THE BLOG
02/25/2013 12:45 pm ET Updated Apr 27, 2013

How to Tame the Corporation

In an interview in the August 20, 1916 edition of the New York Times titled "Why American Business is Constantly Pounded," James A. Emery, then general counsel for the National Council of Industrial Defense said: "Nothing can illustrate more clearly the characteristic operation of these local and peculiar prejudices than the use that has been made of, and the attitude of mind that has been created toward, the term 'corporation.' A mere legal description, it has become upon the lips of some an epithet, and upon those of others an accusation and an indictment that often without a hearing amounts to a conviction of business wrong." This was the big business lobby response nearly a century ago to the attacks on the expansion of corporate power. As Mr. Emery puts it, the corporate entity was nothing more then harmless legal speak, even as corporate power and influence rapidly metastasized in the United States in the early 20th century. How many "business wrongs" have been committed by corporations in the past hundred years? What about the past decade alone? Here's a brief history of the corporation: When the first U.S. public corporations were created in the early 1800s, corporate charters were granted by the state legislatures for very specific purposes. The charters specified that the corporations met what was considered to be a worthy public purpose and contained strict restrictions, such as the length of time the charter lasted and what, specifically, the corporation could manufacture. In the mid-nineteenth century, it wasn't unheard of for states like Ohio, Michigan, New York and Nebraska to revoke corporate charters when corporations no longer fulfilled their purpose. (Imagine if charter revocation was on the table during the recent wave of corporate abuses on Wall Street?) But then the corporate attorneys moved in, working state by state to weaken incorporation laws, loosen restraints and standards, and bend the rules in their favor. In 1891, lawmakers in New Jersey passed the most permissive incorporation laws in the nation. This resulted in corporations flocking to charter in New Jersey, which allowed them to buy and sell the stock or property of other corporations and issue their own stock as payment. This opened the floodgates for the size and market concentration of corporations. Corporate power continued to grow into the 20th century as the states raced to abdicate their roles as vigilant overseers in exchange for corporate tax dollars (eventually settling in Delaware, which currently hosts more than half of publicly traded companies in the U.S. and 63 percent of companies on the Fortune 500). In 1972, Professor Ernest Folk wrote:

"Statutes have become so broad and sweeping that they let a corporation do just about anything it wants... State law does not and cannot exert any real controls. Corporation statutes and most judicial decisions largely tend to reflect the interests and orientation of management or, to use another popular term, insiders. In short, state law has abdicated its responsibility. As a result, only federal law can handle the situation."


Fast forward to 2013 -- federal law has fallen even further behind the challenges presented by today's corporations. America is now "Corporate America." Commercialism is rampant throughout our culture. Corporations are considered "persons," -- entitled to many constitutional rights of actual persons without any of the legal consequences. Corporations can pour endless funds into political campaigns. Their executives regularly step through the "revolving door" into high government positions. Companies such as ExxonMobil, Pfizer, DuPont, Citigroup and Lockheed Martin act like they are above government authority. And big banks are "too big to fail." In the 21st century, the global corporation is deplorably close to being above the rule of law. So much for "a mere legal description."

The time for federal chartering of corporations is upon us. Meaningful federal chartering could improve corporate accountability to owner-shareholders, employees and the public. It is a concept that has been around since nearly the birth of the nation -- in fact, James Madison warned of the dangers of big business, stating that companies "would pass beyond the authority of a single state, and would do business in other states." Twice, Madison proposed that Congress be given the authority to "grant charters of incorporation in cases where the public good may require them and the authority of a single state may be incompetent." A formal vote on these proposals was never taken -- some argued it was unnecessary while others suggested it might lead to monopolies. The idea reemerged in the early 1900s with Presidents Roosevelt, Taft and Wilson all supporting federal corporate chartering as a tool of accountability. The idea continued to be bounced around throughout the 20th century, but nothing ever came of it, and corporations have grown much larger, more conglomeratized and less accountable as a result. In 1976, I, along with Mark Green and Joel Seligman, wrote the book Taming the Giant Corporation which focused on this potentially transformative idea. Congress held hearings, but no federal chartering law was created.

Large corporations have essentially become private governments with an enormous effect on the lives and livelihoods of Americans, but without any accountability to them. The words "corporation" or "company" do not exist in our constitution! This is the antithesis of democracy -- a corporate state run by the few without the consent of the many. The restraint once offered by economic risk has been offset by limited liabilities, government subsidies and bailouts. The power of an effective federal chartering system could instill a new culture of restraint and good behavior within the corporate world, to force corporate bosses to answer to shareholders, to prohibit corporations from lobbying and contributing to electoral campaigns, and from obstructing regulators -- in short, to "constitutionalize the corporation." Corporate attorney Robert Hinkley wrote of ideal corporate charters: "the duty of directors [is] to make money for shareholders, '...but not at the expense of the environment, human rights, the public health or safety, the communities in which the corporation operates or the dignity of its employees.'" Perhaps most importantly, federal charters could end the "legal speak" that has awarded perpetually living, profit-driven corporations even more rights than those held by individual citizens.

A modern federal chartering agency with comprehensive authority could enforce the agreement between government and business to the benefit of the public interest. It could put an end to the wheeling and dealing that corporations use against state governments. And such an agency could be open and accessible to citizen concerns.

Legal speak aside, perhaps a more definitive description of the corporation is the one given by writer Ambrose Bierce -- a corporation is "an ingenious device for obtaining profit without individual responsibility." By supporting meaningful, constructive federal charters crafted to reflect good business practices and American values, we can weaken the corporate domination that now threatens our democracy.

For more on how federal chartering can curb corporate power, see the chapter "Create National Charters for Large Corporations" of my new book, The Seventeen Solutions: Bold Ideas for Our American Future. Available and autographed from Politics and Prose, an independent book store in Washington D.C.