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Utah Business

The role of the corporation is changing. Here's what you need to know about it.

The evolution of the corporation

There is a scene in the 1990’s movie, Grosse Pointe Blank where John Cusack’s character asks a friend about his job as a corporate security guard.  The man reluctantly admits: “Yeah, this badge isn’t a meaningful symbol. We don’t enforce the law, we just execute company policy for homeowners.”  

Back then it mostly worked to joke that corporate pretension was a pale imitation of real power, a carryover from times when companies were important economically but otherwise were expected to stay in their corner.  

Today we live in a world in which some US companies enjoy market valuations in the trillions.  If market value were GDP (not an inappropriate comparison), these companies would rank among the richest nations in the world.  At that scale, it no longer works to look at our companies simply as economic vehicles.  

Not surprisingly, broad corporate growth has triggered a policy debate about whether a new round of regulation addressing corporate governance is needed.  There are no easy answers here, but perhaps it would be helpful to remember how we got to where we are, how the corporate structure has evolved over time and what its natural next stage might be. 

Just a few hundred years ago, it was governments, not corporations—or even private citizens—that controlled wealth. Over time, as individual rights improved, private persons gained the ability to own property.  You didn’t have to be royalty to be a landholder anymore, and the seeds of capitalism were planted.  

Still, the scale of what individuals could do remained limited.  People discovered that if they pooled their resources into joint stock endeavors, they could tackle commercial opportunities on a grander scale.  It took a while, but governments themselves came to embrace this new model of capitalism.  Communities found they could outsource to the private sector expensive public works like canal-building and railroads.  To provide encouragement, states began offering corporate charters that provided a series of benefits to these new legal persons, benefits like limited liability and the power to enter contracts.  

This was innovative, economic policymaking and it reaped huge dividends for society.  As these early companies grew in scale, they were able to effect transformational changes, like connecting the world through ships and trains—and eventually erasing distances altogether through telecommunications.  It is not hyperbole to say that without the corporate form we would likely still be in a pre-industrial age.

In recent decades, the corporate form and the capital markets that formed around it have led to waves of innovation and increased relevance of this legal structure—so much so that the modern corporation curiously finds itself at the intersection of society’s most important interests.  Employees depend on companies for their livelihoods.  Consumers rely on them for products that sustain life.  Lenders and shareholders have made huge bets on their success.  And it doesn’t end there.  Consultants, suppliers, taxing authorities, and communities all have major interests at play.  It’s a lot of mouths to feed.

It’s not surprising then that companies are viewing their own role in society more broadly.  Last year, over 180 CEOs of America’s largest companies signed onto a statement purporting to redefine the purpose of a corporation.  The statement explained that a modern corporation’s goal should be to serve the interests of all stakeholders, not just its investors.  In other words, no longer would corporations see profit as their exclusive objective.  Instead, other interests would also be priorities, like those of employees, customers, and broader society.  CEOs expressed confidence in their ability to create solutions for things like environmental challenges and to even provide “economic opportunity for all.”  

This announcement was controversial and met with healthy skepticism.  To be sure, it was in large part aspirational.  However, it’s also a natural evolution.  At a certain point in a company’s growth, your concern becomes less about increasing market share and more about the sustainability of your environment, the health and growth of the society or geography you are symbiotically tied to.  

We’ve already seen examples of this in Utah, as our most transformational companies have left a topography of legacies as varied as the state’s own geography.  These are corporations that made choices not just to be in Utah but to be a lasting part of it, using their resources to build hospitals and universities, subsidize sports teams, incubate new generations of entrepreneurs and wrap the state in their reputations.  No doubt, you can think of some of these, or maybe you even work for one.

None of this is to suggest that companies no longer require oversight.  Continuous fine-tuning of business regulation is needed for pointing the powerful forces of capitalism in the right direction, to match changing times.  But much of the discourse of late has reflected a generalized distrust of corporations.  This is short-sighted.  While there will always be bad actors, natural incentives for companies to play nice within society are stronger than they have ever been.  Recognizing both the historical criticality of the corporate form and these current, powerful trends may free up policymakers to address more urgent priorities.

Troy Keller is an attorney at the international law firm Dorsey & Whitney in its Salt Lake City office. He has a deep experience in M&A, corporate governance and government relations.

Comments (1)

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    Joel Wright

    Thoughtful article. Incentives matter, and the legal structures we have created have given us many healthy incentives. With time, we realize when some incentives can be unhealthy. Looking back over time, it seems like the break up of AT&T may have been one of the smartest times when government’s re-alignment of incentives was prudent.

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