The Fourteenth Banker Blog

July 7, 2010

Gonzalo Lira: Why Corporations Matter, Part I

Filed under: Running Commentary — thefourteenthbanker @ 10:00 PM

Gonzalo Lira: Why Corporations Matter, Part I.

This is a good piece.  I’m looking forward to the next post, which I think is foreshadowed in these paragraphs at the end:

…once corporations came into existence in 1602 in Europe, we have had the smooth uninterrupted material progress I spoke of earlier, and which we enjoy today.

This is why corporations matter. This is why they are an essential part of our current civilization—above any religion, second only to the individual and the state.

In fact, the relationship between that triumvirate is the main issue in our current society—how corporations, individuals and the state can and should interact.

But that’s for another post.

I’m quite confident that the writer will call for a new balance of power between the individual, the state, and the corporation.


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3 Comments »

  1. Ok, let’s say he’s right about the value to civilization of the corporation, which recent history causes my gut to instinctively rebel against , two things spring to mind. Just because the development of the corporation DID produce this outcome, it doesn’t necessarily follow that that’s the only means to save and develop information and innovation. Two, I hope in part II he goes into how we put the evil genie of greed and short-sightedness back into the corporate bottle, because right now, from where I sit, it appears that the modern corporation is doing more harm than good.
    And this bit – One, productivity engines, designed to produce a specific good or service, while disregarding anything and everything else, so as to satisfy a demand in the society.
    If they are “satisfying the needs of society” why do we need Madison Ave? Seems to me we are constantly being lobbied to buy things we don’t need.

    Comment by Sandi — July 8, 2010 @ 2:02 PM | Reply

  2. A super link. There was a time when corporations were hog tied. The Rockefeller interests had to resort to the idea of a trust agreement to hold corporate stock across state lines. It was once universal that a corporation could not own stock of another corporation. If you research the subject of trusts, the trustees were on the hook for corporate acts chargeable against owners of stock… themselves , in trust, for the holders of their Trustee Certificates. Corporations could not own property outside the state of incorporation. Robber Barons personally owned shares of railroad companies end to end to create a rail ” System” like the New York Central. Rockefeller did the same until he solved the organizatin problem with the trusteeship. Shares were assessable against the shareholder’s in multiples of the Par Value of the stock per share. Even as late as the end of WWI , the bulk of the states had assessable shares.

    Today though , we really no longer have actual share owners for the majority of shares. How could there be if 70 % of trading activity is by program trading ? What is the average life span of share ownership for publically traded shares? A huge percentage change hands every day… they are now a mere currency type vehicle for speculating. Until WWII, the most valued shares were preferred shares and those that paid dividends. The share price was heavily weighted by dividend distributions. Pricing based on earnings per share and quarterly results are a post WWII phenomenon for the most part. Earnings per share just asks for accounting research to accomodate a smooth line of earnings growth.

    People are the greedy ones. Then,just what is excessive acquisitivness? What is acquired to excess? It certainly is more than just wealth items.

    Comment by Jerry J — July 8, 2010 @ 10:42 PM | Reply

  3. It dawned on me that the present BP liability situation is a perfect example to illustrate the working of assessable shares as if they were say in 1910. BP would have been required to set a rather high par value for the shares at the time they sought permission to sell and issue the shares. Let’s say $25 is the Par Value. Further, State X set’s shareholder assessability at 50% of Par Value or a maximum of $12.50. In this case the BP Board of directors would most likely have been compelled by corporate law to assess the shares on the date of the spill the full $12.50. The money thus raised would be used to cover the corporate legal liability. Of course, back then all shares were registered to a known owner by the Transfer Agent and they would bill and collect the assessment. If the shareholder did not pay up the shares were forfeit to the BP treasury for resale. If the shares were sold ex assessment date, the new owner acquired the liability with the shares. Think of the hit to brokers on street shares they held.

    Apply that today. All you can do is laugh and laugh and laugh at the panics induced in the stock market. Even today, actual share certificates carry the bold legend ” Fully Paid and Non-Assessable”. The other remnant of ” The Old Days” is the carrying of a Par Value and a Paid In Surplus amounts in the capital accounts of a corporation. Both are quite obsolete. Indeed, many companies sensibly carry stock of No Par Value. The various corporate laws though resisted this and forced the carrying of a ” Stated Value”.

    All this started to wane when New Jersey allowed holding companies. Hence , Standard Oil of New Jersey. ( Exxon). States were pressured to allow ” foreign” corporations to qualify in a state and function as if it were a domestic corporation of the state. This allowed Delaware to get in the game as a merchant of corporate laxity. Delaware got rid of assessability and the other states followed suit in the roaring twenties.

    So, in 1910, BP would have been forced to collect most of the $20 billion, in theory, from shareholders subject to the limits of their state of incorporation. BP would have had to have been a NJ holding company to have it’s present arrangement. All this was put in place in anticipation of the break up of the Standard Oil Trust. Each portion still needed a holding company for most of the pieces. It was practically mandatory that a replacement for a Trusteeship be available. That was Standard Oil of New York ( Mobil),Standard Oil of New Jersey and Standard oil of California ( Chevron) in 1911. A great deal of current corporate law understandings evolved from trust busting. All that happened initially from the Standard Oil bust up was that Rockefeller and others surrendered their Trust Certificates for stock certificates in a number of new entities. It took a long time for the Standard components to go their own ways, if they ever really did so.

    Comment by Jerry J — July 9, 2010 @ 11:42 AM | Reply


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