business organization


business organization

Introduction

      an entity formed for the purpose of carrying on commercial enterprise. Such an organization is predicated on systems of law governing contract and exchange, property rights, and incorporation.

      Business enterprises customarily take one of three forms: individual proprietorships, partnerships, or limited-liability companies (or corporations). In the first form, a single person holds the entire operation as his personal property, usually managing it on a day-to-day basis. Most businesses are of this type. The second form, the partnership, may have from two to 50 or more members, as in the case of large law and accounting firms, brokerage houses, and advertising agencies. This form of business is owned by the partners themselves; they may receive varying shares of the profits depending on their investment or contribution. Whenever a member leaves or a new member is added, the firm must be reconstituted as a new partnership. The third form, the limited-liability company, or corporation, denotes incorporated groups of persons—that is, a number of persons considered as a legal entity (or fictive “person”) with property, powers, and liabilities separate from those of its members. This type of company is also legally separate from the individuals who work for it, whether they be shareholders or employees or both; it can enter into legal relations with them, make contracts with them, and sue and be sued by them. Most large industrial and commercial organizations are limited-liability companies.

      This article deals primarily with the large private business organizations made up chiefly of partnerships and limited-liability companies—called collectively business associations. Some of the principles of operation included here also apply to large individually owned companies and to public enterprises.

Types of business associations
      Business associations have three distinct characteristics: (1) they have more than one member (at least when they are formed); (2) they have assets that are legally distinct from the private assets of the members; and (3) they have a formal system of management, which may or may not include members of the association.

      The first feature, plurality of membership, distinguishes the business association from the business owned by one individual; the latter does not need to be regulated internally by law because the single owner totally controls the assets. Because the single owner is personally liable for debts and obligations incurred in connection with the business, no special rules are needed to protect its creditors beyond the ordinary provisions of bankruptcy law.

      The second feature, the possession of distinct assets (or a distinct patrimony), is required for two purposes: (1) to delimit the assets to which creditors of the association can resort to satisfy their claims (though in the case of some associations, such as the partnership, they can also compel the members to make good any deficiency) and (2) to make clear what assets the managers of the association may use to carry on business. The assets of an association are contributed directly or indirectly by its members—directly if a member transfers a business or property or investments of his own to the association in return for a share in its capital, and indirectly if a member pays his share of capital in cash and the association then uses his contribution and like contributions in cash made by other members to purchase a business, property, or investments.

      The third essential feature, a system of management, varies greatly. In a simple form of business association the members who provide the assets are entitled to participate in the management unless otherwise agreed. In the more complex form of association, such as the company or corporation of the Anglo-American common-law countries, members have no immediate right to participate in the management of the association's affairs; they are, however, legally entitled to appoint and dismiss the managers (known also as directors, presidents, or administrators), and their consent is legally required (if only pro forma) for major changes in the company's structure or activities, such as reorganizations of its capital and mergers with other associations. The role of a member of a company or corporation is basically passive; he is known as a shareholder or stockholder, the emphasis being placed on his investment function. The managers of a business association, however, do not in law comprise all of the persons who exercise discretion or make decisions. Even the senior executives of large corporations or companies may be merely employees, and, like manual or clerical workers, their legal relationship with the corporation is of no significance in considering the law governing the corporation. Whether an executive is a director, president, or administrator (an element in the company or corporation's legal structure) depends on purely formal considerations; if he is named as such in the document constituting the corporation, or if he is subsequently appointed or elected to hold such an office, it is irrelevant whether his actual functions in running the corporation's business and the power or influence he wields are great or small. Nevertheless, for certain purposes, such as liability for defrauding creditors in English law and liability for deficiencies of assets in bankruptcy in French law, people who act as directors and participate in the management of the company's affairs are treated as such even though they have not been formally appointed.

Partnerships (partnership)
      The distinguishing features of the partnership are the personal and unrestricted liability of each partner for the debts and obligations of the firm (whether he assented to their being incurred or not) and the right of each partner to participate in the management of the firm and to act as an agent of it in entering into legal transactions on its behalf. The civil-law (civil law) systems of most continental European countries have additionally always permitted a modified form of partnership, the limited partnership (société en commandite, Kommanditgesellschaft, società in accomandita) in which one or more of the partners are liable for the firm's debts only to the extent of the capital they contribute or agree to contribute. Such limited partners are prohibited from taking part in the management of the firm, however; if they do, they become personally liable without limit for the debts of the firm, together with the general partners. English common law refused to recognize the limited partnership, and in the United States at the beginning of the 19th century only Louisiana, which was governed by French civil law, permitted such partnerships. During the 19th century most of the states enacted legislation allowing limited partnerships to be formed, and in 1907 Great Britain adopted the limited partnership by statute, but it has not been much used there in practice. Another distinction between kinds of partnership in civil law—one that has no equivalent in Anglo-American common-law countries—is that between civil and commercial partnerships. This distinction depends on whether or not the purposes for which the partnership is formed fall within the list of commercial activities in the country's commercial code. These codes always make manufacturing, dealing in, and transporting goods commercial activities, while professional and agricultural activities are always noncommercial. Consequently, a partnership of lawyers, doctors, or farmers is a civil partnership, governed exclusively by the civil code of the country concerned and untouched by its commercial code. No such distinction is made in the common-law countries, where professional and business partnerships are subject to the same rules as trading partnerships, although only partners in a trading partnership have the power to borrow on the firm's behalf.

