Corporation, an organization, recognized and created by law, that allows people to associate together for a common purpose under a common name. The corporation is a key economic institution, even though it is not the most prevalent form of business organization.
Business corporations are known as joint-stock companies because they are jointly owned by different people who receive shares of stock in exchange for an investment of money in the venture. In business, corporate organization has a number of advantages. First, a corporation exists independently of its owners (the stockholders). Second, in British law (and that of many other countries) the corporation is recognized as a legal person with many of the same rights that individuals have. These include the right to buy and sell property, to sue and be sued, and to enter into contracts. Third, the corporation is an enormously successful device for raising vast amounts of business capital by pooling the financial resources of thousands of individuals, something that cannot be done by other forms of business organizations (the individual proprietorship and the partnership). This also serves to spread the risks of a new venture among many people. Finally, the owners of a corporation are not liable for its debts beyond their investment.
II HISTORICAL BACKGROUND
As a legal form of organization, the corporation can be traced to Roman times. In the Middle Ages corporations were used to organize universities, monasteries, and guilds. The voyages of exploration and discovery in the 16th and 17th centuries stimulated the use of the corporate form of organization, not only for the pursuit of trade but also to carry to distant lands the power of the governments that chartered the corporations. A joint-stock chartered company such as the British East India Company was both a business enterprise and a form of government. The American colonies were established by corporate bodies chartered by the British Crown with the authority both to govern and to engage in trade.
A boom in joint-stock ventures in the early 18th century led to overdevelopment and excessive speculation, resulting in the collapse of some large corporate enterprises, including the South Sea Company in England (in the South Sea Bubble scandal) and John Law’s Louisiana Company in France. In 1720 the British Parliament passed the Bubble Act, which for more than a century after its passage severely restricted the use of corporate organization in business.
In the 19th century the Industrial Revolution brought a tremendous increase in the number of business opportunities that required large amounts of financial capital for their exploitation. In all the industrial nations laws were changed or enacted to permit corporate growth. Thus, industrialization provided the impetus for the emergence of the modern corporation, especially the corporate giants that now dominate much of the world economy.
III CORPORATE CHARACTERISTICS
Most corporations are private; that is, they are owned through shares held by private individuals. Shares are traded in organized markets such as the world’s stock exchanges. Public corporations are owned by governmental bodies.
The majority of corporations are small, but in practice a few giant corporations dominate vast sectors of the global economy, accounting for much of world economic output.
In view of the growing importance of corporations, society is faced with three major problems. First, the growth in corporate size has brought an increasing separation of control from ownership. In large firms, the shareholder (and nominal owner) no longer exercises effective control; actual control rests with management, which tends to be self-selecting and responsible only to itself. Second, the size of many corporations gives them economic power, a development that permits escape from the discipline of the competitive market, because large corporations have substantial control over the prices charged for the goods they produce. Finally, society has not been wholly successful in making certain that corporate performance serves the public interest as well as the interests of owners and managers. Competition laws may prevent the emergence of outright monopoly, but they do not guarantee fair and equitable business competition.
These problems, present in the developed economies, have become acuter with the growing number and power of multinational corporations. The multinationals, many of which are American, are business firms whose sales, workforce, production facilities, and other operations are worldwide in scope. They represent the latest development in the continuing growth of corporate organization. Their power to create wealth on a worldwide scale means that multinationals are likely to remain a dominant force shaping the world economy far into the future.