Software of the Month Club 1995 December/SOFM_Dec1995.bin/pc/win/biz/cyber/forms.exe/CORPORAT.LGF

Text File | 1994-06-02 | 24KB | 460 lines

CORPORATION

A corporation is a business in which large numbers of people
are organized so that their labor and capital are combined in a
single venture.  They may enter or withdraw from the venture at
any time, leaving it to others to carry on.  In law, a
corporation is a single entity, a "person" that may sue or be
sued without its members being held liable.  Modern
corporations include not only profit-making firms but also
educational, scientific, recreational, charitable, and even
religious organizations.  Cities and towns incorporate
themselves.  Some activities of the U. S. government are
carried on in corporate form, for example, the FEDERAL DEPOSIT
INSURANCE CORPORATION and the TENNESSEE VALLEY AUTHORITY.

DEVELOPMENT OF THE CORPORATION

The corporation is a result of two related yet distinct
traditions.  The first is the age-old penchant of people to
join together in associations and engage in mutually beneficial
activities.  The second tradition began when the chartered
company was established by sovereign states in Western Europe
in the late Middle Ages.  Notable forerunners of the modern
corporation were the great English trading companies of the
16th and 17th centuries, chartered by the crown or by an act of
Parliament.  These joint stock companies (see JOINT-STOCK
COMPANY) had a legal existence separate and distinct from that
of their individual members.  They also had the right to engage
in commercial activities, including the exploration and
colonization of new lands.

By the end of the 17th century English lawyers had devised a
new form of corporate organization that did not need an act of
Parliament or the permission of the monarch.  Combining
contract and trust law, they established unchartered
joint-stock companies that had all the attributes of the modern
corporate form:  individuals joined in a voluntary association
for commercial purposes, a group legally distinct from the
personalities of the individual members, funds held jointly for
common use, limited individual liability, a corporate legal
personality extending beyond the life spans of individual
members, ownership easily transferable from one individual to
another in the form of shares in the company's capital or
stock, and a specialized administrative structure.

In the United States, after it gained independence from
Britain, corporations were chartered on an individual basis by
state legislatures much as the British Parliament had done
previously.  This approach, however, placed a staggering burden
on state legislatures;  competing firms were jealous of the
special privileges granted to some corporations, and the
granting of special privileges was a concept alien to a
democratic society.  Consequently, public dissatisfaction with
this system grew.  The result was a shift toward a general
enabling statute under which any group of persons could achieve
corporate status simply by satisfying certain legal
requirements.  New York passed the first general corporation
statute in 1811, and other states followed.

THE CORPORATE FORM OF ENTERPRISE

The corporation is distinguishable from other common forms of
business enterprise, notably the sole proprietorship and the
partnership.  The sole proprietorship is a business that is
owned by one person, while the partnership is an association of
two or more persons.  Although the corporation is more
difficult and costly to organize than the proprietorship or the
partnership, it has several advantages.

Limited Liability

Stockholders in a corporation are not legally responsible for
the debts of the enterprise.  Although they can lose their
personal investment, they cannot be sued by the corporation's
creditors.  Individual proprietors and partners, on the other
hand, are personally liable for their companies' debts and may
have to sell other property to satisfy those debts.

Legal Personality

The law treats a corporation as a person entitled to enter into
contracts, to sue, and to be sued.  The employees of the
corporation are not held personally responsible for the acts of
the corporation as a legal entity, although, under the law,
they may be held responsible for acts committed as individuals.
Transferability of Ownership Interest

Ownership of a corporation is vested in its stockholders, who
may sell their shares on the market whenever they wish.  Thus,
except when stock is held by a few individuals who choose not
to sell it, the ownership of a corporation is constantly
changing.

Continuity of Existence

Proprietorships and partnerships exist only as long as their
owners are alive and as long as they continue the
proprietorships or partnerships.  In contrast, a corporation
exists independently of its individual stockholders.