Limited-liability companies, or corporations (corporation)
      The company or corporation, unlike the partnership, is formed not simply by an agreement entered into between its first members; it must also be registered at a public office or court designated by law or otherwise obtain official acknowledgment of its existence. Under English and American law the company or corporation is incorporated by filing the company's constitution (memorandum and articles of association, articles or certificate of incorporation) signed by its first members at the Companies Registry in London or, in the United States, at the office of the state secretary of state or corporation commissioner. In France, Germany, and Italy and the other countries subject to a civil-law system, a notarized copy of the constitution is filed at the local commercial tribunal, and proof is tendered that the first members of the company have subscribed the whole or a prescribed fraction of the company's capital and that assets transferred to the company in return for an allotment of its shares have been officially valued and found to be worth at least the amount of capital allotted for them. English and American law, together with the laws of The Netherlands (Netherlands, The) and the Scandinavian (Denmark) countries (Norway), provide only one category of business company or corporation (in The Netherlands the naamloze vennootschap, in Sweden the aktiebolag), although all these systems of law make distinctions for tax purposes between private, or close, companies or corporations on the one hand and public companies or corporations on the other. English law also distinguishes between private and public companies for some purposes of company law; for example, a private company cannot have more than 50 members and cannot advertise subscriptions for its shares. Under the civil-law systems, however, a fundamental distinction is drawn between the public company (société anonyme, Aktiengesellschaft, società per azioni) and the private company (société à responsabilité limitée, Gesellschaft mit beschränkter Haftung [G.m.b.H.], società a responsabilità limitata), and in Germany the two kinds of company are governed by different enactments, as they were in France until 1966. For practical purposes, however, public and private companies function the same way in all countries. Private companies are formed when there is no need to appeal to the public to subscribe for the company's shares or to lend money to it, and often they are little more than incorporated partnerships whose directors hold all or most of the company's shares. Public companies are formed—or more usually created by the conversion of private companies into public ones—when the necessary capital cannot be supplied by the directors or their associates and it is necessary to raise funds from the public by publishing a prospectus. In Great Britain, the Commonwealth countries, and the United States, this also requires the obtaining of a stock exchange listing for the shares or other securities offered or an offer on the Unlisted Securities Market (USM). In a typical public company the directors hold only a small fraction of its shares, often less than 1 percent, and in Great Britain and the United States, at least, it is not uncommon for up to one-half of the funds raised by the company to be represented not by shares in the company but by loan securities such as debentures or bonds.

      In Anglo-American common-law countries, public and private companies account for most of the business associations formed, and partnerships are entered into typically only for professional activities. In European countries the partnership in both its forms is still widely used for commercial undertakings. In Germany a popular form of association combines both the partnership and the company. This is the G.m.b.H. & Co., which is a limited partnership whose general partner (nominally liable without limit for the partnership's debts) is a private company and whose limited partners are the same persons as the shareholders of the company. The limited partners enjoy the benefit of limited liability for the partnership's debts, and, by ensuring that most of the partnership's profits are paid to them as limited partners and not to them as shareholders in the private company, they largely avoid the incidence of corporation tax.

Shares (stock) and other securities
      Under all systems of law a partner may assign his share or interest in a partnership to anyone he wishes unless the partnership agreement forbids this, but the assignment does not make the assignee a partner unless all the other partners agree. If they do not, the assignee is merely entitled to receive the financial benefits attached to the share or interest without being able to take part in the management of the firm, but neither is he personally liable for the debts of the firm.

      The shares of a company are quite different. In the first place, they are freely transferable unless the company's constitution imposes restrictions on their transfer or, in French and Belgian law, unless the company is a private one, in which case transfers require the consent of the holders of three-quarters of the company's issued shares. The constitution of an English private company must always restrict the transfer of its shares for the company to qualify as private. The restriction is usually that the directors may refuse to register a transfer for any of several reasons or that the other shareholders shall have the right to buy the shares at a fair price when their holder wishes to sell. In American law similar restrictions may be imposed, but unreasonable restrictions are disallowed by the courts. According to French and German law, the transfer of shares in public companies may be restricted only by being made subject to the consent of the board of directors or of the management board, but under French law if the directors do not find an alternative purchaser at a fair price within three months their consent is considered as given.

      The second significant difference between share holding and partnership is that shares in a company do not expose the holder to unlimited liability in the way that a partner (other than a limited one) is held liable for the debts of the firm. Under all systems of law, except those of Belgium and some U.S. states, all shares must have a nominal value expressed in money terms, such as $10, £1, DM 50, or Fr 100, the latter two being the minimum permissible under German and French law, respectively. A company may issue shares for a price greater than this nominal value (the excess being known as a share premium), but it generally cannot issue them for less. Any part of that nominal value and the share premium that has not so far been paid is the measure of the shareholder's maximum liability to contribute if the company becomes insolvent. If shares are issued without a nominal value (no par value shares), the subscription price is fixed by the directors and is the measure of the shareholder's maximum liability to contribute. Usually the subscription price of shares is paid to the company fairly soon after they are issued. The period for payment of all the installments is rarely more than a year in common-law countries, and it is not uncommon for the whole subscription price to be payable when the shares are issued. The actual subscription price is influenced by market considerations, such as the company's profit record and prospects, and by the market value of the company's existing shares. Although directors have a duty to obtain the best subscription price possible, they can offer new shares to existing shareholders at favourable prices, and those shareholders can benefit either by subscribing for the new shares or by selling their subscription rights to other persons. Under European legislation, directors are bound to offer new shares to existing shareholders in the first place unless they explicitly forgo their preemptive rights. In most U.S. states (but not in the United Kingdom), such preemptive rights are implied if the new shares belong to the same class as existing shares, but the rights may be negated by the company's constitution.

