a history and definition of corporations

It’s hard not to appreciate the success of a ‘mom and pop’ business. The romanticized notion of self-reliance and success. An idealized world where it’s possible for everyone – even the metaphorical ‘little guy’ – to transform their dreams into a vibrant, growing business that supports the local community and provides a good living for the friendly owners. Success stories of small shops certainly exist, however, following major changes to industry, finances, and the general ‘social status’ quo throughout the past century, mom and pop shops are becoming less the norm and more the exception as large, often international, firms dominate the economic landscape. Names like Amazon, Alibaba, Coca-Cola, McDonald’s, and Starbucks are the new mainstream.

These organizations differ from the small businesses in that they have a corporate business model. The corporate business model emerged as companies grew too large for family members to manage, resulting in a new need for organizational management as firms expanded geographically. The American railroad spearheaded the transformation as railways opened the country to economic investment and growth. This evolution gave rise to the professional manager who would have similar job responsibilities in unique geographic locations. At the same time, mass production was mainstreaming which created specialist rather than generalist positions. Employees in these positions then became manageable in a corporate, i.e. reproducible and professionalized, manner. 

As corporations grew, they often had different owners with equity in the business. Equity can either be privately or publicly owned. Privately owned corporations have no external ownership, while ownership of public organizations is traded via stocks in the stock exchange. Owners of publicly traded companies, otherwise known as shareholders, expect monetary benefits from investing in the company. As such, business practices were aimed at creating profit for the shareholders. The external effects of the prescribed business practices were not and are still generally not taken into consideration. That is, the business case always takes priority. Privately owned corporations have some leniency in this respect because there are no outside financial responsibilities. Publicly owned corporations commonly have the following structure:

Stock ownership can take two forms. The first is preferred stock which entitles the owner to dividends before and sometimes in lieu of paying common stock owners. Preferred stock owners have no voting rights. The second and more typical type of stock is common stock. Common stock owners have voting rights within the company and are entitled to a dividend from the company if one is paid and after the dividends have been paid to preferred stock owners. 

Legally speaking, corporations and their owners are separate entities, albeit owners own a stake in the corporation (equity). Despite being a non-living entity, corporations themselves have rights similar to individuals (((Co. v. Riggs (203 U.S. 243 (1906))), including the ability to earn a profit, be taxed, and be held legally accountable for actions taken. As separate entities, owners of corporations have the best protection from personal liability. This means that if a corporation is found to be guilty of breaking a law or becomes financially insolvent, the corporation can be required to pay restitution or declare bankruptcy but the liability is limited to the holdings of the corporation. Such protections make the incorporation of a corporation attractive to both founders and investors. The legal setup also enables diversified and global commerce which in turn provides a global stage for corporations to become extremely large. 

With attractive legal and financial benefits, as well as greater growth potential, corporations have evolved to become the most influential economic model. Society depends on the goods and services provided by these corporations. Such dependencies range from utility delivery to consumer product goods and beyond. Mass production schemes coupled with relative economic wealth created a perfect environment for corporations to flourish and ultimately gain social and economic power and influence. At present, there is a dichotomy of entities devoted to both the regulation and protection of corporations

Perceptions of corporations are often contradictory. For example, some view corporate dominance as the end of individual autonomy and success. In other words, they are the beginning of the end. Others perceive corporations as a stepping stone to a socialized regime regulated not by the government but by private interests. Nonetheless, common perceptions recognize the pervasive nature of corporations.

There are three main types of corporations typically defined by how they gain market power:

  1. Vertical corporations purchase the companies that provide the inputs needed throughout the production process/supply chain so there is no need to rely on external agencies, i.e. vertical integration. 
  2. Horizontal corporations purchase their competitors and typically absorb the components with perceived value and their respective market share while decommissioning the preexisting brands.  
  3. Conglomerates purchase unrelated businesses in an attempt to diversify their assets and become competitive across markets. This strategy is expected to provide economic insurance in cases of instability.

As corporations grow, they gain the benefit of economies of scale. This means they gain a cost advantage by producing larger quantities of goods or services. The larger the corporation, the better able they are to make large upfront investments, e.g. in equipment or infrastructure because the costs are offset by the number of products sold. Economies of scale is a competitive advantage that further perpetuates their market control and further shifts economic norms towards corporate models.

As of 2016, 71 of the top 100  global generators of profit in the world were corporations.

See also:

what is agribusiness? how did agribusiness evolve?


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