Corporation Essay ⋆ Political Science Essay Examples ⋆ EssayEmpire

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Large corporations affect the lives and livelihoods of hundreds of millions of people around the world. They employ a large portion of the world’s population, own the rights to most global technology patents, and yield tremendous influence over governments. The history of the modern corporation reflects a continued path towards greater wealth, influence, and international power—a power that critics contend is wielded with little regard to the social, environmental, or public local costs. As such, a variety of advocacy groups, watchdog organizations, and nongovernmental organizations have mobilized against large corporations’ intent to force corporate reforms toward more socially and environmentally conscious ends. While for some, social pressures may foreshadow a new age of tempered capitalism and diffuse power, for others, corporate changes are regarded as superficial and do not limit their power or influence nor alter their profit-seeking goals.

Brief History

In many ways, the nature of the corporation parallels the evolving political relationship between the state and the market. In the days of monarchic rule, as seen in sixteenth and seventeenth-century Europe, the state’s economy and resources were regarded as extensions of the state’s authority. During this period, a corporation would have to obtain permission from the state to come into existence. In an attempt to curry favor with the monarch to ensure passage of its charter, corporate founders would frame their mission as being in the service of the state while highlighting explicit benefits to the monarch. Describing the role of the corporation during mercantilist time, Freder ick Maitland in Political Theories of the Middle Ages (1900) noted, “The corporation is, and must be, the creature of the State. Into its nostrils the State must breathe the breath of a fictitious life.”

This relationship evolved with philosophical developments in political and economic theory in subsequent centuries. In the eighteenth century, the Scottish Enlightenment philosopher, Adam Smith, extolled the virtues of a self-organizing marketplace unrestricted by the intrusive power of the monarch. Individual liberty within the marketplace was now cast as the necessary component for not only the individual’s but the state’s greater economic prosperity. While Smith’s classical economics did not explicitly extend this concept to corporations, since Smith perceived corporations as a potential risk to market competition, free market advocates and neoclassical economists after him often refer to Smith’s ideas to advocate limited government interference within a free marketplace and specifically on corporations. Toward the middle of the nineteenth century, obtaining a corporate charter became a matter of bureaucratic formality no longer contingent on the approval of rulers, and therefore corporations were no longer obligated on serving a goal or public interest for the state.

Opposing Theories Of The Corporate Firm

The now dominant neoclassic economic theory has firmly transformed the original role of the corporation and its relationship to the state. The purpose of the firm, as theorized by economist Ronald Coase, is to integrate various production operations into one organization in order to minimize external transaction costs. This pervasive and purely economic view of the corporation has overtaken the originating concept in which the firm should serve the greater goals of society. A purely economic view places little restraint on a corporation’s dedication to minimize costs and increase shareholder wealth, encouraging the unbridled expansion of these integral organs of capitalism. The largest global corporations have influence spanning the globe, extending beyond economic powers, but exert influence well into international and political spheres. Of the largest one hundred economies in the world, fifty-three are corporations. The largest corporation in 2000 had revenue greater than the GDP of more than 180 countries, according to M. Gabel and H. Bruner in Global Inc.: An Atlas of the Multinational Corporation.

Today the relationship between the state and the firm has been described as a special relationship of mutual interdependence. This interdependent relationship between governments and powerful corporations was made evident during the worldwide economic crises during 2008 and 2009, following the housing market collapse. Criticisms were hurled at the U.S. government for bailing out major banks; however, counterarguments stated the large financial institutions were the pillars of the global economy and, if allowed to fail, the United States as well as global markets would suffer greater collective losses. Whereas once the corporation remained solidly under the authority of the state, today’s corporations wield tremendous influence among government policy makers and politicians; this causes many to fear these singularly profit-seeking entities are overriding the publicly interested goals of the state.

The controversy surrounding the role of corporations in society can be summarized in two opposing theories of the firm. First, the classical economic or shareholder view of the firm insists on the absolute primacy of profit maximization as the goal of corporations. The well-known quote by economist Milton Friedman in “The Social Responsibility of Business Is to Increase Its Profits” (1970) states, “The social responsibility of business is to increase its profits”—a claim he made in response to the rising tide of another theory of the firm. The competing stakeholder theory does not deny the necessary goal of profit seeking, but insists that beyond the sole interests of shareholders, firms must also consider the interests of every stakeholder group impacted by its operations. The list of stakeholders includes employees, customers, the community within which it operates, and the environment within which it is located.

While these two theories have caused significant debate among scholars, policy makers, and corporate managers as to the actual objectives of a corporation, a simple deduction shows the two theories considerably overlap. When enough people, consumers, and corporate managers believe firms should be sensitive to interests of all stakeholders, it creates an incentive for firms to comply with this normative standard. In other words, adopting the stakeholder theory of corporate behavior may in fact be the best way to meet the goals of the shareholder theory.

New Horizons

Today we observe the proliferation of corporations engaged in voluntary self-regulation, self-auditing, and various other programs of corporate social responsibility (CSR). Even with little empirical evidence of a direct link between profits and CSR, corporations continue to adopt these practices, according to David Vogel in The Market for Virtue: The Potential and Limits of Corporate Social Responsibility (2005). Benjamin Cashore, in his 2002 article “Legitimacy and the Privatization of Environmental Governance,” states the emergence of nongovernmental organizations, advocacy groups, corporate watchdog organizations, and nonstate market based governance systems create an institutional network of interests aiming to shift, yet again, the relationship between the corporation and the state. This shift, however, is not identical to the role corporations held centuries earlier, in which they were compelled to serve a role more aligned with larger public interests. While corporations may engage in more social and environmental responsibility, it is not necessarily born out of pressure or negotiations with states, but rather to appease the variety of actors and civil society groups, some of which are active stakeholders.

Bibliography:

Cashore, Benjamin. “Legitimacy and the Privatization of Environmental Governance: How Non-state Market-driven (NSMD) Governance Systems Gain Rule-making Authority.” Governance: An International Journal of Policy, Administration, and Institutions 15, no. 4 (2002): 503–529.
Frederick W. Maitland. “Introduction.” In Political Theories of the Middle Ages, edited by Otto von Gierke. Cambridge: Cambridge University Press, 1900.
Gabel, M., and H. Bruner. Global Inc.: An Atlas of the Multinational Corporation. New York: W.W. Norton, 2003.
Friedman, Milton. “The Social Responsibility of Business Is to Increase Its Profits,” New York Times Magazine, September 13, 1970.
Vogel, David. The Market for Virtue: The Potential and Limits of Corporate Social Responsibility. Washington, D.C.: Brookings Institution Press, 2005.