Dividends (dividend)
      The third difference between share holding and partnerships is that a partner is automatically entitled to a share of the profits (profit) of the firm as soon as they are ascertained, but a shareholder is entitled to a dividend out of the company's profits only when it has been declared. Under English law, dividends are usually declared at annual general meetings of shareholders, though the company's constitution usually provides that the shareholders cannot declare higher dividends than the directors recommend. Under American law, dividends are usually declared by the directors, and, if shareholders consider, in view of the company's profits, that too small a dividend has been paid, they may apply to the court to direct payment of a reasonable dividend. German law similarly protects shareholders of public companies against niggardly dividends by giving the annual general meeting power to dispose as it wishes of at least half the profit shown by the company's annual accounts before making transfers to reserve. For the same object, Swedish law empowers the holders of 10 percent of a company's shares to require at least one-fifth of its accumulated profits and reserves to be distributed as a dividend, provided that the total distribution does not exceed one-half of the profits of its last financial year. Thus, most national law recognizes potential conflict of interest between directors and shareholders.

Classes of shares
      Companies may issue shares of different classes, the commonest classes being ordinary and preference, or, in American terminology, common and preferred shares. Preference shares are so called because they are entitled by the terms on which they are issued to payment of a dividend of a fixed amount (usually expressed as a percentage of their nominal value) before any dividend is paid to the ordinary shareholders. In the case of cumulative preference shares, any unpaid part of a year's dividend is carried forward and added to the next year's dividend and so on until the arrears of preference dividend are paid off. The accumulation of arrears of preference dividend depreciates the value of the ordinary shares, whose holders cannot be paid a dividend until the arrears of preference dividend have been paid. Consequently, it has been common in the United States (but not in the United Kingdom) for companies to issue noncumulative preference shares, giving their holders the right to a fixed preferential dividend each year if the company's profits are sufficient to pay it but limiting the dividend to the amount of the profits of the year if they are insufficient to pay the preference dividend in full. Preference shares are not common in Europe, but under German and Italian law they have the distinction of being the only kind of shares that can be issued without voting rights in general meetings, all other shares carrying voting rights proportionate to their nominal value by law.

History of the limited-liability company
      The limited-liability company, or corporation, is a relatively recent innovation. Only since the mid-19th century have incorporated businesses risen to ascendancy over other modes of ownership. Thus, any attempt to trace the forerunners of the modern corporation should be distinguished from a general history of business or a chronicle of associated activity. Men have embarked on enterprises for profit and have joined together for collective purposes since the dawn of recorded history, but these early enterprises were forerunners of the contemporary corporation in terms of their functions and activities, not in terms of their mode of incorporation. When a group of Athenian or Phoenician merchants pooled their savings to build or charter a trading vessel, their organization was not a corporation but a partnership; ancient societies did not have laws of incorporation that delimited the scope and standards of business activity.

      The corporate form itself developed in the early Middle Ages with the growth and codification of civil and canon law. Several centuries passed, however, before business ownership was subsumed under this arrangement. The first corporations were towns, universities, and ecclesiastical orders. These differed from partnerships in that the corporation existed independently of any particular membership. Unlike modern business corporations, they were not the “property” of their participants. The holdings of a monastery, for example, belonged to the order itself; no individual owned shares in its assets. The same was true of the medieval guilds (guild), which dominated many trades and occupations. As corporate bodies, they were chartered by government, and their business practices were regulated by public statutes; each guild member, however, was an individual proprietor who ran his own establishment, and, while many guilds had substantial properties, these were the historic accruals of the associations themselves. By the 15th century, the courts of England had agreed on the principle of “limited liability”: Si quid universitati debetur, singulis non debetur, nec quod debet universitas, singuli debent (“If something is owed to the group, it is not owed to the individuals nor do the individuals owe what the group owes”). Originally applied to guilds and municipalities, this principle set limits on how much an alderman of the Liverpool Corporation, for example, might be called upon to pay if the city ran into debt or bankruptcy. Applied later to stockholders in business corporations, it served to encourage investment because the most an individual could lose in the event of the firm's failure would be the actual amount he had originally paid for his shares.

      Incorporation of business enterprises began in England during the Elizabethan era. This was a period when businessmen were beginning to accumulate substantial surpluses, and overseas exploration and trade presented expanded investment opportunities. This was an age that gave overriding regulatory powers to the state, which sought to ensure that business activity was consonant with current mercantilist conceptions of national prosperity. Thus, the first joint-stock companies, while financed with private capital, were created by public charters setting down in detail the activities in which the enterprises might operate. In 1600 Queen Elizabeth I granted to a group of investors headed by the Earl of Cumberland the right to be “one body corporate,” known as the Governor and Company of Merchants of London, trading into the East Indies. The East India Company was bestowed a trading monopoly in its territories and also was given authority to make and enforce laws in the areas it entered. The East India Company, the Royal African Company, the Hudson's Bay Company, and similar incorporated firms were semipublic enterprises acting both as arms of the state and as vehicles for private profit. The same principle held with the colonial charters (charter) on the American continent. In 1606 the crown vested in a syndicate of “loving and well-disposed Subjects” the right to develop Virginia as a royal domain, including the power to coin money and to maintain a military force. The same was done in subsequent decades for the “Governor and Company of the Massachusetts Bay (Massachusetts Bay Colony) in New England” and for William Penn's “Free Society of Traders” in Pennsylvania.