Concentration and Specialization of Management

Large corporations can employ professional managers with
training and skills, a capability proprietors or partners may
not have.  An overwhelming majority of modern-day, large
corporations are, in fact, run entirely by hired professional
managers who may have little or no ownership stake in the
corporate entity.

LARGE CORPORATIONS

The size and economic power of some industrial agglomerations
has long been a subject of controversy.  Many of today's
corporations have thousands of employees and control billions
of dollars in assets.  Although small- and medium-size
businesses often show faster rates of growth and employment, it
is the large corporations that define the structure of a
nation's economy.  They often dominate major industries and
regional economies, and make possible production of goods and
services that require combining massive amounts of capital,
technological know-how, labor resources, managerial skills, and
an ability to acquire and process vast and diverse amounts of
information.  In 1990 the combined sales of the largest 500
U.S.  industrial corporations were $2.3 trillion, profits were
$93.4 billion, and they collectively employed almost 12.5
million workers.  The combined annual revenues of the world's
top five corporations alone were almost $450 billion, more than
the gross national product of all but a handful of countries.

Corporate Growth and Mergers

Large corporations have followed a dual path of growth and
expansion--both from within and without.  The growth urge has
often been propelled by the need for securing greater economies
of scale through more efficient production and becoming more
competitive.  Just as often corporations have sought to
dominate certain markets and monopolize, or to seek greater
pecuniary rewards for the professional managers at the expense
of corporate owners--that is, stockholders.

Corporations began to grow large late in the 19th century.  In
the United States corporate expansion through mergers and
acquisitions has come in waves.  Between 1897 and 1902 a wave
of mergers occurred, producing hundreds of large companies.  A
second wave of mergers occurred in the 1920s, reaching a peak
of 1,250 in 1929.  During the 1960s a third wave occurred;  in
1969 about 2,500 mergers took place.  The last big wave of
corporate mergers took place in the 1980s, spurred by a lax
regulatory environment, creation of innovative debt financing
(junk bonds) and the easy credit that made it possible to raise
billions of dollars in loans and to acquire companies with very
little equity investment by the new owners.  In the 1980s over
$1.3 trillion was spent in mergers, which roughly equaled the
gross national product of the Federal Republic of Germany.  In
1989 alone $210 billion was spent on merger activity, compared
with $50 billion in 1987.  Some of the biggest mergers of this
era were U.S. Steel-Marathon Oil (1982, $6.26 billion);
Chevron-Gulf (1984, $13.25 billion);  KKR-RJR-Nabisco (1989,
$24.76 billion);  and Bristol-Myers-Squibb (1989, $12.56
billion).

The enormous debts taken by the new companies often left them
too weakened to fund new technologies or compete in contracting
markets.  Thus, the early 1990s saw a rash of bankruptcies and
corporate restructuring and downsizing to meet new realities.
In the wake, hundreds of thousands of workers lost their jobs,
lenders went unpaid, retirees were left without pensions, and
unwary stockholders lost their investments.  In many cases, the
scandals spawned by the go-go years of the 1980s required the
taxpayers to pay for the damage--as in the savings and loan
debacle .

Mergers among corporations take several forms.  In the
horizontal MERGER, a company seeks to extend its share of the
market by acquiring another firm in the same industry.  Such
mergers do not necessarily involve smaller companies trying to
combine their resources or larger companies absorbing smaller
companies to acquire specialized market niches or new
technologies.  In the vertical merger a company moves up
(forward) or down (backward) in the productive process,
acquiring others engaged in producing raw materials or in
selling to the final consumer, as, for example, when a steel
company acquires coal mines and oil fields (a backward merger)
or buys a bridge-building firm (a forward merger).  In the
1960s mergers began to take place among companies in
substantially different industries.  Greyhound, a bus company,
acquired Armour, a meat packer.  These are called CONGLOMERATE
mergers.  The great merger manias of the 1960s and the 1980s
were characterized by combinations of unrelated companies,
driven more than anything else by tax considerations and
asset-plays (such as, immediate cashing in of a firm's hidden
assets, thereby raising capital for the company from its own
resources).

