Time and time again, I see people on my side of the corporate social responsibility debate claim that “originally” corporations only came into existence for a “public purpose”.

Some go on to argue that we should reinstate that qualification. Others think we should assume the requirement still exists and impose higher levels of social responsibility on companies.

While history does not support the claim of a golden age when corporations came into being to serve a “public purpose”, it does not prevent society from imposing one now.

Corporate Charters

When people seek a public purpose for an early modern corporation, they look to its charter.

A charter, like today’s articles of incorporation, brought a corporation into existence. Lawyers still commonly refer to articles as charters, their historical antecedent. The charter - then and now - invariably has a “purpose” clause, a statement of why the company is coming into existence.

From the early middle ages, a charter was the means by which the crown devolved its powers to groups and individuals. Magna Carta means great charter. As its popular name implies, there were many minor cartas.

The same King John who reluctantly signed Magna Carta would have issued the Sheriff of Nottingham a charter to collect taxes on his behalf in Nottinghamshire. The Africa Company 450 years later had one from Charles II granting it powers that were in the nature of government.

This common instrument, the charter, explains why the same remedy exists at law to redress assertions of power by officials beyond the scope of their offices and actions outside of their powers by corporations: the writ of quo warranto.

Getting a Charter pre-1850

The “public purpose” argument is usually made anachronistically — we apply our notion of a “public purpose” when 18th century legislators or 17th century sovereigns had very different notions.

Then, to the extent one could conjure up a public benefit for the new corporation, it would justify the granting of special powers, usually a local monopoly on a particular business. Hence, the Hudson Bay Company’s lock on commerce in vast swaths of colonial Canada.

The earliest, recognizably modern business corporation was the famous - or infamous - East India Company. Chartered December 31, 1600, its public purpose - “the advancement of trade” (1) was nothing more glorious than the making of money for its proprietors. For the next three centuries, Parliament would debate every twenty years or so the extent of its monopolies and privileges.

Sharing the Wealth

Almost invariably, after American independence only supporters of the party in power in the state legislature could win charters. Some shares on the offering routinely and pretty openly went (at least in New York up to the 1840s) to legislators.

That pattern reflected the one that existed in Britain before the “South Sea Bubble Act” in 1720 moved chartering authority from the King to Parliament and restricted the charters that Parliament could authorize. The Parliamentary inquiry into the South Sea Company’s cataclysmic failure revealed rampant bribery with shares handed out up to the highest levels of the Court.

General Incorporation

In the 1830s-40s, the Jacksonian Democrats devised the approach that solved the corruption and political favoritism inherent in chartering. They advocated treating the corporation as simply another business form, available to all - just as a partnership or an unincorporated company was. This reform took nearly 80 years to reach full fruition.(2)

One of the objectives of the “general incorporation” reforms was to eliminate determinations of a “public purpose” that warranted granting special privileges to a particular business organization. Theoretically, all corporations would receive the same privileges and immunities.

General incorporation thus ended the evils of select access to the corporate form and of tying the legislature in knots over monopoly-type privileges to be extended to charter recipients. It granted corporations perpetual life and thereby ended the evil of periodic charter renewals which provided generations of legislators and courtiers with reliable streams of income (bribes).

A New Concept of Public Purpose

One of the few certainties of history is that the great reforms of one era become the great causes for reform of a later era. General incorporation brought us problems few dreamt of.

As we address them, it is time to explore what a corporation’s public purpose should be. It is not too late to impose one.

Endnotes

1. Nick Robins, The Corporation that Changed the World (London: Pluto Press, 2006), p. 43.
2. A series of articles by Harold Hovenkamp, professor of law at the University of Iowa shaped my thinking on general incorporation. I have collected his articles in the bibliography collected on KLD’s website: http://www.kld.com/resources/index.html