 Much of North America's settlement was initially underwritten as a business venture. But, while British investors accepted the regulations inhering in their charters, American entrepreneurs came to regard such rules as repressive and unrealistic. The U.S. War of Independence (American Revolution) can be interpreted as a movement against the tenets of this mercantile system, raising serious questions about a direct tie between business enterprise and public policy. One result of that war, therefore, was to establish the premise that a corporation need not show that its activities advance a specific public purpose. Alexander Hamilton (Hamilton, Alexander), the first secretary of the treasury and an admirer of Adam Smith, took the view that businessmen should be encouraged to explore their own avenues of enterprise. “To cherish and stimulate the activity of the human mind, by multiplying the objects of enterprise, is not among the least considerable of the expedients by which the wealth of a nation may be promoted,” he wrote in 1791.

      The growth of independent corporations did not occur overnight. For a long time, both in Europe and in the United States, the corporate form was regarded as a creature of government, providing a form of monopoly. In the United States the new state legislatures granted charters principally to public-service companies intending to build or operate docks, bridges, turnpikes, canals, and waterworks, as well as to banks and insurance companies. Of the 335 companies receiving charters prior to 1800, only 13 were firms engaging in commerce or manufacturing. By 1811, however, New York had adopted a general act of incorporation, setting the precedent that businessmen had only to provide a summary description of their intentions for permission to launch an enterprise. By the 1840s and '50s the rest of the states had followed suit. In Great Britain (United Kingdom) after 1825 the statutes were gradually liberalized so that the former privilege of incorporating joint-stock companies became the right of any group complying with certain minimum conditions, and the principle of limited liability was extended to them. A similar development occurred in France and parts of what is now Germany.

      By the late 20th century, in terms of size, influence, and visibility, the corporation has become the dominant business form in industrial nations. While corporations may be large or small, ranging from firms having hundreds of thousands of employees to neighbourhood businesses of very modest proportions, public attention has increasingly focused on the several hundred giant companies that play a preponderant economic role in the United States, Japan, Korea, the nations of western Europe, Canada, Australia, New Zealand, South Africa, and several other countries. These firms not only occupy important positions in the economy, but they have great social, political, and cultural influence as well. Both at home and abroad they affect the operations of national and local governments, give shape to local communities, and influence the values of ordinary individuals. Therefore, while in fact and in law corporate businesses are private enterprises, their activities have consequences that are public in character and as pervasive as those of many governments.

Other forms of business association
      Besides the partnership and the company or corporation, there are a number of other forms of business association, of which some are developments or adaptations of the partnership or company, some are based on contract between the members or on a trust created for their benefit, and others are statutory creations. The first of these classes includes the cooperative society; the building society, home loan association, and its German equivalent, the Bausparkasse; the trustee savings bank, or people's or cooperative bank; the friendly society, or mutual insurance association; and the American mutual fund investment company. The essential features of these associations are that they provide for the small or medium investor; and, although they originated as contractual associations, they are now governed in most countries by special legislation and not by the law applicable to companies or corporations.

      The establishment and management of cooperatives (cooperative) is treated in most countries under laws distinct from those governing other business associations. The cooperative is a legal entity but typically owned and controlled by those who use it or work in it, though there may be various degrees of participation and profit sharing. The essential point is that the directors and managers are accountable ultimately to the enterprise members, not to the outside owners of capital. This form is rooted in a strong sense of social purpose; it was devised more than a century ago as an idealistic alternative to the conventional capitalist business association. It has been particularly associated with credit, retailing, agricultural marketing, and crafts.

      The second class comprises the English unit trust and the European fonds d'investissements or Investmentfonds, which fulfill the same functions as American mutual funds; the Massachusetts business trust (now little used but providing a means of limiting the liability of participants in a business activity like the limited partnership); the foundation (fondation, Stiftung), a European organization that has social or charitable objects and often carries on a business whose profits are devoted to those objects; and, finally, the cartel, or trade association, which regulates the business activities of its individual members and is itself extensively regulated by antitrust and antimonopoly legislation.

      The third class of associations, those wholly created by statute, comprises corporations formed to carry on nationalized business undertakings (public enterprise) (such as the Bank of England and the German Federal Railways) or to coexist with other businesses in the same field (such as the Italian Istituto per la Ricostruzione Industriale) or to fulfill a particular governmental function (such as the Tennessee Valley Authority). Such statutory associations usually have no share capital, though they may raise loans from the public. They are regarded in European law as being creatures of public law, like departments and agencies of the government. In recent years, however, a hybrid between the state corporation and the privately owned corporation or company has appeared in the form of the mixed company or corporation (société mixte). In this kind of organization, part of the association's share capital is held by the state or a state agency and part by private persons, this situation often resulting from a partial acquisition of the association's shares by the state. In only France and Italy are there special rules governing such associations; in the United Kingdom and Germany they are subject to the ordinary rules of company law.

Management and control of companies
      The simplest form of management is the partnership. In Anglo-American common-law and European civil-law countries, every partner is entitled to take part in the management of the firm's business, unless he is a limited partner; however, a partnership agreement may provide that an ordinary partner shall not participate in management, in which case he is a dormant partner but is still personally liable for the debts and obligations incurred by the other managing partners.

