The Corporation

The bulk of economic activit)’ in an advanced market economy takes place in private corporations. Centuries ago. corporate charters were awarded by special acts of the monarch or legislature. The British East India Company wasa privileged corporatlon and as such it practically ruled india for more than a century,In the nineteenth century, railroads often had to spend as much money on getting a charter through the legislature as on. preparing their roadbeds. Over the past century. laws have been passed that allow almost anyone the privilege of forming a corporation for almost any purpose.

Today. a’ corpondoD is a form of business organization, chartered in one of the fifty states or abroad and owned by a number of individual stockholders. The corporation has a separate legal identill’. and indeed is a legal “person” that may on its own behalf buy. Sell. borrow money. produce goods and services, and enter into contracts. In addition. the corporation enjoys the ,right of limited IjabililJ. whereby each owner’s investment and financial exposure in the corporation is strictly limited to a specified amount.

The central features of a modern corporation are , the following:

The ownership of a corporation is determined by the ownership of the company’s common stock. If you o~ 10 percent of a orporation’s shares, you have 10 percent of the ownership. Publicly owned corporations are valued on stock exchanges,
like the NewYork Stock Exchange. It is in such stock markets that the titles to the largest corporations are traded and that much of the nation’s risk capital is invested.

In principle. the shareholders control the companies they own. They collect dividends in’ proportion to the fraction of the shares they own. and they elect directors and vote on many important issues. But don’t think that the shareholders have a significant role in running giant  corporations. In practice, shareholders of giant corporations. exercise virtually no control because they are 100 dispersed to overrule the entrenched managers.

The corporation’s managers and directors have the legal power to make decisions for the corporation. They decide what to produce and how to produce it. They negotiate with labor unions and decide whether to sell the firm if another firm wishes to take it over, When the newspaper announces that a firm has laid off 20.000 workers. this decision was made by the managers. The
shareholders own the corporation, but the managers run it.

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