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How the Corporation Lost Its Image as a “Creature of State”


Carly Knight (@carlyrknight1) is Assistant Professor of Sociology at New York University.

In 2018, Elizabeth Warren introduced her plan to fix capitalism in the opinion pages of the Wall Street Journal. Dubbed the “Accountable Capitalism Act,” she proposed a radical overhaul of corporate governance, federalizing the corporate charter system and legally mandating that corporations consider stakeholders, not just shareholders, in their decision-making. In her opening salvo to the Journal’s readers, she underscored that corporations are fundamentally creations of the public by noting that corporate privileges exist only because “the American people grant [corporations] charters.” In return for these privileges, she argued, corporations have duties to the public.

The fact that Warren felt it necessary to argue this point reflects just how far the dominant legal understanding of corporations has travelled in the past two centuries. Prior to the early 19th century, the dominant legal view held that corporations were artificial, quasi-public institutions, whose shareholders received corporate privileges in exchange for the fulfillment of public goods. Indeed, the view that corporations were “creatures of the state” (as many legal scholars, politicians, and journalists referred to them) was so dominant that, in 1805, Justice Locke of the North Carolina Supreme Court noted that, “it seems difficult to conceive of a corporation established for merely private purposes.”

Today, however, corporations are primarily understood to be private economic actors: legally obligated, as well as socially expected, to maximize profits for shareholders. This conceptual shift is in some ways quite puzzling. Despite the changing nature of the relationship between states and corporations throughout the 19th century, corporate business entities always, in practice, remained embedded in state and political institutions. How, then, did the image of the corporation as a “creature” or a “creation” of the state come to be replaced with an understanding of the corporation as a “pure creature of the market”?

In a recent article, I argue that the symbolic privatization of the corporation was the joint product of both liberal and progressive theorizing. In particular, I argue that this transformation required not only changes in legal form but also new analogies, symbols, and legal ideas about corporations. The view of the corporation as a creature of the state was displaced by two alternative theories of the corporation: “aggregate” and “natural entity” theories. While these theories were radically different in substance, they were united on one important point: they both agreed that the state recognized, but did not create, corporations. Instead, both theories drew a connection between corporations and natural persons.

Mere Associations or Collective Persons

For “aggregate theorists,” corporations were just aggregations of shareholders, similar to partnerships. Therefore, questions about the rights of corporations could be determined based on the rights of the corporation’s owners. By deflating a corporation to a set of relationships among shareholders, this view diminished the idea that corporations owed their unique privileges to a grant of power from the state. Corporations were unremarkable “fictions” that instead originated in voluntary, private contract. As Victor Morawetz, one of the most famous proponents of this view, argued:

There is no reason of immediate justice to others, why a number of individuals should not be permitted to form a corporation of their own free will and without first obtaining permission from the legislature, just as they may form a partnership or enter into ordinary contracts with one another.

This theory, which presents corporations as unremarkable collectives, played a crucial role in the expansion of corporate rights, as can be seen in the Railroad Tax Cases of the late 19th century—a series of cases that culminated in the Supreme Court declaring corporations as persons under the 14th Amendment. When, in 1879, the state of California amended its constitution to increase tax burdens on corporations, banning corporations from availing themselves of mortgage deductions that were available to individuals, Southern Pacific Railroad sued the state, arguing that, since corporations were persons within the meaning of the 14th Amendment, California’s tax was an unconstitutional violation of the equal protection clause. Ruling in favor of the railroads and drawing upon the aggregate theory, Justice Stephen F. Field reasoned that: “It would be a most singular result if a constitutional provision intended for the protection of every person against partial and discriminating legislation by the States, should cease to exert such protection the moment the person becomes a member of the corporation.”

It is perhaps not surprising that a view that the law should look “through” the corporation to the rights of individual in corporations would be used to expand corporate power. What is perhaps surprising is the response to this view among a set of progressive “natural entity theorists.” These theorists wished to argue that corporation was not a “fiction” but was, instead, “real”—as real as any citizen of the polity. In a move that resembled that of their aggregate theorist opponents, natural entity theorists like Deiser would argue: “[T]his juristic person . . . is not a creation of the law; the law does not create its personality, but finding a group engaged in some common pursuit, endows it with a definite legal capacity.”

Yet, unlike aggregate theorists, progressive entity theorists advanced this view of the corporation primarily as a means by which to hold it publicly accountable for its actions. These theorists worried that the idea that corporations were aggregate “fictions” would make it harder to hold corporations themselves (separate from their members) accountable for harms. This was particularly the case for certain kinds of torts, like those involving vicarious liability and certain types of crimes, like those involving intent. As Deiser, again, worried: “When [corporations] are wronged, they set the machinery of the criminal law in motion—when they do wrong, the law is puzzled to find a fiction responsible for a crime.”

By contrast, recognizing the corporation as a “real” actor, just like any person, would shore up the view that the corporate entity itself, and not just some of its agents, was the responsible party. Arguing for the importance of corporate legal theory to corporate criminal cases, Charles G. Little declared: “The sooner the idea of the corporate personality as a pure fiction is abandoned, the sooner will some logical theory of corporate responsibility both civil and criminal be evolved.”

While advocates viewed this as a strategy for holding corporations accountable, their rhetoric contributed to the naturalization of corporations, which increasingly came to be seen as ordinary features of the private, social landscape, rather than as government creations. Over the next several decades, the key dispute in the corporate personality debates centered on whether the corporation was a fiction representing an aggregate of shareholders or a real, natural entity. What was lost was the image of the corporation as a grant of power from the state.

The Fading and Possible Rebirth of the State Metaphor

Over the course of the early 20th century, explicit corporate personality debates faded. As legal formalism gave way to legal realism, philosophical questions about the ultimate “nature” of the corporation appeared far too abstract to be useful in answering specific legal questions about corporate governance or regulations. Nevertheless, the argument that the corporations offered a “natural” mode of collectivizing property—that was recognized by but did not fundamentally require the state—remained. Joint naturalizing analogies thus successfully conjoined the corporation with private, collective property, while obscuring the state privilege behind that collectivization—a legacy that reverberates in recent decisions like Citizens United and Hobby Lobby.

It is time to revisit the utility of the “creation of the state” metaphor. As Warren’s op-ed demonstrates, emphasizing that corporate privileges exist because the government grants them those privileges is powerful rhetoric. It is also factually correct. Legal scholars, economists, and political theorists seeking to advocate for a more democratically accountable corporation are increasingly pointing to the fact that the state provides corporations their unique set of privileges—privileges that do not simply reduce to a set of contracts among private shareholders.

Resuscitating some version of the “creature of the state” view—or articulating new and better arguments for why corporate privileges do not reduce to merely private contracts—is an important part of reclaiming the progressive argument for increased corporate democratic accountability. This time around, perhaps the analogy that corporations are the state’s “creation” will endure.

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For a response to this post, see Dan Rohde’s “Corporate Personhood & Corporate Purpose.”