      The management structure of companies or corporations is more complex. The simplest is that envisaged by English, Belgian (Belgium), Italian, and Scandinavian law, by which the shareholders of the company periodically elect a board of directors who collectively manage the company's affairs and reach decisions by a majority vote but also have the right to delegate any of their powers, or even the whole management of the company's business, to one or more of their number. Under this regime it is common for a managing director (directeur général, direttore generale) to be appointed, often with one or more assistant managing directors, and for the board of directors to authorize them to enter into all transactions needed for carrying on the company's business, subject only to the general supervision of the board and to its approval of particularly important measures, such as issuing shares or bonds or borrowing. The U.S. system is a development of this basic pattern. By the laws of most states it is obligatory for the board of directors elected periodically by the shareholders to appoint certain executive officers, such as the president, vice president, treasurer, and secretary. The latter two have no management powers and fulfill the administrative functions that in an English company are the concern of its secretary; but the president and in his absence the vice president have by law or by delegation from the board of directors the same full powers of day-to-day management as are exercised in practice by an English managing director.

      The most complex management structures are those provided for public companies under German and French law. The management of private companies under these systems is confided to one or more managers (gérants, Geschäftsführer) who have the same powers as managing directors. In the case of public companies, however, German law imposes a two-tier structure, the lower tier consisting of a supervisory committee (Aufsichtsrat) whose members are elected periodically by the shareholders and the employees of the company in the proportion of two-thirds shareholder representatives and one-third employee representatives (except in the case of mining and steel companies where shareholders and employees are equally represented) and the upper tier consisting of a management board (Vorstand) comprising one or more persons appointed by the supervisory committee but not from its own number. The affairs of the company are managed by the management board, subject to the supervision of the supervisory committee, to which it must report periodically and which can at any time require information or explanations. The supervisory committee is forbidden to undertake the management of the company itself, but the company's constitution may require its approval for particular transactions, such as borrowing or the establishment of branches overseas, and by law it is the supervisory committee that fixes the remuneration of the managers and has power to dismiss them.

      The French management structure for public companies offers two alternatives. Unless the company's constitution otherwise provides, the shareholders periodically elect a board of directors (conseil d'administration), which “is vested with the widest powers to act on behalf of the company” but which is also required to elect a president from its members who “undertakes on his own responsibility the general management of the company,” so that in fact the board of directors' functions are reduced to supervising him. The similarity to the German pattern is obvious, and French legislation carries this further by openly permitting public companies to establish a supervisory committee (conseil de surveillance) and a management board (directoire) like the German equivalents as an alternative to the board of directors–president structure.

      Dutch and Italian public companies tend to follow the German pattern of management, although it is not expressly sanctioned by the law of those countries. The Dutch commissarissen and the Italian sindaci, appointed by the shareholders, have taken over the task of supervising the directors and reporting on the wisdom and efficiency of their management to the shareholders.

Separation of ownership and control
      The investing public is a major source of funds for new or expanding operations. As companies have grown, their need for funds has grown, with the consequence that legal ownership of companies has become widely dispersed. For example, in large American corporations, shareholders may run into the hundreds of thousands and even more. Although large blocks of shares may be held by wealthy individuals or institutions, the total amount of stock in these companies is so large that even a very wealthy person is not likely to own more than a small fraction of it.

      The chief effect of this stock dispersion has been to give effective control of the companies to their salaried managers. Although each company holds an annual meeting open to all stockholders, who may vote on company policy, these gatherings, in fact, tend to ratify ongoing policy. Even if sharp questions are asked, the presiding officers almost invariably hold enough proxies to override outside proposals. The only real recourse for dissatisfied shareholders is to sell their stock and invest in firms whose policies are more to their liking. (If enough shareholders do this, of course, the price of the stock will fall quite markedly, perhaps impelling changes in management personnel or company policy.) Occasionally, there are “proxy battles,” when attempts are made to persuade a majority of shareholders to vote against a firm's managers (or to secure representation of a minority bloc on the board), but such struggles seldom involve the largest companies. It is in the managers' interest to keep the stockholders happy, for, if the company's shares are regarded as a good buy, then it is easy to raise capital through a new stock issue.

      Thus, if a company is performing well in terms of sales and earnings, its executives will have a relatively free hand. If a company gets into trouble, its usual course is to agree to be merged into another incorporated company or to borrow money. In the latter case, the lending institution may insist on a new chief executive of its own choosing. If a company undergoes bankruptcy and receivership, the court may appoint someone to head the operation. But managerial autonomy is the rule. The salaried executives typically have the discretion and authority to decide what products and services they will put on the market, where they will locate plants and offices, how they will deal with employees, and whether and in what directions they will expand their spheres of operation.

Executive management
      The markets that corporations serve reflect the great variety of humanity and human wants; accordingly, firms that serve different markets exhibit great differences in technology, structure, beliefs, and practice. Because the essence of competition and innovation lies in differentiation and change, corporations are in general under degrees of competitive pressure to modify or change their existing offerings and to introduce new products or services. Similarly, as markets decline or become less profitable, they are under pressure to invent or discover new wants and markets. Resistance to this pressure for change and variety is among the benefits derived from regulated manufacturing, from standardization of machines and tools, and from labour specialization. Every firm has to arrive at a mode of balancing change and stability, a conflict often expressed in distinctions drawn between capital and revenue and long- and short-term operations and strategy. Many corporations have achieved relatively stable product–market relationships, providing further opportunity for growth within particular markets and expansion into new areas. Such relative market control endows corporate executives and officers with considerable discretion over resources and, in turn, with considerable corporate powers. In theory these men and women are hired to manage someone else's property; in practice, however, many management officers have come increasingly to regard the stockholders as simply one of several constituencies to which they must report at periodic intervals through the year.