Merger Language

The growth of corporate mergers and takeovers brought an
associated set of buzz concepts and strategies--and new terms.
"Junk bonds" are corporate bonds lacking investment-grade
rating from Moody's and Standard and Poor's investors' services
and are considered highly risky or "speculative." "Leveraged
buyout" is the purchase of assets or stock of another company,
or part thereof, in which the purchaser uses a significant
amount of debt and very little or no capital.  A "poison pill"
is an action by the management of a company threatened by
takeover that makes acquiring the firm so expensive that the
predator goes off to seek other game.  "Shark repellants" are
other measures used to fight off a pursuing firm, including
changing the bylaws to make acquiring the company more
difficult.  "Corporate raiders" are individuals who make
"hostile takeover" bids for a company.  "Arbitragers" are
securities specialists who buy stock of a target company on the
hunch that a takeover effort will be successful or will elicit
bids from the target or from another suitor.  "Green mail" is
the premium paid by a company above the market prices to buy
back stock from a corporate raider.  "Golden parachutes" are
financial benefits that a company guarantees its top managers
in the event of a hostile takeover of the corporation, when
managers might lose their jobs.

CORPORATIONS AND ISSUES OF PUBLIC POLICY

The growth of large corporations has provided their managers
with enormous power in shaping a nation's economic policy and
also in influencing its political direction.  For better or
worse, ordinary citizens are affected by what corporations do,
how they manage themselves, and whether or not they prosper.
Accompanying this enormous concentration of economic resources
is the "unnatural" character of the "corporate person," thereby
giving rise to a number of important issues of public policy
pertaining to growth and concentration, management
accountability, top management compensation, and the role of
business in society.

Growth and Regulation

As corporations grew many Americans became concerned that they
were becoming too powerful.  In 1890, Congress passed the
SHERMAN ANTI-TRUST ACT, which makes illegal any combination of
or conspiracy among companies in restraint of trade.  The
meaning of "restraint of trade" was not clear.  The Supreme
Court adopted what it called the "rule of reason," holding that
bigness alone was not in restraint of trade but only
combinations that were intended to coerce or attack
competitors.  Applying the rule of reason in 1911, the Court
ordered the American Tobacco Company and Standard Oil to be
broken up into separate companies.  Through other laws Congress
has sought to prevent large companies from using their power
unfairly against competitors or consumers.

Defenders of the corporation point to its efficiency as a form
of economic organization, arguing that the size of a
corporation is no indication of its power, since every company
faces competition within its particular industry.  The three
giants of the U.S. automobile industry--General Motors, Ford,
and Chrysler--compete vigorously for their share of the market,
as well as facing strong competition from foreign
manufacturers.  The same is true of other industries in which a
few large companies control 60% or more of the market.  On the
average, the share of large companies in total sales of their
industries has not changed much over time.

Ownership and Control

In addition to size, a striking characteristic of the modern
corporation is that those who own it have little say in how it
is run.  In theory, corporate managers are supposed to work for
the benefit of their owners, the stockholders, and are
accountable for their actions to a board of directors, elected
by the company's stockholders.  The reality is, however, quite
different.  Most stockholders own such a tiny portion of a
company's stock that they have little or no incentive to take
active interest in the management or even board elections.  The
easy liquidity of the stock market allows them to shift their
investment to minimize risk.  Thus, for all intents and
purposes, in most large corporations, effective control is in
the hands of management, which may select or change the board
of directors as it sees fit.  Management exercises control by
use of the proxy mechanism--a provision that allows
stockholders who cannot attend the annual meeting to authorize
management to cast their votes for them.  Most stockholder
meetings are so sparsely attended that a serious challenge to
company policy can come only from holders of large blocks of
stock, or, as often happens, from banks to which the company
owes money.

