Session Two: The History of the Corporation

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By Lee Drutman

How did corporations become the dominant institutions in our society, powerful behemoths with a hand in every almost every aspect of our lives?

The history of corporations in America is indeed a fascinating tale, the story of how a small legal construction designed to harness human ingenuity and entrepreneurship for the public good has been transformed into a largely unaccountable force that has, in some instances, grown larger than entire nations.

The modern corporation dates back to 1601, when Queen Elizabeth I created the East India Trading Company. At the time, the concept of a corporation was quite different than today. Corporations were small, quasi-government institutions chartered by the crown for a specific purpose. The idea was to bring together investors interested in financing large projects, such as exploration. (Many American colonies were originally governed by corporations, such as the Massachusetts Bay Company) Kings and queens kept a close watch on these corporations and didn't hesitate to revoke charters if they weren't happy with the way things were being run. Investors were liable for any harm or loss caused by the company.

As the American colonies developed and won their independence, corporations remained in the background. Sure, there were a few notable anti-corporate protests, like the Boston Tea Party (the Sons of Liberty dumped 342 crates of British East India Company tea into the ocean), but the vast majority of Americans at the time lived and worked on small family farms. The real threat was the unilateral, unaccountable power of King George III, and the founders of a new nation, skeptical of that kind of power, formed a government of checks and balances to prevent any one branch from getting too powerful. Although corporations were not mentioned once in the Constitution or the Bill of Rights, Thomas Jefferson famously noted that representative government's purpose was "to curb the excesses of the monied interests." Had the Founders realized how powerful corporations would become, likely they would have created checks on their power.

Post-Revolution America developed largely along the ideals of Jefferson's yeoman farmer, with American industrialism lagging behind its European counterparts. Corporations remained small institutions, chartered at the state level for specific purposes, such as banking or seafaring. Corporations could only exist for a limited time, could not make any political contributions, and could not own stock in other companies. Their owners were responsible for criminal acts committed by the corporation and the doctrine of limited liability (shielding investors from responsibility for harm and loss caused by the corporation) did not yet exist. Often corporate charters went to the wealthy or well-connected. But these small corporations did move America into the industrial era, encouraging entrepeneurism on a grander scale. Governments kept a close watch on how these corporations were being run, regularly revoking charters if corporations were not serving the public interest. For example, 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.

Slowly, though, corporations were gaining power. In 1819, the Supreme Court ruled in the case of Dartmouth College v. Woodward that states could not alter a contract granted by a previous legislature, leaving Dartmouth's King George III-granted charter in tact and creating a framework of protection for corporations against government encroachment.

As industrialization began reshaping America, great fortunes began accumulating in the hands of canal owners and financiers and later railroad and steel magnates. And as great fortunes accumulated, a new wealthy class began influencing policymaking, changing the rules governing the corporations they owned. Charters grew longer and less restrictive. The doctrine of limited liability - allowing corporate owners and managers to avoid responsibility for harm and losses caused by the corporation - began to appear in state corporate laws. Charter revocation became less frequent, and government functions shifted from keeping a close watch on corporations to encouraging their growth. For example, between 1861 and 1871, railroads received nearly $100 million in financial aid, and 200 million acres of land.

As corporations grew in size and influence, however, their accounting structure remained the same. For a small corporation driven by investors, it made sense to measure corporate performance by measuring financial profits and losses. But for a corporation with thousands of employees and millions of customers, a corporation that was receiving public subsidies and encroaching on communities, a more extensive reporting system that measured the impact of the corporation on people's lives might have made sense. This never developed, however, and the profit-generating mentality remained the dominant driving force behind corporations.

The growing industrialization of America in the second half of the 19th century meant more citizens were leaving the countryside farms for work in the cities. A wave of immigration swelled the ranks of the urban workers, creating a new class that depended on factory jobs to earn a living and depended on factory products to survive. The era of self-sufficiency was ending and the era of corporate market dominance was beginning.

Meanwhile, corporations were expanding their power through both courts and legislatures, both of which were increasingly packed with sympathizers. In 1886, corporations emerged from the Supreme Court case of Santa Clara v. Southern Pacific Railroad as "persons" under the law and thus could use the 14th Amendment to protect their equal rights. This meant that corporations were now entitled to free speech, protection from searches and seizures, and could not be discriminated against. Suddenly, corporations (artificial persons) had the same rights as real people.

At the state level, checks on corporate power were quickly eroding. In 1889, New Jersey became the first state to permit corporations to own equity in one another, perhaps as an attempt to attract more business. A "race to the bottom" quickly followed, with states all over the country madly gutting their corporate laws to be the most business-friendly state. In 1896, New Jersey passed the revolutionary "General Revision Act," permitting unlimited size and market share, removing all time limits on corporate charters, reducing shareholder powers, and allowing all kinds of mergers, acquisitions, and purchases. Not to be outdone, Delaware passed its "General Incorporation Law" in 1899, which set the standard by essentially allowing corporations to write all their own rules of governance. Today, nearly 60% of all Fortune 500 companies are incorporated in Delaware

Meanwhile, between 1895 and 1904, the first great merger wave consolidated 1,800 companies into 137 mega corporations or "trusts." When all was said and done, the corporation was transformed from a quasi-public, state-controlled organization limited in size to a gigantic unlimited private organization with limited responsibility and limited accountability.

