What is a Corporation?

What is the most influential social institution in the Western world? Now by “influential” I don’t mean just “positive influence” but also “negative influence.” Well, let’s look at some of the candidates. Given the cultural forces that are currently at work here in the United States, most of you would say either religion or government. Both are pretty good candidates. But let’s look a bit closer. Who produced the food that you ate this morning? Who sold it to you? Who loaned you the money to go to college? Who built your computer? Who sold it to you? Who printed your books? Who sold them to you? Who brewed the beer that you drank last Saturday night, and who sold it to you? Who produced your cigarettes and who sold them to you? Who owns the Reds and the Bengals? Who built your home? Who financed it? Get the point? For better or worse, I would argue that corporations are the most influential social institutions in the Western world, especially in the United States. But what is a corporation? The answer to any question requires a theory. Therefore, we need a “theory of the modern corporation.”

Orthodoxy in business management and ethics often cites “Nexus-of-Contracts Theory.” Rooted in in social contract theory, it argues that the firm, or the modern corporation, is a complex adaptive system comprised of definable subsystems, called stakeholders. A stakeholder is any individual or group of individuals that either benefits of suffers as a result of the actions of that corporation. Therefore, the modern corporation is essentially a set of contracts or agreements between various stakeholder groups. The corporate stakeholder groups, engaged in this bargaining process typically include: stockholders, employees, consumers, suppliers, financiers, and local communities. The interests of these various groups are often represented by “agents.” 

Now in order for the Nexus-of Contracts Theory to be useful it must be both descriptive and prescriptive; that is, it must describe how the classes of stakeholders (stockholders, consumers, managers, employees, consumers etc.) bargain in the real world, AND prescribe how those stakeholders ought to bargain. It must also describe and prescribe the role that leaders ought to play in this process. Hence, any theory of the modern corporation must answer three questions:

1. Whose ends (rights or interests) are in fact served by corporate leaders? (E.g.: stockholders, consumers, employees, financiers, suppliers, local communities, nations, humanity etc.) AND, whose ends (rights or interests) ought to be served by corporate leaders?

2. By what means can leaders in fact employ in order to efficiently realize these stated ends (rights or interests) AND, what means can managers morally realize these stated ends.

3. What role does government in fact play in the realization of these various ends? AND, what role ought government (local, state, federal, international) play in this process?

Despite the idealistic ruminations of various “win-win” strategists, in the real world, what’s “good” for one group of stakeholders (stockholders, employees, consumers, etc) is not necessarily “good” for the other stakeholders. If you raise the pay of employees, generally, either the consumers pay higher prices, and/or the stockholders earn less. And, what’s “good” for any given society may or may not be “good” for individual industries or corporations. And, what’s “good” for United States may or may not be “good” for the rest of the world. And what’s “good” for present stakeholders, may not be good for future stakeholders. Hence, corporations are both cooperative and competitive. 

Within the NOC framework, a “good leader,” is a leader that can reconcile the often conflicting interests of the various stakeholder groups. NOC scholars have identified two alternative sub-theories of corporate leadership.

Stockholder Theory: Leaders are morally and legally obligated to serve as agents of the stockholders, and advance their interests regardless of how those decisions might affect the other stakeholders.

 Stakeholder Theory: Leaders are morally and legally obligated to serve as agents of all stakeholder groups, and try to advance all of these interests collectively and impartially.

The next two blogs will discuss these two theories.