It’s time to transform corporations...again

For the Better comes to you bi-weekly with ideas about how and why to build companies focused on human flourishing and stories of the people who are doing it. Other enthusiasms may occasionally appear.

What is the purpose of a corporation? The way we’ve answered that question at various points is directly related to our shared prosperity – and probably not in the way you imagine. 

The most abundant era in American history ran more or less from the period when general incorporation was introduced in the late 19th century until the rise of shareholder primacy in the 1960s and 70s. 

Prior to general incorporation, in order to get permission to form a company, founders had to prove it was going to serve some kind of public benefit. For example, during the Gilded Age, the Union Pacific Railroad was chartered specifically “for the purpose of constructing the transcontinental railroad.” Not only that, but if the company strayed from that mission – say, in favor of simply making as much money as possible – its directors could be held personally liable under the Ultra Vires Doctrine. 

This not only constrained the economy but also led to a lot of cronyism in terms of who was able to start a company. (When I talk to lawyers about the history of general incorporation, if they know about it at all from some vaguely remembered law textbook, it’s only in this context rather than anything to do with corporate purpose). So, over the course of about 60 years, state by state, legislatures adopted general incorporation, allowing companies to be formed for “any lawful purpose”. The major milestone came when Delaware signed on in 1899. 

This long series of acts of democratic will opened the door to incredible growth and innovation. The engine ran smoothly for over half a century until the idea of general purpose was co-opted by shareholders for a single, very specific purpose: making as much money as possible. By 1970, thinkers like Milton Friedman were declaring that “the social responsibility of business is to increase its profits.” 

Here’s the strangest thing about this whole progression: It took legislative action to effect the shift from purposes that benefitted the public to general purpose. But the next move, from general purpose to shareholder primacy as purpose, took place simply because the class of people who would most benefit from it decided it should. The nature of the corporation was transformed in boardrooms and courtrooms; not a single law was needed.

It’s time to transform it again. We already have all the parts – we just have to combine them. We need to build companies committed to specific purposes that benefit the public, and provide access to company founding for anyone ready to help push us all into the next era of prosperity.

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