Corporations were now the dominant institutions of society, and as their excesses provoked public sentiment, the government set out to deal with the problem. Presidents like Teddy Roosevelt and Woodrow Wilson now turned to a regulatory system and applied anti-trust laws to corporations that were getting too big, engaging in a tug-of-war with corporations over who was in charge. By the 1920s, however, a string of pro-business presidents (Harding, Coolidge, Hoover) gave up on cracking down on corporate power. Instead, Coolidge proclaimed in 1925: "The business of America is business."

Meanwhile, as corporations grew larger and larger and more and more people began to own stock, a new problem emerged - the owners (now an increasingly diffuse network of individual investors) no longer controlled the corporation. Instead, managers were running the company at their whims, accountable to no one. In the days of the robber barons, magnates like J.P. Morgan and Cornelius Vanderbilt ran the companies they owned with pride, insisting that their benevolent leadership would benefit the public. Now, with ownership increasingly divorced from management, owners took little interest in how their company was being run and managers had few consequences for mismanagement. This meant that managers could more easily use the corporations to enrich themselves at the expense of workers or employees, as they increasingly did. A.A. Berle and Gardiner C. Means first noted this problem in their groundbreaking work The Modern Corporation and Private Property, published in 1932.

In 1929, the stock market crashed, ending a speculative bubble and pushing the country into a great depression where unemployment would reach 25%. Like the stock bubble of the '90s, the bubble of the '20s featured a new technology (the automobile and the radio) and lots of financial speculation.

The Great Depression changed the corporate power equation again. For the first time, government became the dominant economic force by creating a massive public works program as well as attempting to control wages and prices. The New Deal worked toward stronger government control of industry, but it was a control that favored large, stable corporations over the unpredictability of competition. The New Deal favored government mechanisms to reduce the risks of capitalism. This helped the entrenched corporate powers to stay strong. However, organized labor grew more powerful as well, creating a more balanced corporate framework.

America emerged from World War II as the dominant global power and the world's major exporter. This helped U.S. corporations to become increasingly wealthy. In the 1950s and 1960s, large corporations dominated, but organized labor and government remained strong countervailing forces, creating an economy that was at least somewhat equitable and balanced (compared to today). In 1954, Union membership peaked at 34 percent of the workforce.

By the 1970s, however, a new free market idealism was developing. In 1970, Nobel Prize-winning economist Milton Friedman wrote that "There is one and only one social responsibility of business -- to use its resources and engage in activities designed to increase its profits", signaling the birth of a new American myth. When Ronald Reagan became president in 1980, he put much of this into policy, kicking off two decades worth of deregulation, eliminating key public controls over corporations. He also cut taxes on corporations and the wealthy, draining the public coffers. Organized labor became weaker as industrial jobs went overseas and employees began to jump around more and more. Big business was now increasingly free to do as it wanted with minimal government oversight. Market populism prospered with mega-mergers everywhere and CEO pay skyrocketing. (By 2000, corporations were merging at the rate of more than 100 a day, approximately 5 times the rate in 1995. Meanwhile, CEO pay clocked in at 531 times average employee pay in 2000; in 1980, the ratio was 42-to-1.)

Corporate political donations also grew rapidly; in 2000, business interests donated $1.2 billion to federally elected candidates, accounting for 75% of all political donations. With 20,000 lobbyists in Washington, corporations have become experts at getting their money's worth in legislation and lax regulation in return for cash contributions.

And that's where we are today. Corporations stand as the dominant institutions in our society. They provide the products and services upon which most of us have come to depend. Through advertising, public relations, and mass media, they shape our views of the world and our views of each other. They handle our finances and our health care, even our ability to communicate with each other. They provide most of our jobs. They wield more influence over the legislative process than any government branch was ever supposed to wield. They increasingly provide many essential services, including water, electricity, and health care. Even public schools, universities, and churches have turned to corporations for funding, opening up once sacred spaces to commercialization. Meanwhile most natural countervailing force against corporate power, organized labor, has become increasingly powerless. Today, only 10% of the private workforce is organized, a 60-year low.

Yet, hopefully by examining and understanding the history of corporations in America, we can understand that it doesn't have to be this way. Corporations were not always the dominant institutions in society. Corporations did not always enjoy constitutional rights, unlimited size, and unlimited lifetimes. Naturally, we cannot go back to the past, nor should we overly romanticize a prior era. We must instead learn from the past and draw inspiration from American traditions like democracy that have proven far more durable than corporate dominance.

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Lee Drutman is the Communications Director of Citizen Works and has researched and written extensively on corporate reform issues. He is also the editor of the Corporate Reform Weekly, a weekly e-mail digest on the rhetoric and reality of corporate reform.

Last Updated March 25, 2003