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Should corporations be democracies? Absolutely not, says Peter Wallison. But maybe union pension plans should be.

Article Excerpt
FEW MAJOR INSTITUTIONS in our society are as misunderstood as the corporation. Artificial legal persons, chartered by governments with special attributes intended to accomplish narrow economic objectives, corporations are one of the most successful legal innovations ever devised.

The distinctive feature of the corporation is limited liability. If the corporate form is respected--that is, if the organization is run by its board of directors rather than its shareholders--then, by law, those shareholders will not be held responsible for the corporation's debts. That's the trade-off: the shareholders abstain from managing the business, and in exchange they are insulated from any liability the business incurs.

In addition to staying out of management, shareholders generally lack the right to withdraw the cash or other assets they originally contributed to the corporation in return for their shares. Yes, they can sell their interests to others, but, unless special provisions are made in its charter, the corporation has no obligation to distribute anything--including their own capital contributions--to its shareholders.

Before the advent of the corporate form in the mid-19th century, investors could be charged with the debts of companies, and companies frequently had to liquidate when one or more investors decided to withdraw their capital. With the adoption of state corporate chartering laws, however, corporations could have perpetual existence and were able to establish policies and commit capital independently of their investors.

With this background, what can we say about the glib assertions frequently voiced today that corporations are--or should be--democracies, or that the shareholders are the "owners" of corporations? Both these propositions rest on a weak understanding of corporate law and the elements that have made corporations successful as economic actors.

For example, if shareholders actually took operational control of a corporation--a concept implicit in the idea that shareholders are "owners" of a corporation--they would lose their limited liability and would be responsible for the debts of the business. In fact, if operational control is the key indicator of ownership, then, under most corporate laws, the directors are much closer...