Managerial decision making
      The guidelines governing management decisions cannot be reduced to a simple formula. Traditionally, economists have assumed that the goal of a business enterprise was to maximize its profits. There are, however, problems of interpretation with this simple assertion. First, over time the notion of “profit” is itself unclear in operational terms. Today's profits can be increased at the expense of profits years away, by cutting maintenance, deferring investment, and exploiting staff. Second, there are questions over whether expenditure on offices, cars, staff expenses, and other trappings of status reduces shareholders' wealth or whether these are part of necessary performance incentives for executives. Some proponents of such expenditures believe that they serve to enhance contacts, breed confidence, improve the flow of information, and stimulate business. Third, if management asserts primacy of profits, this may in itself provide negative signals to employees about systems of corporate values. Where long-term success requires goodwill, commitment, and cooperation, focus on short-term profit may alienate or drive away those very employees upon whom long-term success depends.

      Generally speaking, most companies turn over only about half of their earnings to stockholders as dividends. They plow the rest of their profits back into the operation. A major motivation of executives is to expand their operations faster than those of their competitors. The important point, however, is that without profit over the long term no firm can survive. For growing firms in competitive markets a major indicator of executive competence is the ability to augment company earnings by increasing sales or productivity or by achieving savings in other ways. This principle distinguishes the field of business from other fields. A drug company makes pharmaceuticals and may be interested in improving health, but it exists, first and foremost, to make profits. If it found that it could make more money by manufacturing frozen orange juice, it might choose to do so.

The modern executive
      Much has been written about business executives as “organization men.” According to this view, typical company managers no longer display the individualism of earlier generations of entrepreneurs. They seek protection in committee-made decisions and tailor their personalities to please their superiors; they aim to be good “team” members, adopting the firm's values as their own. The view is commonly held that there are companies—and entire industries—that have discouraged innovative ideas. The real question now is whether or not companies will develop policies to encourage autonomy and adventuresomeness among managers.

      In Japan, where the employees of large corporations tend to remain with the same employer throughout their working lives, the corporations recruit young men upon their graduation from universities and train them as company cadets. Those among the cadets who demonstrate ability and a personality compatible with the organization are later selected as managers. Because of the seniority system, many are well past middle age before they achieve high status. There are signs that the system is weakening, however, as efforts are more often made to lift promising young men out of low-echelon positions. Criticism of the traditional method has been stimulated by the example of some of the newer corporations and of those owned by foreign capital. The few men in the Japanese business world who have emerged as personalities are either founders of corporations, managers of family enterprises, or small businessmen. They share a strong inclination to make their own decisions and to minimize the role of directors and boards.

Modern trends
      The sheer size of the largest limited-liability companies, or corporations—especially “multinationals,” with holdings across the world—has been a subject of discussion and public concern since the end of the 19th century. For with this rise has come market and political power. While some large firms have declined, been taken over, or gone out of business, others have grown to replace them. The giant firms continue to increase their sales and assets, by expanding their markets, by diversifying, and by absorbing smaller companies. Diversification carried to the extreme has brought into being the conglomerate company, which acquires and operates subsidiaries that are often in unrelated fields. The holding company, with the conglomerate, acts as a kind of internal stock market, allocating funds to its subsidiaries on the basis of financial performance. The decline or failure of many conglomerates, however, has cast doubt upon the competence of any one group of executives to manage a diversity of unrelated operations. Empirical evidence from the United States suggests that conglomerates have been less successful financially than companies that have had a clear product-market focus based on organizational strengths and competencies.

      The causes of such vast corporate growth have found varying explanations. One school of thought, most prominently represented by the U.S. economist John Kenneth Galbraith (Galbraith, John Kenneth), sees growth as stemming from the imperatives of modern technology. Only a large firm can employ the range of talent needed for research and development in areas such as aerospace and nuclear energy. And only companies of this stature have the capacity for innovating industrial processes and entering international markets. Just as government has had to grow in order to meet new responsibilities, so have corporations found that producing for the contemporary economy calls for the intricate interaction of executives, experts, and extensive staffs of employees. While there is certainly room for small firms, the kinds of goods and services that the public seems to want increasingly require the resources that only a large company can master.

      Others hold that the optimum size of the efficient firm is substantially smaller than many people believe. For instance George Romney, a former president of the U.S. company American Motors Corporation, contended that an automobile company could prosper and be profitable while producing only 200,000 cars a year. By this reasoning, most of the divisions of the huge U.S. General Motors Corporation could be established as separate companies. Some research has shown that profit rates in industries having a large number of smaller firms are just as high as in those in which a few big companies dominate a market. In this view, corporate expansion stems not from technological necessity but rather from an impulse to acquire or establish new subsidiaries or to branch out into new fields. The structures of most large corporations are really the equivalent of a congeries of semi-independent companies. In some cases these divisions compete against one another as if they were separately owned. The picture has been further complicated by growth across national boundaries, producing multinational (multinational corporation) companies, principally firms from western Europe and North America. Their enormous size and extent raise questions about their accountability and political and economic influence and power.

