Who Owns the Corporation?

In the earliest days of free enterprise there was little distinction to be drawn between the ownership and management of business entities. In most cases these roles were played by the same individuals, who brought to the economic system their own personal goals and aspirations, and in turn their own sense of accountability. For better or worse, this direct personal involvement provided the essential driving force of our economic growth and development.

As these private enterprises grew and evolved, however, new forms of ownership emerged, beginning with the various forms of partnership and proceeding to the development of the modern corporation. In these forms a gap began to appear, and then widen, between the functions of ownership and management, and the direct human involvement of individual owners grew increasingly removed from management. The need to bridge this gap has in turn provided the foundation for much of our contemporary system of contract law and our standards of accounting practice, all formal mechanisms devised to codify and monitor the various relationships between and within business entities. The development of the modern publicly held corporation accelerated this process tremendously, as represented by the rise of the U. S. Securities and Exchange Commission, a powerful source of standards for corporate life.

The key advantages of the corporate form – limited liability and a vastly expanded capacity for raising capital – have led in turn to the development of a corporate culture far removed from the greater concerns of individual owners, with a resultant focus on near term growth and profitability. This tendency of large corporations to organize themselves around short term interests is increasingly a matter of public concern, for despite the continued existence of other business forms the large publicly held corporations dominate the developed world’s economic landscape.

It is also important to note that corporations are legal inventions, and can only exist within a particular legal and regulatory milieu. In the US corporations are chartered by the individual states, where considerable variations exist in this milieu. Traditionally, of course, Delaware is the most corporate friendly state. In this particular context Delaware is also the most management friendly state. Sarbanes-Oxley, however, represents a significant departure from this historical pattern, as it is the first federal law related to corporate governance to be enacted.