Corporations as entities

Hi Matthew,

I'll rewrite. I wanted to test what I thought was your principle: We ought consider an entity any group 'deliberately and consciously set up by individuals for a specific purpose, with the full knowledge and consent of those individuals'. I wanted to apply this principle to the concepts of 'nation' and 'planned society'. I figured that under this principle you would not consider 'nation' an entity because it is not deliberately and consciously set up by the individuals for a specific purpose, and the individuals who are part of it lack full knowledge and consent. Because 'nation' is often an entity under the law, I asserted that if we revoke entity status for nations, we'll great affect today's law.

Next, I applied the principle to the concept of 'planned society' (I was actually thinking of planned communities here, like gated neighborhoods and such), and I figured that because they are deliberately and consciously set up by individuals for a specific purpose, with full knowledge and consent of those individuals, then planned communities should be granted entity status under the law. I hope that clarifies.

But you wrote:

Not necessarily everything "deliberately and consciously set up by individuals for a specific purpose and with the full knowledge and consent of those individuals", but many things, including corporations, should.

So I'm afraid I haven't identified the principle you'd use to determine what should and shouldn't be considered an entity. I want one overarching principle, one that says, 'a group of individuals should be considered an entity if...'

What other contexts do you have in mind?

Well, I was really wondering whether the epistemic rules to concept-formation change when we're dealing with legal definitions. That is, I was wondering whether we should not consider corporations as entities outside the law, like in normal conversation.

*

I see what appears to be a strong Pragmatic bent running through the posts of Andrew and Joe, and Jennifer earlier. It would seem they aren't so concerned with the consistency of treating a corporation as an entity, but rather with all the good fortunes that an entity status might bring. I'm not judging these good SOLOists, just pointing what appears to me an interesting pattern.

Jordan

Post 21

Sunday, December 12, 2004 - 7:32am

Aside from protection from personal liability (though that is not guaranteed) and the means of using stock to raise money, one thing the corporation provides is continuity of management. No enterprises exists in a vacume. For it to do its work, i.e. make a profit, the enterprise must interact with other entities. These entities can be individuals, partnerships, LLC's, other corporations, etc; banks. These relationships must be spelled out in contracts.

Without the corporate entity or something like it, with whom are those contracts drawn? It would have to be with the individual. While I personally hold the individual to be supreme, a contract with him is only as good as his life is long and people die all the time. They go insane. They can be corrupt. By contracting with a corporation rather than an individual, you are entering into an agreement with an entity whose rules of management and succession are codified in shareholder's agreements and corporate resolutions. Much of this is standardized in the Uniform Commercial Code which gives you some security as you contract from state to state. Your corporation will not protect you or its officers, etc., from liability unless you keep a corporate record book which spells out all significant actions taken by the board and shareholders. Such actions must be in keeping with the UCC and a corporation so structured and run gives you a "known entity" with which to contract. Failure to comply with these formalities will allow a creditor or wronged party to "pierce the corporate veil" and attack the personal assets of the responsible corporate members. And, believe me, the minute it hits the fan, the first thing the opposing attorneys (or the government ) do is demand that your turn over your corporate record book so they can scrutinize it for any failure to comply because they are looking for a way not only to clean out the corporation but they want to hit the personal assets of the members.

Even if "Henry Ford" owns 100% of the stock, the existence of a corporate governance procedure allows the development of business relationships which would not otherwise be prudent, or even possible. If he dies, do you want to continue to deal with "The Ford Motor Company" or his heirs and assigns?

So, while there are benefits to the employees and shareholders of the corporation by their being incorporated, another very real manifold of benefit accrues to the economy and the system as a whole. Corporations and like entities allow for a class of contracting and cooperation to exist that simply could not if one were attempting to structure such relationships between individuals.

Post 22

Sunday, December 12, 2004 - 9:18am

Jordan,

I want one overarching principle, one that says, 'a group of individuals should be considered an entity if...'

This strikes me as a touch intrinsicist. As I said above, all the word "entity" actually means is something that can be considered as a single unit. Whether something is an entity depends at least partly on the context in which you're speaking. For instance in the legal context a process exists which allows companies to incorporate and be regarded as entities. Therefore in that legal context, you might be able to say that "a group of individuals should be considered an entity if they own/work for a company which has taken the requisite steps to incorporate". Regarding nations and gated communities, their status as entities would be defined by provisions in the law (international law in the case of nations).

Well, I was really wondering whether the epistemic rules to concept-formation change when we're dealing with legal definitions. That is, I was wondering whether we should not consider corporations as entities outside the law, like in normal conversation.

