Understanding What a Corporation Actually Is Can Help Restore Democracy

This post originally appeared at Imagine Democracy.

“Some corporations do bad things.” “Corporations bribe politicians.” “Good corporations don’t harm people.” “Corporations are greedy.”

Almost everything we read and hear about corporations destructively misstates what corporations are and why we have them. Understanding what a corporation really is has enormous implications for our democracy.

Corporations Don’t “Do” Things

Here’s the thing: A corporation is a contract. It is a legal agreement enabled by our (“We the People”) government. That’s it.

Corporations are not sentient entities. Contracts don’t “think” or “want” or “need” or say” or “care” or “do” anything. Neither does a will, nor a lease, nor a confidentiality agreement. Corporations also can’t be “greedy” or “criminal” or “good” or “altruistic.” But people can.

When we say these things about corporations we are reinforcing misunderstanding of what a corporation is. This helps the executives running corporations get away with all kind of bad acts.

We the People Want And Need Things

People have forgotten that the United States is (supposedly) a democracy of, by and FOR We the People. We elect representatives to make laws and appropriate resources to protect us and make our lives better.

So what does this have to do with corporations? We the People want to have factories to build cars or toasters. We the People could do this – build the factory, hire the managers, organize supply chains, provide insurance. etc. – ourselves but instead we have come up with corporations as a way to “contract it out” to private investors to accomplish these jobs for us.

So We Created A Legal Construct

An individual can’t build and supply a factory or set up an insurance company, etc. So our government passed laws enabling a legal structure allowing people to pool funds and resources in order to accomplish tasks that would be difficult or impossible for an individual. (Historical example: one person could have a ship built, hire a crew, etc and send it off to trade for … maybe tea. But it quickly became obvious that groups of investors pooling their funds could get more done, and also spread out the risk. So back then government (the king) granted them a corporate charter to do that.)

In the modern corporate structure the investors pool their money. They set up a Board that hires executives to manage the process for us. The investors are rewarded in various ways for doing this for us. Those rewards include limited liability, a share of the profits, tax breaks, etc.

Suppose We the People want toasters. And for whatever reasons we decide not to just invest our money and resources to make them. But privately building and equipping a factory requires enormous funds, so we pass laws setting up a structure called a corporation to enable private investors to do this for us, for a reward. We do this to benefit us – We the People.

For Our Benefit

Here is the key point. Obviously the reason we pass these laws is to benefit us. That’s supposed to be why our democratic government does things – to benefit us: We the People; to serve our interests. Why ELSE would a democratic government of We the People have written legislation creating these agreements that create entities called corporations?

The implications of this are enormous, once we understand this basic thing: what a corporation really is and, especially, why we passed laws enabling them. We did this to benefit us – We the People.

The Implications Are Enormous

Many things fall out from common misunderstanding of what a corporation really is. Many people think corporations always existed, that they are something separate from government and owned by shareholders, and that government should not be able to tell corporations what to do. And they think of corporations as sentient entities – like they’re people – that do thing or thing things or behave certain ways.

1) Shareholders do not “own” a corporation, they have a claim on its assets. Not even a primary claim. Laws passed by We the people – not shareholders – determine what corporate executives may or may not use the corporation for. (Hint: If someone insists that shareholders “own” a corporation, ask them why shareholders don’t have to pay off a corporation’s debts or pay corporate fines.)

2) Corporations don’t “do” things, executives do. Executives have a duty to manage the corporation according the the legislated purpose and rules of corporations – which at its core are for the benefit of We the People.

3) Corporate executives do not have a legal duty to maximize profits. They have a legal duty to follow the laws and operate the corporation to benefit “stakeholders” that include the customers, the employees, the government and surrounding communities as well as the investors.

4) Corporate funds are for the purpose of operating the corporation and nothing else.

Use Of Corporate Funds

Milton Friedman famously noted that donations of corporate funds to charities, etc, is theft from the corporation. Corporate funds are supposed to be used to manage the corporations and executives are supposed to make sure that’s how they are used. When corporate executives decide to use corporate funds to benefit a cause THEY approve of that is misappropriation of corporate funds. If funds are “leaking” out of the corporation the corporation is less able to accomplish the mission that We the People approved the corporate charter to accomplish. This applies to uniforms for Little League teams, donations to local art museums and donations to political candidates or “think tanks.”

Money Is Power, Aggregated Money Is Aggregated Power

Money is power. Aggregating private funds means aggregation of power. We have allowed corporate aggregation of funds and resources to accomplish specific purposes. But history has taught us that allowing concentration of wealth enables concentration of power that threatens democracy. So these entities we created to aggregate funds and resources need to be carefully monitored and controlled.

What happens without that careful control? What happens if those aggregated funds are able to be used for anything other than running the corporation? Look around you.


We the People created corporate entities to accomplish tasks. They are managed by a Board that hires executives to manage the corporation. The idea that these executives could use corporate funds and resources to influence the government that created, regulates and monitors them is absurd. It clearly violates the entire purpose government had in creating the corporate entity: to serve us. Obviously the self-interest of executives using corporate resources to influence government would overcome any larger interest. This influence could only be for their own benefit.

The way to advise government about a particular industry should be to create a board of advisors including academics and other experts on the field and allow no individual corporate interests to be involved.

Political Contributions

Corporations can not “donate.” They are not sentient and don’t “do” anything. Executives do. They are hired by the Board to manage the corporation. Corporate funds are for corporate purposes. Executives using corporate funds for anything other than corporate purposes is a violation of their duty.

An argument is often made that political donations are for the benefit of the corporation. Executives give corporate money to politicians and in turn the politicians give them tax breaks, advantages over competitors, contracts, etc.

This is obviously the definition of bribery. It is necessarily a quid pro quo. It is not “speech” as the Republicans on the Supreme Court said, it is corruption. The Republicans on the Supreme Court understood WHO that corporate money was flowing to – and a lot of it was spent getting those individuals onto that court so they would rule that way.

Again, We the People created corporations to benefit us. Use of corporate funds to influence politicians or the public obviously works against that.

Destructive Language

The language we use to discuss corporations is important because language affects how we think. If we talk about corporations “doing” things, this affects how we think. It affects what we think corporations are. It causes the mind to envision a corporation as a sentient entity with agency rather than simply contracts that We the People legislated into existence. This misdirects our thinking from the real actors. It misdirects us from insisting on government enforcement of rules that describe the legal duties of the executives who manage a corporation.

In a democracy our government’s job is to protect us and make our lives better. This includes protecting us from the harms, scams, pollution, fraud, price-fixing, wage-steaking and other abuses enabled by aggregated wealth and power. Instead, because of corruption – corporate money “leaking” into our political system – the government has been captured and turned on us.

We are the boss of them (democracy) has been turned into … well, look around you.

Corporations are a great idea for times We the People decide to “contract out” certain tasks instead of doing them ourselves. But it requires us to carefully monitor and regulate. Otherwise we lose everything.

That ship obviously sailed.

See also:

The Problem of Corporate Purpose, Lynn A. Stout

The Contest on Corporate Purpose: Why Lynn Stout was Right and Milton Friedman was Wrong, Thomas Clarke

A Brief History of the Corporate Form and Why it Matters, Tyler Halloran