Although it seems seldom if ever remarked, there is a rich set of parallels between modern U.S. bank regulation, on the one hand, and what used to be garden variety American corporation law, on the other hand. Just as bank charters are matters not of right but of conditional privilege even today, so were all corporate charters not long ago. Just as chartered banks are authorized to engage only in specifically enumerated, carefully limited activities even today, so were all corporations restricted not long ago. And just as banks are subject to strict capital regulation even today, so were all corporations not long ago. In short, the law of commercial banking today is starkly reminiscent of the law of the corporate form more generally yesterday. The former seems almost a vestige of the latter.
In a new article, we suggest that the parallels between contemporary banking regulation and past corporate regulation are not merely curious accidents, but a reflection of certain foundational dynamics embedded in the corporate form itself. Tracing the history of the incorporated American firm, we show that the business corporation is, and always has been, an inherently hybrid public-private entity that cannot exist without, and is fundamentally defined by, specific privileges conferred by the state. These constitutive corporate privileges – the interlocking and mutually reinforcing attributes of corporate “personality” separate from constituent personalities, perpetual existence, and asset segregation (which includes arguably the best known corporate privilege, limited shareholder liability) – are now taken for granted almost as “natural rights” in private markets. Before the late 19th – early 20th century, however, all of the corporate privileges were commonly recognized as truly extraordinary – i.e., not “freely” available to just anyone as a matter of right – because they represented radical departures from fundamental common law principles of individual personality and accountability. Originally, these corporate privileges were very clearly characterized, in statutes and in judicial opinions, as public benefits conditionally conferred upon private actors when, and only when, such conferral served some public purpose. Those were purposes that ceased to be operative when firms acted ultra vires – that is, outside their state-delimited authority – and so corporate privileges could be forfeited by violating the conditions on which they were granted.
Importantly, the conditions that historically attended corporate privileges always sounded in some socially cognizable public benefit. Initially, the benefits in question were charitable or infrastructural in character. Early American corporations were chartered to assist the poor or the sick, to build public libraries, or to construct turnpikes, wharves, bridges, or canals. In time, the list of socially cognizable public benefits widened out to include the private capitalization of heavy industry itself, as the nation sought to industrialize under conditions of capital scarcity and still-nascent state and federal fiscal structures with no central bank.
At least two critical observations follow from reminding ourselves of this early American corporate history.
The first observation has to do with the nature of the corporate form. In terms of its genesis and function, the American business corporation is not a “natural” market phenomenon but an extraordinary vehicle of public policy: an institutionalized – and conditional – outsourcing to private parties of certain essentially public powers and functions. In this sense, it is at bottom a public-private “franchise” arrangement, in which the public is franchisor and private incorporators and shareholders, collectively, are franchisees.
The second observation has to do with the drivers and implications of the evolution of American corporate law since the late 19th-early 20th century. During this period, the strings attached to corporate privilege loosened, the requirement that private corporations produce public benefits became easier to meet and then effectively disappeared, and the original ultra vires doctrine gradually lost any real meaning. We argue that the key reasons for this “privatization” of the corporate form were, once again, rooted in the perceived need to encourage accumulation of private capital on a scale sufficient to finance nation-wide industrial growth. In this sense, the proliferation of general – or, more accurately, “ultra-general” – corporation statutes, which made corporate privileges “freely” available to all who sought them, was a public policy of promoting industrialization under conditions of scarce public and private capital.
Unfortunately, however, with this policy’s success came a gradually deepening amnesia concerning the fundamentally franchise-like character of the corporate form of enterprise organization. Today, the business corporation is widely and uncritically assumed to be a purely private association of private profit-seeking individuals, and some of the bitterest battles in corporate law and theory are fought over the question of whether corporations have, or should have, any duties or responsibilities beyond enrichment of their shareholders – a question that would have been regarded with incredulity in the not so distant past.
The exception to this trajectory is the incorporated bank. Here, the franchise-like character of the firms in question never fully receded from public consciousness, presumably thanks both to the obvious public utility supplied by banks in their credit-extending and associated money-creating capacities, and to the obvious public disutility occasioned by regular bank-runs and bank failures. As a result, U.S. bank regulation continued to look fundamentally similar to the original, pre-20th century, American regulation of corporations in general. Banking law became a “special” case, a single most salient vestige of the original corporate settlement.
In our article, we query whether it might be time to bridge the gulf between banking and general corporate regulatory regimes – not by making access to bank charters “free and easy,” but by making access to corporate privileges once again expressly conditional on the delivery of public benefits. Even as a humble thought experiment, this suggestion might sound like heresy to many scholars and practitioners of corporate law. Yet, if today’s regime of “free incorporation” is a result of a specific era in the country’s history, why not reconsider its continuing utility in the light of today’s very different economic and political imperatives? Many of the circumstances that warranted making the corporate form easily available to skittish private investors in the late 19th century no longer obtain today. Our nation is heavily industrialized, even “postindustrial,” and capital is anything but scarce – indeed, it now tends toward overabundance, as frequent asset price bubbles and attendant financial dysfunction make clear. State and federal government structures, for their part, are now well developed and endowed with effective fiscal – i.e., taxing, borrowing, and spending – powers. And, of course, the nation now has a fully functional and usually effective central bank – the Federal Reserve System – well able to influence the flow of financial capital and public credit to where they are needed. Against this backdrop, it is natural to wonder whether regulation of the corporate form might reasonably be expected to move at least part way back toward something more like what it used to look like – and what bank regulation continues to look like.
The final part of our article takes up this suggestion and tentatively outlines some modest possibilities where reintroducing at least some public interest-driven conditions into state grants of corporate privilege are concerned. Public grants of corporate powers always occasion social costs – at least as much now as in the past. One hundred years ago, the benefits brought by such grants arguably outweighed those costs. Today that is less clear, and the time would accordingly seem ripe for an open-minded reexamination of the public-private imbalance at work in what remains the inherently public-private corporate franchise. This need not mean wholesale return to the past; it can mean simply selective retrieval of that which looks best for the future.
The preceding post comes to us from Robert C. Hockett, the Edward Cornell Professor of Law at Cornell University Law School, and Saule Omarova, Professor of Law at Cornell University Law School. The post is based on their recent article, which is entitled “‘Special,’ Vestigial, or Visionary? What Bank Regulation Tells Us About the Corporation – And Vice Versa” and available here.