Hmm this might be circular reasoning on my part, but really if you're referring to a corporation during a general conversation, you are by definition referring to a legal entity. Does that makes sense? :-\

MH

Post 23

Sunday, December 12, 2004 - 11:17am

Hi Matthew,

This strikes me as a touch intrinsicist

Why? I was just applying the O'ist principle of testing the validity and soundness of a definition. A good definition is one that includes all intended referrents and excludes all unintended referrents. If some unintended referrents sneak in, or if some intended referrents get barred, then our definition needs work.

For instance in the legal context a process exists which allows companies to incorporate and be regarded as entities.

So it's not a fallacy to reify a group of individuals, so long as we're doing it under the law? I mean, if the law gives 'society' legal status, that'd be okay?

but really if you're referring to a corporation during a general conversation, you are by definition referring to a legal entity. Does that makes sense?

Yes. Good point. I guess I'm making an assumption that the law shouldn't be exempt from valid concept-formation. If a group of individuals cannot validly be reified into an entity, then the law shouldn't acknowledge any concepts based on such a reification (unless perhaps, as some here might be suggesting, the advantages from such a legal fiction far outweigh its costs).

Jordan

Post 24

Sunday, December 12, 2004 - 1:22pm

Jordan,

Why? I was just applying the O'ist principle of testing the validity and soundness of a definition. A good definition is one that includes all intended referrents and excludes all unintended referrents. If some unintended referrents sneak in, or if some intended referrents get barred, then our definition needs work.

Ok, the best definition I've heard of an entity is that one can be regarded as a single unit. You seemed earlier to want one principle for identifying an entity in any given situation, but Objectively, a principle rarely helps much outside of context (hence my intrinsicism reference).

So it's not a fallacy to reify a group of individuals, so long as we're doing it under the law? I mean, if the law gives 'society' legal status, that'd be okay?

We aren't reifying individuals, we're talking about individuals consensually forming (and subsequently joining) a type of business organisation. Partnerships and LLPs are simply different forms of business organisation.

Yes. Good point. I guess I'm making an assumption that the law shouldn't be exempt from valid concept-formation. If a group of individuals cannot validly be reified into an entity, then the law shouldn't acknowledge any concepts based on such a reification (unless perhaps, as some here might be suggesting, the advantages from such a legal fiction far outweigh its costs).

Well the law shouldn't be exempt of course, though at the moment given that the law isn't Objectivist, it isn't always going to be set up in a manner that's acceptable from as Objectivist perspective. That said, as far as setting up various forms of business organisations (corporations, partnerships, LLPs etc) is in the question, I don't see that too much needs changing (at least in the legal systems that I'm familiar with!).

MH

Post 25

Monday, December 13, 2004 - 6:58am

Matthew,

I wasn't so much looking for a definition of "entity," as I was a definition (or principle) that would help us to determine whether and when to recognize groups of individuals as entities. This time around it would seem that your principle would be: A group of individuals ought to be considered an entity where "individuals consensually form (and subsequently join) a type of business organisation." I don't really see why consent to membership and formation of the group warrants group-as-entity status. It'd help if you'd go over that again.

And nevertheless, aside from the business organization requirement (which seems nonessential here), I would like to apply this principle to 'society' and 'nation' and 'planned community.' The reason I want to apply this principle is to see what effects it would have on the law.

Jordan

(Edited by Jordan on 12/13, 6:59am)

Post 26

Friday, December 17, 2004 - 11:36am

It strikes me as a bit peculiar that no one, so far in this thread, has identified the source of the problem in the "package deal". A corporation permits investors to exercise, by common agreements, rights that they already have as individuals under a common, readily identifiable legal status, and that is good. Under current law of some countries, a corporate charter also immunizes the participants in the corporation from full financial responsibility for their torts, and this is bad. The latter aspect of corporate charters is often blanked-out in the writings of conservatives and mercantilists, but it is in fact a morally reprehensible practice for anyone, including businessmen, to buy such limitation on one's liability from politicians corrupt enough to sell it to them. As a former employee of Lucent, I was defrauded of significant wealth by the gang of swindlers who ruined Lucent Technologies and Bell Labs. The stockholders are responsible for their own losses - they should have made sure of better oversight of their officers, or invested elsewhere - but customers, employees and suppliers are not. We literally were robbed.

If there were no limited liability, it would be possible for insurance companies to insure corporations and their employees etc. against exposure to liabilities - in return for transparency and adherence to underwriter-imposed standards. This works fine for product liability (as in Underwriters Laboratories) and would also work for finance. This would, however, take a major source of corrupt income away from politicians, so it is not going to happen any time soon - and certainly not as long as politicians "regulate" the insurance industry and can prevent it from moving in this direction.

