Saturday, May 09, 2009

Incorporating the Incorporeal has Consequences

photo credit:  the corporation is powerful by markhsx


Why do businesses incorporate?  In other words, why don't we just stick with businesses where the owner or owners are personally culpable for wrongdoing by that business.

The shoemaker has to take the heat if his shoes hurt his customer's feet.  If he adds employees and equipment to his workshop, he may crank out lots and lots of shoes.  In a sense he is now capable of hurting a lot more feet.  At some point he realizes that he is in a risky position.  Angry customers could bankrupt him and blacken his name.  So he incorporates.

The law allows him to pretend that his business is a someone.  That pretend someone can be bankrupted and reviled, but the shoemaker takes comfort that he personally can walk away with the rest of his assets in tact.  He may even escape notice and keep his good name.

Henry Ford made cars.   He and his descendants ran the company for a while.  However, once Ford Motor Company was incorporated, the Ford family's other assets were safe, even if Ford Motor Company went broke.  Over time the Ford Motor Company was sold to investors. Eventually the Ford family no longer managed the company.  The Ford Corporation is an idea, not a flesh and blood person or persons.  We have incorporated the incorporeal.

So when Ford Inc. does something nasty, who takes the rap?  The investors might lose the money they spent to buy in.  A board of directors has responsibility to ensure that the corporation is well run.  The board of directors is elected by the investors.  Sort of.

Although my personal fortune is modest, it is invested in a large number of corporations.  A little bit of GM.  A particle of Dell.  A very small piece of United Airlines.  Lots and lots of little pieces that add up to my life savings.  I spread it around that way on purpose.  My hope is that I may lose a piece here or there, but most of what I own will still be around for me to live on.  

Perhaps I owned a tiny piece of Enron, and it disappeared when Enron went bust.  I have no idea.  I own too many little pieces in too many places (mutual funds, annuities, etc.)  Nor do I have any idea who the directors are for any of those corporations that I own tiny pieces of.  One way or another, my "vote" gets voted by someone else.  Theoretically I could keep track of every piece and vote every vote to ensure that every deficiency is addressed in every company.  That will never happen.  I couldn't do it even if I devoted all my waking hours to keeping track of it all.

Yes, there are some folks with very large personal fortunes.  However, for the most part, they spread their money around as well.  They may own bigger pieces of companies than I do, but they will often own so many pieces of so many companies that they too will be woefully ignorant of what is going one in most of those companies.  

Incorporating the incorporeal has consequences.  Accountability is lost.  The personal touch is gone.  The management is simply tasked to make more money, at least for a while, until they can bail out with a golden parachute or get severed with an awesome severance package.

So it goes.
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