Corporations Research Paper

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The rise of the corporation to its position of world preeminence has its roots in the corporate consolidation of finance and industry in the late nineteenth century, most especially in the United States. Competition for capital globally and within the confines of the United States played a central role in the rise of U.S. multinational firms, as revealed by an amendment to the New Jersey corporation law of 1889. Until this date, there were only a few large corporate combines of more than $10 million, except in railroads (Horwitz 1992, pp. 83–90; Roy 1997). The amended New Jersey corporation law, designed by William Nelson Cromwell (1854–1948) and his lawyers from the firm of Sullivan and Cromwell and acceded to by the New Jersey State Legislature as a way to attract capital to its domains, helped change all this. Businesses worth hundreds of millions of dollars fled from New York and other locations to set up shop in New Jersey. By the dawn of the twentieth century, roughly seven hundred corporations worth some $1 billion had incorporated in the state (Lisagor and Lipsius 1988, p. 27). With the expenses of New Jersey now paid from corporate fees, and with other regions losing business, rival states adopted similar laws to attract capital, thus largely curbing state regulation of corporations (Horwitz 1992, pp. 83–87).

Competition for capital, which the German sociologist and economist Max Weber (1864–1920) argued was key to corporate influence over states in the world system, thus displayed its power in the United States. Immediately after the New Jersey law’s passage, from 1890 to 1893, the rise of Wall Street and the securitization of finance and equity—a major aspect of the financial expansion of the later twentieth century—began. Corporate stock in the new industrial firms became listed on the stock market and was traded by brokerage firms, being publicly offered for purchase on the stock exchange in 1897 as the U.S. merger movement gathered steam. Stock offerings rose from $57 million to $260 million between 1896 and 1907, and the corporate concentration of U.S. capitalism, warned against by such observers as the French writer Alexis de Tocqueville (1805–1859), was solidified (Horwitz 1992, p. 95).

From 1875 to 1904 approximately three thousand companies merged or consolidated as a full third of the country’s largest firms evaporated through mergers and vertical integration. This is roughly the same percentage of Fortune 500 firms (the largest publicly held firms in the United States) eliminated during the merger wave and corporate restructuring of the late twentieth century as investment bankers and corporate lawyers once again ascended to the top of the corporate hierarchy (Sobel 1998, p. 24). Morton Horwitz argues that “if the private law of corporations—that is, the law regulating relations within the corporation as well as with private parties— had not changed after 1880, it is difficult to imagine how the enormous corporate consolidation of the next thirty years could have taken place” (1992, pp. 85–86).

Much the same can be said of the wave of state-corporate globalization occurring in the first decade of the twenty-first century. The proliferation of multinational corporations and related supranational institutions is directly related to this early adumbration of transnational firms freed from territorial regulation in the late nineteenth century, with its earlier roots in the Madisonian emphasis on property rights in the U.S. Constitution. The American sociologist C. Wright Mills (1916–1962) and others dated the supremacy of corporate power in the United States to the elections of 1866 and the Supreme Court decision in Santa Clara v. Southern Pacific Railroad Company (1886), which declared the corporation a person under the Fourteenth Amendment. However, Horwitz argues: “More probably, the phenomenal migration of corporations to New Jersey after 1889 made legal thinkers finally see that, in fact as well as in theory, corporations could do virtually anything they wanted.” (Horowitz 1992, p. 101). The subsequent replacement of the “artificial entity theory” of the corporation, which “represented a standing reminder of the social creation of property rights” by “the natural entity theory of the business corporation was to legitimate large-scale enterprise and to destroy any special basis for state regulation of the corporation that derived from its creation by the state” (Horwitz 1992, p. 104).

Corporations arose elsewhere, as exemplified by Japan’s zaibatsu—the unparalleled family-controlled banking and industrial collaborations exemplified by Mitsui, Mitsubishi, Dai Ichi Kangyo, Sumitomo, Sanwa, and Fuyo—and Germany’s heavy industrial corporations with links to universal banks. In the 2000s, of course, corporations extend their reach globally, with new corporate firms arising in such East Asian countries as China, Taiwan, and South Korea. With the growing power of corporate firms in the early twentieth century came increased attempts to regulate them, though in the United States antitrust legislation remained subordinate to the need to rely on corporations during wartime and in support of foreign policy. After the wave of nationalization that arose with the Russian, Chinese, and Cuban revolutions, U.S. corporations became increasingly contested and their relative freedom continued to be a mainstay of Western foreign policy.

In the aftermath of the Soviet Empire’s collapse in the early 1990s, thousands of corporate firms and their foreign affiliates control about half of the value of all goods and services in the global economy, while the Fortune 500 is responsible for roughly half of all profits in the U.S. economy. Despite free market rhetoric, corporations are often heavily subsidized by their states; these subsidies include military spending, which is exempted from World Trade Organization bans against certain types of subsidies. Corporate exploitation of developing countries occurs through the use of resources and labor, often through subcontracting, a practice exemplified by one of the world’s largest corporations, Wal-Mart. Meanwhile, foreign direct investment gives developed countries control over the economies of their junior partners. Simultaneously, limited liability serves to shelter shareholders and officers from corporate malfeasance, while the huge amount of money available for criminal defense often limits the severity of punishment for corporate crime, as evidenced in the wave of corporate accounting scandals involving such companies as Enron and Arthur Anderson in the early twenty-first century. Despite this, corporate advertising and public relations continue to be used to manipulate tastes for consumer goods and to put a positive public face on corporate business. In addition, lobbying associations such as the Business Roundtable in the United States represent the increased politicization of corporations as they use their immense power to influence legislation.

Bibliography:

  1. Horwitz, Morton J. 1992. The Transformation of American Law, 1870–1960. New York: Oxford University Press.
  2. Lisagor, Nancy, and Frank Lipsius. 1988. A Law Unto Itself: The Untold Story of the Law Firm Sullivan & Cromwell. New York: Morrow.
  3. Roy, William G. 1997. Socializing Capital: The Rise of the Large Industrial Corporation in America. Princeton, NJ: Princeton University Press.
  4. Sobel, Robert. 1998. Hubris Humbled: Merger Mania, Retribution, Reform—It’s All Happened Before. Barron’s 78 (15): 24–25.

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