Post 27

Friday, December 17, 2004 - 3:10pm

Reed,

If you were the victim of fraud at the hands of a corporation, whoever was giving you legal advice may not have served you well. The corporation shield can never be used to protect officers, directors, and shareholders engaged in fraud. If a colorable claim of fraud can be alleged, the corporate veil can be pierced to hold the corporation's principals personally liable. This is a matter of common law.

Pukszta

Post 28

Friday, December 17, 2004 - 8:00pm

Rooster,

The combined net worth of the swindlers as individuals - the maximum that could be recovered in a class action suit by defrauded employees - would not have been enough to pay the lawyers. Yes, we tried. And of course the swindlers had paid their lawyers already. The limited liability of the stockholders, who had permitted their officers to defraud the employees of Lucent and Bell Labs, was the enabling political privilege, and the initiation of force that needs to be corrected.

Post 29

Saturday, December 18, 2004 - 1:20pm

Reed,

That's injustice upon injustice when you cannot collect from the thieves. Out of curiosity, did the feds consider prosecuting the swindlers?

Pukszta

P.S. Thanks for the "mackerels in tomato sauce" translation in the other thread. That's a bit of Polish I'll remember.

Post 30

Saturday, December 18, 2004 - 2:53pm

Rooster (and please call me by my first name, Adam):

The swindlers invented a new scam, which was not yet prohibited by criminal law.

Post 31

Sunday, December 19, 2004 - 4:52pm

Jordan,

Sorry for the delay responding here, I've been busy with a couple of big assessments on my law course and some other stuff.

Adam's interesting comments here help me to answer your question:

A corporation permits investors to exercise, by common agreements, rights that they already have as individuals under a common, readily identifiable legal status, and that is good

So we recognise a corporation as an entity because the law says it is one and because the individuals involved wish it to be so. Societies and nations don't arise in this way (at least not yet), they are not entities in the same sense as a corporation because people aren't all voluntarily co-operating towards a common goal. I'm not sure of the law in the US but I guess a planned community could, to the extent that it arises voluntarily.

Adam,

As I said above, you make very interesting points. Of course there is a very serious problem where crooked directors are ripping off honest employees, and I am very sorry to learn that you found yourself in that position. Perhaps it would be much better for the law to be written in such a way that a broadly defined offence of fraud was legislated against (if it isn't already), thus removing the need for new legislation whenever a new scam starts up?

I'm very sympathetic to your ideas for reforming the current system of incorporation, however my one concern about ending any kind of limited liability would be its effect on innocent shareholders - its fair enough to say that shareholders ought to hold the directors to account (and of course they should) but take for instance the tobacco companies, where the health risks were by and large unknown for many years, or the fast food industry where companies are being sued by people who chose to eat their products. Liability in both cases purportedly arises due to factors no amount of shareholder scrutiny could have prevented. Given the increasingly litigeous climate I'm not sure that insurance companies would be willing to pay up.

MH

Post 32

Sunday, December 19, 2004 - 5:59pm

Matt,

I think that you are seriously underestimating both the free market and the power of civil law. I referred to the example of product liability and Underwriters' Laboratories specifically because it illustrates clearly the market mechanism I have in mind.

Suppose a company wishes to buy insurance against liabilities arising from some product. The insurance underwriter has the product's safety evaluated by Underwriters' Laboratories, and sets liability premiums in accordance with their results. The product vendor then decides whether the product would be sufficiently profitable with payment of that premium for product liability insurance. If the product is not worth the liability insurance premium because the risk is too high, the prospective product vendor will rationally decide to invest in selling something else. Or the vendor may raise the price to cover the liability insurance premiums, and the product will still be sold to those willing to buy the higher price. The higher price also conveys objective valuation of the implicit risk, and informs the buyers about the risks they are taking by using the product.

Now what the tobacco companies did was, in fact, an irresponsible scam. They deliberately marketed their product without product liability insurance, even after medical studies began to indicate that their products were risky enough to make the lack of product liability insurance into reckless endangerment, of their stockholders and their customers. The tobacco companies also paid quacks to conduct fake "studies" "proving" that tobacco was safe.

What enabled this scam was limited liability. If the stockholders had been operating in a free-market environment, that they would have expected to be held responsible for the safety of their product. Then the stockholders would insist on purchase of adequate product liability insurance. The price of that insurance would be set by objective evaluation of risk - by Underwriters' Laboratories, or by scientists under contract to the underwriters - and included in the market price of the product. No problem - that is how the market works (unless governments play favorites by granting limited liability etc.)

