The word “corporation” has become a pejorative in American politics, particularly among a segment of the population seen holding signs, declaring objections to corporations, and urging certain political candidates to fix that. Their anger and more importantly, their lack of definition of the problem seems to leave no alternative but to shut down corporations! These people do not understand, “It is not by the benevolence of the butcher, the brewer and the baker that we expect our dinner, but from their regard for their own interest.” I do not mean to imply they should read The Wealth of Nations, but rather to give consideration to how The United States has the greatest standard of living for the most people. There has been a role for strong government protection of personal freedom and liberty for every resident. Infrequently considered is the importance of corporations as a means of conducting business. The equation is simple to understand. Businesses produce the substance of a nation’s standard of living. A healthy standard of living requires capital for use by business to produce products and services. Corporations are the best means for acquiring and using capital for a business. Corporations are efficient vessels for employing capital for use in business (and for other purposes too).
Corporations are old in history. Monarchs in England and Holland used corporations to grant monopolies to persons willing to produce public goods. The thirteen colonies established in North America resulted from wealthy persons obtaining charters to pay for other Englishmen to relocate their lives to North America. After the Revolutionary War, some states issued corporation charters to carry out some large scale businesses. Similar to The Crown’s granting charters, the states created corporations; each corporation required a separate act of the legislature. The promoter of the corporation sold shares of stock in the corporation to the public, and the corporation used it to build railroads, dig canals and build steamships. This was the era of the “Robber Barons” in American history, and skullduggery was involved in sales of stock. It was not until 1896 that a state enacted a general corporation law providing a state-granted corporation charter for the cost of a filing fee. Each corporation had standard features, most of which are still used today. Other states quickly followed. The features important for investors to invest in a business corporation are: perpetual life, the ability of a corporation to sue and be sued, limited liability of shareholders for the corporation’s debts, and ability to conduct any business that was lawful in the state. There was so much interest in corporation’s stock that The Wall Street Journal‘s publisher, Messrs. Dow and Jones constructed a stock index of large corporations’ stock. States regulated stock issuance and trading by what were called Blue Sky laws, which were anti-fraud regulations. State laws are still applicable today, but are mostly superseded from effect by the U.S. Securities and Exchange Commission (1933).
There are about 3,500 corporations in America having public ownership, and which are traded on stock exchanges. There are hundreds of thousands more corporations that are privately owned in America. The estimated value of all these corporations exceeds ninety trillion dollars. In addition, publicly owned bonds issued by these corporations exceed forty trillion dollars. The great majority of these securities are owned by mutual funds, foundations, insurance companies, university endowments, labor union pension funds, and individual retirement savings accounts. Nearly every adult in America has some derivative ownership interest in their $130 trillion value. By way of comparison, the value of all single family residences in America is about $32 trillion.
Business corporations are not big solely for the purpose of grandeur. Economics dictates an optimum capital structure for various businesses, particularly in capital intensive industries such as steel mills, electric utilities, and information technology. Efficient scale is a term economists and investment analysts use to consider a corporations’ sustainability. Capital has a cost to every corporation, whether a business or something else. Corporations, as any other form of business, must earn an excess over its costs, including cost of its capital for it to be sustainable. If a corporation does not earn a sustainable amount it will perish. This factor often shows itself when corporations seek mergers or acquisitions to obtain more efficient scale. This economic premise is exactly the point of Sprint and T-Mobile merging. Neither is earning its cost of capital, although both show profits on their income statements. Companies that have excess capital may be thought of as being in a wonderful position. Not so; when a business reaches a condition when it is unable to find new investment projects worthy of undertaking there is only one good solution. That is to return the excess capital to its shareholders, either by paying dividends or buying its own shares of stock on the market. To make an acquisition of another company merely to use up capital is the worst choice. First, a company that is willing to sell to a buyer in such a position will see the buyer has excess capital and will sell only at a large premium above its fair market value. Putting unneeded capital back into the market is best; that way another company needing capital may use it. This situation is often misunderstood by some journalists and politicians as feeding the rich. Capital, if permitted to return to the market will naturally seek the highest return.
Business corporations enjoying free market capitalism are the goose that lays the golden eggs.
Publiustoo.com March 4, 2020