The impact of the large company
      While it is generally agreed that the power of large companies extends beyond the economic sphere, this influence is difficult to measure in any objective way. The processes of business entail at least some effort to ensure the sympathetic enactment and enforcement of legislation, since costs and earnings are affected by tax rates and government regulations. Companies and business groups send agents (lobbying) to local and national capitals and use such vehicles as advertising to enlist support for policies that they favour. Although, in many countries, companies may not legally contribute directly to candidates running for public office, their executives and stockholders may do so as individuals. Companies may, however, make payments to influence peddlers and contribute to committees working to pass or defeat legislative proposals. In practical terms, many lawmakers look upon companies as part of their constituency, although, if their districts depend on local plants, these lawmakers may be concerned more with preserving jobs than with protecting company profits. In any case, limited-liability companies are central institutions in society; it would be unrealistic to expect them to remain aloof from the political process that affects their operations, performance, and principles.

      The decisions made by company managements have ramifications throughout society. In effect, companies can decide which parts of the country or even which parts of the world will prosper and which will decline by choosing where to locate their plants and other installations. The giant companies not only decide what to produce but also help to instill in their customers a desire for the amenities that the companies make available. To the extent that large firms provide employment, their personnel requirements determine the curricula of schools and universities. For these reasons, individuals' aspirations and dissatisfactions are likely to be influenced by large companies. This does not mean that large business firms can influence the public in any way they choose; it is simply that they are the only institutions available to perform certain functions. Automobiles, typewriters, frozen food, and electric toasters must come from company auspices if they are to be provided at all. Understanding this dependence as a given, companies tend to create an environment congenial to the conduct of their business.

The social role of the large company
      Some company executives believe that their companies should act as “responsible” public institutions, holding power in trust for the community. Most companies engage in at least some public-service projects and make contributions to charities. A certain percentage of these donations can be deducted from a corporation's taxable income. Most of the donated money goes to private health, education, and welfare agencies, ranging from local hospital and charity funds to civil-rights groups and cultural institutions.

      At the other extreme, it is generally agreed that companies should reject the notion that they have public duties, that society as a whole will be better off if companies maximize their profits, for this will expand employment, improve technology, raise living standards, and also provide individuals with more money to donate to causes of their own choosing. A cornerstone of this argument is that management has no right to withhold dividends. If stockholders wish to give gifts themselves, they should do so from their personal funds. On the other hand, some critics complain that large companies have been much too conservative in defining their responsibilities. Not only have most firms avoided public controversy, but also they have sought to reap public-relations benefits from every sum that they donate. Very few, say the critics, have made more than a token effort to promote minority hiring, provide day-care centres, or take on school dropouts and former convicts. Companies have also been charged with abandoning the central cities, profiting from military contracts, misrepresenting their merchandise, and investing in foreign countries governed by repressive regimes. A perennial indictment has been that profits, prices, and executive compensation are too high, while the wages and taxes paid by corporations are too low.

      In the late 20th century a new school of critics emerged who stressed the social costs of the large company. They charged that automobiles, pharmaceuticals, and other products were badly designed and dangerous to their users. The new consumer movement (consumer advocacy), led by such figures as the U.S. lawyer Ralph Nader, was joined by environmental critics who pointed to the quantities of waste products released into streams and into the air. Local and national laws were passed in an effort to set higher standards of safety and to force companies to install antipollution devices. Not all of the critics understand that the costs of these measures are passed on to the consumer. If a nuclear power plant must have cooling towers so that it does not discharge heated water into an adjacent lake, for example, the extra equipment results in higher electricity bills. Most companies are hesitant to take such steps on their own initiative, fearing that they will need to raise prices without thereby increasing profits. Society, however, is already paying for the costs of traffic congestion, trash removal, and nutritional deficiencies. The prices charged by companies are far from reflecting the total impact that the manufacture and consumption of their products have upon human life.

Additional Reading

General
John P. Davis, Corporations: A Study of the Origin and Development of Great Business Combinations and Their Relation to the Authority of the State, 2 vol. (1905, reprinted 1971), remains the definitive historical account of the corporate form in the medieval and mercantile periods.

U.S. corporations
Louis M. Hacker, American Capitalism, Its Promise and Accomplishment (1957, reprinted 1979), traces the rise of corporations in the United States in the 19th century. The divorce of ownership and management is analyzed in Adolph A. Berle and Gardiner C. Means, The Modern Corporation and Private Property, rev. ed. (1968); and the implications of this development are treated in John Kenneth Galbraith, The New Industrial State, 3rd ed. rev. (1978). Analysis of the competitive powers of the free market is continued in Nicholas Wolfson, The Modern Corporation: Free Markets Versus Regulation (1984). Wilbert E. Moore, The Conduct of the Corporation (1962, reprinted 1975), focuses on internal operations; while Richard J. Barber, The American Corporation: Its Power, Its Money, Its Politics (1970), concentrates on external aspects. Osborn Elliott, Men at the Top (1959), examines the backgrounds and behaviour of company executives. Joseph Livingston, The American Stockholder, new rev. ed. (1963), evaluates the individuals and institutions that own corporate shares. Milton Friedman, Capitalism and Freedom (1962, reprinted 1982), is a plea for noninterference by public agencies; while Estes Kefauver, In a Few Hands: Monopoly Power in America (1965), supports further regulation and antitrust action by government. Edward S. Mason (ed.), The Corporation in Modern Society (1960, reprinted 1980); and Andrew Hacker (ed.), The Corporation Take-Over (1964, reprinted 1970), contain theoretical analyses and research findings. Managerial styles of the modern corporation are examined in Bruce Henderson, The Logic of Business Strategy (1984); A.L. Minkes and C.S. Nuttall, Business Behavior and Management Structure (1985); Johannes M. Pennings (ed.), Organizational Strategy and Change (1985); and Edgar H. Schein, Organizational Culture and Leadership (1985).