Post 33

Sunday, December 19, 2004 - 7:19pm

The liability protection to shareholders makes possible the raising of vast capital. The first effect of removing the protection would be that capital would have to be raised with debt. Andrew Bissell pointed out (post 15) that that is much more expensive. So the second effect would be a vast diminishment of capital available for deployment by new ventures�everyone�s standard of living would suffer.

Widespread exposure to liability of shareholders and widespread purchasing of product liability insurance would also cause the trial lawyers to salivate even more at the prospect. Better for the cause of maximal capital utilization and the cause of liberty if we make demands on the courts that they properly dismiss the vast majority of product liability cases, most surely including all tobacco cases and all food company cases that are being drawn up as we speak. These cases are the irresponsible scams.

Jon

Post 34

Sunday, December 19, 2004 - 8:12pm

Jon,

Please spare us the mercantilist argument about how we are all "better off" if the government licenses the initiation of force to its favorite "businessmen." One of the preconditions of freedom is legal responsibility for "torts," that is wrongs, including those done by fraud. And one would have to search hard to find a clearer case of fraud, than tobacco companies paying quacks to conduct fake "studies" to "prove" that tobacco was safe.

Post 35

Sunday, December 19, 2004 - 9:17pm

The Corporation does have legal liability, and it is required to pay damages if it is sued. That is why the business suffers when suits take place, such as happened with Viox and Merck. I don't see any "initiation of force" by saying that if I owned a few shares of stock in Merck, I could be named in that suit. That doesn't make any sense, and is completely out of proportion to the investment I have made. There is also nothing wrong with mergers and the like, in many cases they are a means of getting rid of entrenched management that is not operating a company with the best interests of the shareholders in mind. Also, there are many "divestitures" and the like that happen as often, with companies splitting into smaller, more dynamic companies, sometimes private companies. That does not mean there are not lots of problems with various laws and regulations that we have, but the basic mechanism of the Corporation was a breakthrough in finance that made possible a great deal of good in the real world. I don't know enough about the Lucent situation that Adam speaks about to comment on it specifically, but what was the exact nature of the fraud that took place? I know the company stock price was massively damaged, like WorldCom, but stockholders in both those companies seem to have suffered a tremendous loss, so that would appear to be something anyone would want to avoid! I don't see how they are somehow being given some special privilege, that wow I just lost 95% of my share value, happy day!
(Edited by Kurt Eichert on 12/19, 9:20pm)

Post 36

Sunday, December 19, 2004 - 11:24pm

I don�t have to search all that hard, Adam. There you are spouting a very clear case of fraud that someone other than the individual is responsible for making the choice to smoke tobacco, known to be dangerous from the very first cough it caused.

I call that personal responsibility. Please spare me the bizarre charge of being a mercantilist.

Jon

Post 37

Monday, December 20, 2004 - 8:28am

Jon,

Knowledge is contextual. A merchant who misrepresents the risks of his merchandise can hardly claim that the buyer should have known that the seller was lying. When the seller lies, the buyer can hardly be "making the choice to smoke tobacco, known to be dangerous from the very first cough it caused." Ayn Rand, for one, can hardly be accused of being the kind of person who would throw away her life recklessly. Until she got the diagnosis of lung cancer, she believed, quite rationally, that the tobacco "businessmen" were telling the truth; that "scientists had shown that tobacco is safe" etc.

If the seller informs the buyer of the risks, and the buyer knowingly consents to those risks, then the buyer is responsible for the consequences - and a product liability lawsuit is a a fraud. If the seller lies to the buyer, directly or indirectly, then the buyer has not willingly consented to the risk, and the seller is rightfully liable for the harm done. To limit the liability of the seller for his own lies in such cases, on the ground that "it makes everybody wealthier," is in fact mercantilism.

Post 38

Monday, December 20, 2004 - 8:48am

Kurt,

The fraud at Lucent was complicated, and I shall probably write about it at some point at length. The stockholders in that case were also defrauded. It happened because liability insurance, the natural free-market fraud-prevention mechanism, was disabled and "taken out of the picture" by the government's grant of limited liability to the stockholders.

If the market forces had not been short-circuited by the government's grant of limited liability to the corporation, you would have insisted on proof of liability insurance before buying stock. The underwriter of the financial liability insurance policy, in turn, would monitor the company's doings for fraud - just as underwriters of product liability insurance monitor product safety. The supposed "market failures" that we are discussing were not caused by the unimpeded operation of the market, but rather by government intervention - in this case, intervention through grants of limited liability.

Post 39

Monday, December 20, 2004 - 9:53am