Thursday, February 3, 2011

The Legal Ontology of the Corporation as a Description of its Goal, and its Role in Society
INSEAD Working Paper 2011/16/ISIC Revised version of 2009/09/ISIC

The purpose of the corporation in society has been an issue of contention ever since the Berle-Dodd debate in the 1930’s and still resonates as part of the “basic-debate” in the field of business ethics today. Prescriptions about the purpose of the corporation (such as Stakeholder Theory) should be argued in relation to a robust description of the purpose that the corporation actually has so that we know what change is being argued for. This paper provides a description of the purpose of the corporation in society through an analysis of four primary attributes of the corporate legal form. These are the shareholder primacy norm; that the corporation is a separate legal entity from the shareholders; the transferability of corporate shares; and the limited liability of shareholders. The paper explicates these legal attributes and describes their development in the UK and the US. The economic function of these attributes is then analysed in the context of the industrial revolution when they arose. It is maintained as a point of description that the purpose of the corporation in society is to serve as a legal vehicle for production and economic growth. A consequence of regarding the purpose of the corporation in terms of its legal attributes is that its purpose can be changed by augmenting the corporate legal form.