name; a public company has the letters Ltd. We’ll come back to what the word ‘limited’ means later on.
Stephen Parker
Some people describe a corporation as an ‘artificial’ or ‘fictional’ legal entity. The point is to distinguish the corporation from natural persons – such as you or me (or at least me). The word ‘corporation’ comes from the Latin term for ‘body’, so a corporation means ‘combined in one body’. Our law thus recognises ‘human bodies’ and ‘corporate bodies’.
Stephen Bottomley
While there is philosophical debate about what the corporation is, everyone does agree that a corporation is a ‘separate legal entity’, meaning that it can exercise legal rights and powers that are quite separate from those of its directors, shareholders, employees. For legal purposes, a corporation can do many of the things that you or I can do, such as buying and selling property, entering into contracts. There are some things corporations cannot do; for example, they cannot vote in elections, and they cannot get married (although I suppose that they can enter into merger or takeover arrangements).
Stephen Parker
Is there anything corporations can do that we mere mortals cannot?
Stephen Bottomley
Yes, and these are really crucial to the growth of corporate power across the centuries. First, a corporation has what is called ‘perpetual succession’. This means that a corporation exists forever, or until some legal step is taken to bring it to an end – usually through the process of ‘winding up’. So, while a corporation’s directors may change over the years, and its managers and employees will come and go, or its business model or name may change, the corporation behind it all persists as the same legal entity.
Second, a company can issue shares, usually as a way to raise money, but also to structure control within the company. People who acquire shares in a company – the shareholders – become members of the company. This is a unique feature because we mere mortals cannot issue shares in ourselves. It is this capacity to issue shares, and to structure the nature of those shares to meet different circumstances, that has been the catalyst for the spread of corporations into all aspects of modern life.
Stephen Parker
Shares in a company give the shareowner certain rights, especially the right to receive dividend payments out of profits and the right to vote at company meetings. But perhaps the most important feature of share ownership is the idea of ‘limited liability’. We’ll come back to look at that more closely in a subsequent/the next episode. For the moment, let’s finish describing the legal picture.
Stephen Bottomley
The picture so far is that the company is a legal entity in its own right. It has issued shares and so it has shareholders. The other key players are the directors. Every company must have a minimum number of directors. Directors are appointed by the shareholders and they are responsible for the management of the company. In a proprietary company the directors will likely also be shareholders in the company, and also be directly involved in running that business. In fact it is possible have a company in which one person is both the sole shareholder and the sole director – a ‘one-person company’. In public companies the directors might own some shares but their role is less hands-on; they appoint people to manage the business under the direction of the board of directors.
Stephen Parker
There is almost nothing that we do in our everyday lives that does not involve companies. From small businesses and community organisations through to the global reach of multinationals Today, according to one estimate, well over half of the largest 100 economic entities in the world are corporations, not countries. But this level of corporate power is not new. Companies, in one form or another, have been part of the economic – and political – life of western economies for centuries. The British Empire owed its expansion to corporations such as the East India Company, which, with the consent of the British government, effectively ruled the Indian sub-continent in the 18th and 19th centuries, even having its own army.
Stephen Bottomley
That’s a good example. The common perception today is that corporations are part of the private sector, as opposed to the public sector of government and the courts. But companies have always straddled the two sectors. Today, corporate economic power has extended beyond what we usually think of as the commercial or business market. Corporations now dominate in providing public infrastructure and services in critical areas such as telecommunications, transport, health, aged care, education.
Stephen Parker
So, are corporations today taking on the role of government? They seem to do much of the work that three or four decades ago was thought to be the province of government. In some instances that is the result of governments deliberately contracting out or privatising government services; in others, private enterprise has moved in to fill gaps left by governments. How does the law deal with this expansion of corporate power?
Stephen Bottomley
At this point, not very well. In Australia our corporate law is still based on the idea that the directors of a company must act in the best interests of the shareholders – not the best interests of employees, or consumers, or even the environment. There is debate, however, about whether that traditional model can or should continue. One idea is that ‘best interests of shareholders’ is not just about their financial interests, recognising that shareholders may also have an interest being part of a company that pays attention to Environmental, Social and Governance (or ESG) factors.
Another idea is that the law should simply impose additional requirements and expectations on directors and companies. We are already seeing examples of this. In the UK, the Companies Act contains a section that requires directors to have regard to matters such as the interests of the company’s employees, and the impact of the company’s operations on the community and the environment. And several countries, including Australia, UK and US have imposed, or are looking at imposing, climate-related reporting requirements on companies.
Stephen Parker
Corporations certainly raise some important questions and challenges for our understanding of law in context. In future episodes we will explore other aspects of the interface between corporations and the law, including the idea of limited liability and whether corporations should be required by law to pay attention to their social impact as much as their economic goals.
Further Reading
Joel Bakan, The New Corporation: How ‘Good’ Corporations are Bad for Democracy, Vintage Books, 2020
John Mickelthwaite and Adrian Wooldrige, The Company: A Short History of a Revolutionary Idea, Modern Library, 2005
Business Roundtable Statement on the Purpose of a Corporation: Two Year Anniversary (2021) – available at https://www.businessroundtable.org/purposeanniversary
Thomas Clarke, Why Shareholder Value Drives Income Inequality, The Conversation, July 26 2018 – https://theconversation.com/why-shareholder-value-drives-income-inequality-100324