In recent years a new kind of stockholder has emerged:  the
large financial institution that holds stock for its clients.
Included in these institutional investors are insurance
companies, mutual funds, savings banks, employee pension funds,
and the trust departments of commercial banks.  In the late
1980s the institutional investor had about $2 trillion in
assets in U.S. publicly-owned corporations, primarily in the
form of the pension fund.  Pension funds owned one-third of the
equity of all publicly traded U.S. companies and 50% or more
of the equity of the large ones.  U.S. stock ownership has
become more concentrated than ever before.  The institutional
investor, however, has also behaved, until recently, as
absentee owner, choosing to sell stock rather than force
managers to improve corporate performance.

Top-Management Compensation

One manifestation of the power of top management and the
relative ineffectiveness of the corporate board can be seen in
the rising compensation and perks of top managers even when
their companies were showing lackluster performance or losing
money.  Furthermore, while U.S.-based large corporations, as a
group, seem to be losing competitive and technological ground
to their overseas competitors, U.S. managers far outpace their
foreign peers in salaries and perks.  For example, during the
1980s average earnings per share (EPS) for the Standard and
Poor 500 companies grew by 78% and factory workers' and
engineers' earnings by 53% and 73%.  During the same period the
compensation of chief executive officers (CEOs) increased by
212%.

Corporate Governance

The rising compensation of CEOs, their entrenched position, and
the declining competitiveness of U.S. industry have raised
anew the question of corporate governance--that is, to whom are
the top managers really accountable?  A number of new trends
are emerging.  Institutional investors are beginning to exert
more influence on corporate managers through selection of board
members, a movement that is being strongly resisted by
management.

INTERNATIONAL CORPORATE GROWTH AND INTERNATIONAL ECONOMI
INTERDEPENDENCE

Large corporations have played an important role not only in
their national economies but also in the expansion of world
trade and global interdependencies.  Freed from the moorings of
the nation-state, they have developed worldwide organizations
that dwarf, in their scope of influence and operational
efficiency, even the most powerful empires of the past.  In the
process they have brought economic growth to large parts of the
world and made possible unprecedented levels of prosperity and
human welfare.

Multinational Corporations
The corporation has come full circle since it began.  Just as
the English trading companies of the 17th century set out to
seize the commercial opportunities of overseas trade, the large
industrial corporations of today look beyond the borders of
their home countries for commercial opportunities.  During the
20th century the multinational corporation--one that owns
plants or business enterprises in more than one country--has
emerged as one of the most prominent factors on the economic
scene.  Moreover, with the decline of the Soviet empire and the
failure of the socialistic systems, privatization of previously
state-owned enterprises is taking place all over the world--and
therefore large multinational corporations are bound to play an
even bigger role in international trade and investments.

The growth of the multinationals has been viewed with alarm by
some and hailed as a step forward by others.  The French
publisher Jean Jacques Servan-Schreiber wrote in The American
Challenge (1968) that U.S. business interests in Europe had
acquired the dimensions of a superpower, penetrating deeply
into certain critical high-technology industries, such as
computers and integrated circuits.  A similar charge is now
being laid in some quarters against Japanese companies.
Multinationals have also been criticized for pursuing their own
interests while disregarding those of the countries in which
they operate, as well as the interests of their home countries.
The catastrophe that occurred at a chemical plant in BHOPAL,
India, in 1984 refocused attention on this question.

