Some members of the political pole around which the Occupy Wall Street movement has coalesced suggest that one solution to our economic problems would be to revoke or rewrite the legal fiction under which a corporation has status as a person. Supposedly, this would remove the element of big, “faceless” corporations making decisions for the rest of us. However, like most simple solutions to complex problems, I fear this one will have unintended consequences. Bad ones.
The argument in favor of ending this artificial legal personality is that it would remove the shield protecting the living, breathing people actually making those decisions. They would be exposed to public scrutiny and could be punished for their crimes. However, laws are already in place to hold individuals responsible for the decisions they make as corporate officers. Our laws and regulations are thick with personal, human responsibility. Corporate executives and directors who break the law can be and have been prosecuted, fined, and imprisoned.
Still, one of the functions of a corporate entity is to absorb and deflect legal liability, as when there are financial losses to be borne or legal disagreements to be resolved. For example, a corporation may acquire debts beyond its capacity to pay. When the cash flow stops and creditors outnumber payers, the corporation can go bankrupt—divide its assets, pay out what it can, and in the process disappoint a number of those lenders—without impoverishing the human management and the corporation’s shareholders. A corporation may enter into agreements and, if they should become disagreements, bear the consequences of a lawsuit. The corporation can receive and defend a suit from others, or bring suit if its rights are infringed. Although people with a pulse are making decisions about this, they do so in the name of a collective, the interests of the shareholders, rather than as a matter of their own personal honor.
If this weren’t the case, then running a business or buying stock in one would be far more risky. Encounter a downturn in the market, a falloff in sales, an expansion plan gone wrong, or a customer or contractor with a grudge—and you could lose not only your livelihood or your investment but also your home, your savings, all your possessions, and still be in hock for future wages.
Maybe this is what the OWS people want. Make shareholder capitalism so risky and punitive that no one would want to play. That would be a quick route to state-sponsored socialism or communism.1
But if your aim is to improve our free market system, rather than put a stake through its heart, ending legal personality would probably be a bad idea. Consider that under our system of laws, only a person can enter into a contract, open a bank account, acquire and own property, borrow money and pay debts (a form of contract), hire people (another contract), and function in a hundred other ways required to transact business. If the assembled owners—partners, shareholders, or some other collective with a common cause despite their individual aims and wishes—could not function in this way as a legal entity, our economics would be returned to a medieval level. All business would be personal business. The cobbler makes a pair of shoes and sells them to the farmer, who pays for them with the proceeds of his grain harvest, which he has sold to the miller, who grinds it to make flour and sells it to the baker, who makes the bread the cobbler will buy with the money from selling that pair of shoes.
It’s tidy. It’s neat. It’s personal, and everyone takes responsibility for his actions. People lived that way in Europe for almost a thousand years. They were called the Dark Ages. Business on a personal level will enable a community—a small one—to survive. But it keeps you at the productive level of a pair of shoes and now and then a violin. Try to make anything bigger and more complex, like a piano, and you need several craftsman to come together and blend their skills.
Perhaps those piano makers can all work under personal contract with the owner of the piano shop. That owner takes responsibility for the business, investing his profits when he needs to buy iron for another piano harp, wood for a case, or wire for strings. And if the market for pianos dries up, he takes the loss and goes out of business, returning his craftsmen to farming or working for the miller. This is still at the community level. Such a business cannot aspire to anything big.
Consider the automobile. In the early years of the nineteenth century, hundreds of makers of horseless carriages functioned like our imagined piano shop: garages turning out handmade vehicles, each one unique, with few parts in common. They didn’t travel very far, which was a good thing because if you drove a car made in Cleveland into Chicago, and it broke down, you would have to return to the maker’s garage to get it fixed.
The convenience we take for granted, that a Ford sedan made in Michigan can be sold and serviced in San Francisco, would be extremely difficult to achieve on the basis of such purely personal business. William Clay Ford, Jr., the great-grandson of that Henry who actually did start out in a garage workshop in Detroit, would have to buy and own factories all over the globe, borrowing the money for this from his personal friends. He would personally contract with hundreds of thousands of workers to build the cars, acquire and hold millions of tons of steel and other raw materials as his personal property, and maintain possession of those millions of vehicles until each one could be sold to an individual buyer.
Of course, the buyer of that car would have to save up and pay for it all at once, unless he knew someone with a large amount of uncommitted cash willing to make a personal loan. There would be no banks to evaluate the buyer’s creditworthiness and write a loan against the value of the car. There would be no insurance company to assume the risks of his driving this encumbered asset on the city streets. Every aspect of our lives would be carried out on the basis of the people we knew personally or could convince of our trustworthiness through their personal experience or on the basis of our smiles and winning personalities.
There was a time when such a personal approach to business was the norm, and it could achieve great things. In ancient the Roman world, there were actually corporations with an artificial personality: the societas and collegia, where people joined together and created a group—a body or corpus—that that could enter transactions and acquire debts that were not the personal liability of the members.2 But these groups were still social; people came together on a first-name basis and could know and trust the other members. They were anything but the faceless creations of a legal system.
Elsewhere in Rome, however, the individual—the strength of one man’s personality and trust in his skills and judgment—was everything. Julius Caesar was the scion of a noble family and became its paternal head, but he wasn’t the president of any “Caesar Inc.” like the Fords, Hiltons, or Versaces. The family fortune—what there was of it—was his to spend. He made his way as a politician in Rome on the basis of the people for whom he could offer protection and do favors. They became his followers and, if they had personal followers of their own, those became the followers of Caesar as well.3 On the basis of this popularity and not a little personal generosity, the Roman state advanced him in the course of public offices, the cursus honorum, and in time of war gave him command of army units. But as office holder and commander he still had to win the confidence of the people under him. A general going into battle didn’t just give orders and expect his soldiers to carry them out as a matter of law and discipline—he had to make a personal speech before each engagement to whip up their enthusiasm.
Ending the fiction of the artificial legal personality in our current laws would either reduce the power and robustness of our economy to the level of a village in the Dark Ages, or give rise to an even greater emphasis on “the 1%.” These would be the people who, like ancient kings and tyrants, could command a following on the basis of their personality and their fortune. Imagine a society that did not put its trust in institutions like the Ford Motor Company or Exxon-Mobil, which today are owned by legions of shareholders, whose interests are protected by disinterested financial rating agencies like Standard & Poor’s. Instead, our economy would function at the whim of great patrons like Henry Ford or John D. Rockefeller—robber barons answerable to no auditors or committees, who could whip out their checkbooks and make any little inconveniences such as laws and competitors simply disappear.
Granting institutions the power to do business has enriched us all, enabling a level of product standardization, global convenience, and economic power unimagined by previous societies. To undo that would impoverish millions. It’s simply a bad idea.
1. Assuming, of course, that the state itself could still function as a legal entity representing the interests of its citizens, a republic, and not as the personal retinue loyal to a single individual, a king.
2. Municipal entities like the City of Rome functioned in similar fashion. And the tradition of collective ownership continued under the church in the Middle Ages, where the members of a brotherhood shared ownership of an abbey or monastery and its property. This tradition grew up with the great universities, where the student colleges were modeled on the collegia of Rome.
3. It’s no coincidence that the criminal organization shown in The Godfather—with its emphasis on favors, protection, personal loyalty, and demonstrations of respect—so closely resembles this Roman tradition.
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