We The People: Revisiting the corporate charter

Presenter: The ‘We the People’ party is presenting another policy idea that deserves another look. Alan Cohen explains why most corporations should be granted charters by the federal government rather than the states. 

Alan Cohen (We The People): To listen to representatives of the Chamber of Commerce or the CEOs and lobbyists of large corporations you would think that a corporation is as natural as a fruit tree. Just as everyone is free to plant such a tree and enjoy its fruits, they suggest, everyone should also and always be free to plant a corporation and enjoy its fruits. 

But trees grew on the earth millions of years before humanity turned up. They are indeed natural gifts, while corporations were invented in the 16th century. The opportunity to incorporate is a gift of a society made available to benefit the society and to profit those forming the corporation only as an incentive to provide something of value to that society. 

In other words, every charter to incorporate is a privilege, not a right. And that’s how the laws defining corporate charters were written in the United States from before the Revolution through the Civil War. 

Charters defined what could be done: Build a town, for example; an education or religious institution; a canal; a library; and yes, a bank, an insurance company, or a textile company; who and how many could invest; what were the voting rules; how it would reimburse its investors; where it could conduct business; how much money the corporation could accumulate; how long the charter would last; how much, if any, property could be owned; whether it could access capital markets for sales of stocks and bonds; sue or be sued, etc.

[00:01:46] And there was usually a specific prohibition of participation in the political process. How times have changed.

[00:01:53] Presenter: With all the limits placed on them, why did organizations even want to incorporate? 

[00:01:58] Alan Cohen (We The People): Well, for one thing, corporations can continue to exist in perpetuity long after their founders have passed on. Then, too, corporations can issue stocks or bonds to raise money, and the investors do not have to be active in the enterprise or get along with or even ever meet one another. 

Moreover, in a corporation, any given participant, owner, or investor, has no responsibility for corporate debt, injury, damage, failure, or bankruptcy beyond what they themselves invested.

[00:02:34] Moreover, shares in a corporation could be bought and sold, so corporate investments were semi-liquid assets. The government imprimatur was also an attraction and an applicant could try to have specific privileges included in the charter. So even back then, there was ample reward, the gift of the society that the charter represents. And today, there were also many tax benefits that didn’t exist back then.

[00:03:02] Presenter: So was incorporation seen as the way to go?

[00:03:05] Alan Cohen (We The People): Actually, no. At first, they had a bad reputation. In England, very few companies chose incorporation. Adam Smith in his Wealth of Nations in 1776 said, ‘The pretense that corporations are necessary to the better government of trade is without foundation.’ He felt that corporations interfered with free market capitalism, and this view was widely held at the time. 

But early Americans ‘rescued the corporation, an all-but-moribund institution in late-18th-century England, and utilized its capacity to empower individuals whose resources were unequal to their imaginations. They attempted to recreate it as an agent of opportunity rather than a recipient of privilege, to limit its tendency to exacerbate inequalities of wealth, then devised checks on its potentially dangerous power, to harness it more firmly to the public good.‘

[00:04:02] Presenter: What went wrong? 

[00:04:03] Alan Cohen (We The People): First England removed the requirement for a public good in a corporation’s goals in 1845; then general incorporation laws were introduced in America. That led to an increase in incorporation and a decrease in oversight, business corporations became more independent and less socially responsible. The change not only in rules, but also in cultural expectations. At least to those running the corporation and to their government supporters, profit became an end in itself independent of the impact on society at large.

[00:04:42] Still, it was only once the Civil War ended, and most states found themselves in debt, that some of them began to consider incorporation fees and taxes as sources of income.

[00:04:54] The Supreme Court had decided in 1839 that corporations established in one state are free to operate in the others. This also meant that companies did not necessarily have to relocate to the states where they were chartered or rechartered. 

The introduction of general charter laws meant that companies no longer had to get a special charter from a legislature. Then in the 1880s, New Jersey began to encourage businesses to incorporate in their state in earnest.

[00:05:25] From 1888 through the general revision of 1896, New Jersey sought corporation charters by liberalizing its statutes. In 1888, it allowed some corporations to merge and hold stock in other corporations. By 1893, most corporations could merge horizontally and hold stock in any foreign, non-New Jersey or domestic corporation. And a general corporation law revision of 1896 contained provisions that allowed directors to create and define the corporation’s powers.

[00:06:01] Delaware later replaced New Jersey as the go-to state with the most liberal incorporation laws as the corporations successfully played one state off against another. So in return for what turned out to be relatively paltry, short-lived revenue in corporate fees and taxes, competition freed a large part of our nation’s corporations from most of the laws and oversight that had previously restrained them.

[00:06:29] It was not long before Corporate America began to argue that companies had a right to incorporate and to do anything they pleased once they had. And since then, large corporations have become more and more comfortable, for example, choosing how our economy will spend its wealth, increasing economic, legal, and political inequality, enlarging corporate welfare, polluting our environment, and dominating our elections and government, among other things. 

Both dominant political parties accept their arguments (and the money they donate to their election funds); and neither has had much to say about corporate charters in more than 100 years. 

[00:07:12] Presenter: How would federal charters help? 

[00:07:13] Alan Cohen (We The People): A simple fix exists if a government of, by, and for the people is voted into office. We could require any company that engages in interstate or international commerce to acquire a federal charter. The charters could again be individually written, define various limits and insist that each corporation state how it will benefit society before a charter is granted. To encourage competition, a limit on the percentage of an industry a corporation could serve could be specified, and such charters could be monitored at intervals to make sure that promises made were kept as a condition for renewal of the charter. Meanwhile, states could continue to charter small and medium-sized state-confined businesses with only modest regulation. 

With regulation of larger corporations taking place at the level of granting charters, the legion of regulatory agencies and the associated legal proceedings could be downsized with substantial savings in money and time, and corporations could go back to benefiting rather than harming the society that gives them permission to exist.

[00:08:22] Presenter: That’s Alan Cohen from a new political party on the Oregon ballot called ‘We The People.’ You can find more information on their website, WTPLane.org.