European limited-liability companies
The growth of corporations in Europe is discussed in Michael M. Postan, An Economic History of Western Europe, 1945–1964 (1967). Ephraim Lipson, The Economic History of England, vol. 1, 12th ed., and vol. 2–3, 6th ed. (1960–64), provides a full exposition of joint-stock companies and chartered companies. See also P. Sargant Florence, Ownership, Control and Success of Large Companies: An Analysis of English Industrial Structure and Policy, 1936–1951 (1961); and John Sheahan, Promotion and Control of Industry in Postwar France (1963).

Japanese companies
For the historical development of the Japanese economy, see William W. Lockwood, The Economic Development of Japan, expanded ed. (1968, reprinted 1970); and Henry Rosovsky, Capital Formation in Japan, 1868–1940 (1961), which cover the period from the Meiji Restoration to World War II; and Ryutaro Komiya (ed.), Postwar Economic Growth in Japan (1966; originally published in Japanese, 1963), for the postwar period. For a statistical analysis of Japan's economic growth since the 1860s, Lawrence Klein and Kazushi Ohkawa (eds.), Economic Growth: The Japanese Experience Since the Meiji Era (1968), is useful. The characteristics of entrepreneurs in the early Meiji period, when modern capitalism rose in Japan, are given in Johannes Hirshmeier, The Origins of Entrepreneurship in Meiji Japan (1964). Kazuo Noda, “The Postwar Japanese Executive,” in Ryutaro Komiya (ed.), op. cit., explains the role of business executives in the post-World War II period. Some aspects of Japanese industrial labour are described in Ezra F. Vogel, Japan's New Middle Class, 2nd ed. (1971); and in a comparative study by Arthur M. Whitehill, Jr., and Shin-Ichi Takezawa, The Other Worker: A Comparative Study of Industrial Relations in the United States and Japan (1968). Regarding the Japanese industrial structure, Joe S. Bain, International Differences in Industrial Structure: Eight Nations in the 1950's (1966, reprinted 1980), is recommended, though rather outdated now. Japan's bureaucratic establishment is described in Marshall E. Dimock, The Japanese Technocracy (1968). For a view of Japan's management system, see Michael Y. Yoshino, Japan's Managerial System (1968, reprinted 1971); Thomas F.M. Adams and Noritake Kobayashi, The World of Japanese Business (1969); and Robert J. Ballon (ed.), Doing Business in Japan, 2nd ed. rev. (1968). In addition, James C. Abegglen, The Japanese Factory (1958, reprinted 1979); and Solomon B. Levine, Industrial Relations in Postwar Japan (1958), are considered semiclassics in the management field. See also James C. Abegglen, The Strategy of Japanese Business (1984).

Cooperatives
International Labour Office, Co-operative Management and Administration (1960, reprinted with rev. bibliog., 1978), is a comprehensive introduction and guide. Robert Oakeshott, The Case for Workers' Co-ops (1978), discusses the principles and reviews the experience; while Jaroslav Vanek (ed.), Self-Management: Economic Liberation of Man (1975), provides a collection of readings.

Multinational development
Growth of multinationals and the political implications of the phenomenon are reviewed in Christopher Tugendhat, The Multinationals (1971, reissued 1984); Ian M. Clarke, The Spatial Organization of Multinational Corporations (1985); and Thomas A. Poynter, Multinational Enterprises and Government Intervention (1984).

Business law
L.C.B. Gower, Gower's Principles of Modern Company Law, 4th ed. (1979); Robert R. Pennington, Company Law, 4th ed. (1979); and Robert R. Pennington and Frank Wooldridge, Company Law in the European Communities, 3rd ed. (1982), are textbooks written primarily for students but may also be used by practitioners. Robert R. Pennington, The Investor and the Law (1968), is primarily a comparative study of the laws of the United States and the western European countries on investment law, with consideration given to questions relevant to business associations. M.A. Weinberg, M.V. Blank, and A.L. Greystoke, Weinberg and Blank on Take-Overs and Mergers, 4th ed. (1979), is a practitioner's textbook on English law. Two works intended for the general reader are A. Rubner, The Ensnared Shareholder (1965); and G. Goyder, The Responsible Company (1961). Henry Winthrop Ballantine, Ballantine on Corporations, rev. ed. (1946); George D. Hornstein, Corporation Law and Practice (1959); and Richard W. Jennings and Richard M. Buxbaum, Corporations, Cases and Materials, 5th ed. (1979), are standard student textbooks. Edward Ross Aranow and Herbert A. Einhorn, Proxy Contests for Corporate Control, 2nd ed. (1968); and Edward Ross Aranow, Herbert A. Einhorn, and George Berlstein, Developments in Tender Offers for Corporate Control (1977), are detailed practitioner's books that the experienced reader will find interesting. Wolfgang G. Friedmann and Richard C. Pugh (eds.), Legal Aspects of Foreign Investment (1959); Robert R. Pennington, Companies in the Common Market, 2nd ed. (1970); and Edgar M. Church, Business Associations Under French Law (1960), are suitable works for the reader who has no knowledge of the company law of overseas countries. G. Ripert and R. Roblot (eds.), Traité élémentaire de droit commercial, 11th ed., vol. 1 (1983); A. Hueck, Gesellschaftsrecht, 17th ed. (1975); and Alessandro Graziani, Diritto delle società, 5th ed. (1963), are standard students' textbooks on French, German, and Italian company law.S. Nicholas Woodward Ed.

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Universalium. 2010.

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