In some cases multinationals have bribed government officials.
In 1976 the managements of Exxon, Northrop, Gulf Oil, and
United Brands Company admitted making clandestine payments to
officials of foreign governments.  That same year, the exposure
of Lockheed Aircraft's bribery of high officials in Japan, the
Netherlands, Italy, and Turkey caused an international scandal.
Multinational corporations have also been criticized for their
role in environmental degradation, marketing and promotion of
products ill-suited for the poor people in Third World
countries, and fostering of inappropriate technologies.  This
has led to a new form of international regulation of
multinational corporations.  For example, in 1981 the World
Health Organization, a body affiliated with the United Nations,
enacted a Code of Marketing of Breast-Milk Substitutes for
Infant Formula Products.  The United Nations is also discussing
the enactment of a Code of Ethics for Multinational
Corporations.

On the positive side the multinationals are viewed as a
unifying force in the world economy, enabling entrepreneurs of
all nations to compete wherever economic conditions exist that
are favorable to business.  Thus a watch company based in Hong
Kong may combine Swiss technology and an Asian work force with
a sales organization in the United States.  In this view, the
old international economy dominated by importing and exporting,
and subjected to nationalist passion and shortsighted
government intervention, may someday be replaced by one of
international organizations in which capital and managerial
ability can move from country to country.

The world of the 1980s and 1990s is different from the one
described by the critics of the multinationals in the 1960s and
1970s.  Instead of dominating the world, the U.S.
multinationals are struggling to hold their own--not only in
foreign markets but also in their home markets.  Multinational
corporations have emerged from such Asian countries as Japan,
South Korea, Taiwan, Hong Kong, and even India and the
Philippines.  The changing international economic scene can be
seen from the fact that in 1990 some 13 of the top 25 global
industrial corporations were non-U.S., compared with only 7 in
1980.  Of the 13 largest non-U.S. companies, 5 were Japanese.
In 1990, the top 5 world's largest banks were Japanese,
compared to none in 1980.  Japan also accounted for 11 of the
top 25 world's largest banks.  Large corporations in general,
and multinational corporations in particular, will continue to
play a vital role in global economic activity.  However, they
will face new challenges to their operational autonomy,
investment safety, and profitability as they evolve and adapt
to meet new societal expectations.  The world has also seen the
emergence of new global forces in the form of international
agencies and internationally linked religious and other public
interest groups that monitor the performance of multinational
corporations to ensure that their activities benefit all
concerned parties.


     THE 25 LARGEST INDUSTRIAL CORPORATIONS IN THE WORLD
                   (1990--Ranked by Sales)
---------------------------------------------------------------
Rank Company        Headquarters        ($ Millions)  Employees
---------------------------------------------------------------
1   General Motors      U.S.             126,974.3      775,100
2   Ford Motor          U.S               96,932.6      366,641
3   Exxon               U.S.              86,656.0      104,000
4.  Royal Dutch/Shell   U.K./Neth.        85,527.9      135,000
5   Int'l Business      U.S.              63,438.0      383,220
6   Toyota Motor        Japan             60,443.6       91,790
7   General Electric    U.S.              55,264.0      292,000
8   Mobil               Italy             50,976.0       67,900
9   Hitachi             Japan             50,894.0      274,508
10  British Petroleum   U.K.              49,484.4      119,850
11  IRI                 Italy             49,077.2      416,200
12  Matsushita          Japan             43,086.0      193,088
13  Daimler-Benz        Germany           40,616.0      368,226
14  Phillip Morris      U.S.              39,069.0      157,000
15  Fiat                Italy             36,740.8      286,294
16  Chrysler            U.S.              36,156.0      121,947
17  Nissan Motor        Japan             36,078.4      117,330
18  Unilever            U.K./Neth.        35,284.4      300,000
19  E.Dupont de Nemours U.S.              35,209.0      145,787
20  Samsung             S.Korea           35,189.1      176,947
21  Volkswagon          Germany           34,746.4      250,616
22  Siemens             Germany           32,659.6      365,000
23  Texaco              U.S.              32,416.0       37,067
24  Toshiba             Japan             29,469.3      125,000
25  Chevron             U.S.              29,443.0       54,826
---------------------------------------------------------------
SOURCE: Fortune, July 30, 1990.