Corporation Nation

Chapter 6. Governance Principles

C h a p t e r 6 Governance Principles Principles, then, and not regard to men, should guide our conduct. —Charles Sigourney, 18371 Early corporate charters were somewhat experimental at first and hence marked by diversity. Convergence occurred with some rapidity as incorporators and legislators discovered what worked and what did not.2 What worked was whatever prevented employees, managers, officers, directors, or large stockholders from stealing from a corporation’s other stakeholders. As Chapter 7 will make clear, corporations were not always successful in their quest to prevent fraud and mismanagement. Were it more honest about itself, our species would call itself Homo sapiens ereptor, “man the wise thief.” When corporations successfully protected themselves from the agency problems that their critics so feared, they almost invariably followed the principles of corporate governance described in this chapter. Early corporate and political governance were deeply intertwined.3 Many of the men who formed the nation’s first constitutions were also those who formed its first corporations. George Washington, George Mason, and Thomas Jefferson were all founding stockholders in a 1774 joint-stock company thwarted by the Revolution.4 “A nation itself,” wrote nineteenth-century political philosopher Francis Lieber, “is the great corporation, comprehending all the others.”5 A corporation’s charter (or an unincorporated joint-stock company’s articles of association) was considered analogous to a nation’s constitution . Its bylaws were akin to statutes, its board of directors to legislatures, and its officers to the executive branch. Corporations and governments were both essentially Lockean: if leadership/management did not benefit the Principles 117 citizens/stockholders, the government/management could be—indeed, should be—lawfully ousted.6 Also like a political entity, as the business grew larger, a bureaucracy arose from the skeletal constitutional framework to standardize routine tasks. As Charles Sigourney suggested in the epigraph to this chapter, what decided the fate of the business was the same as what decided the fate of nations: the degree of alignment between the organization’s goals and the incentives it provided to its stakeholders, not the quality of men it attracted per se. If men were angels, to paraphrase James Madison, corporate governance would be as unnecessary as political governance. Because most people were decidedly unangelic , corporations, like governments, operated best when they were designed with rogues and knaves in mind, not the most virtuous.7 Legislators generally worked with incorporators and the interested public to create the most robust charter possible; but after that, governments closely monitored only a few corporations—mostly, banks in which they had deposits or owned shares. Individual investors, in other words, were more or less on their own. Perhaps their greatest protection from expropriation was the limit that charters most placed on managerial discretion.8 “Acts of incorporation,” explained an anonymous observer in 1835, “are generally granted for specific objects, and confer specific powers; and any deviation, on the part of the corporators , from the proper line of their duty, is attended with an exposure of their interest.”9 Early corporations were only supposed to engage in activities explicitly laid out in their charters, a concept tied to the legal doctrine called “ultra vires.”10 “If the object or design of a charter is limited,” William Wright argued in 1820, “the powers of the Body Corporate must be considered as limited by the object. No general capacity to act at discretion in pursuit of other objects, can be implied from the grant of corporate powers even in general terms.”11 Any corporation “created by Legislative grant, for a special purpose,” lawyers Isaac Williams and Garret Wall explained in 1835, “is to be considered as having such powers only, as have been specifically granted to it, by the Legislature ; or are necessary for the purpose of carrying into effect, the powers expressly granted.” Thus a turnpike corporation chartered to build a wagon road from Trenton to New Brunswick could not lay rails without the approval of both the government and its stockholders.12 The point of such restrictions, Williams and Wall explained, was “to prevent the usurpation and exercise of powers, not intended to be granted.” An antebellum corporation could not even “hold any more real estate than is proper for the purposes for which it 118 Chapter 6 was incorporated.”13 Section 4 of Louisiana’s 1848 general incorporation statute explicitly stated that “it shall not be lawful for any corporation established under...