A corporation is a business in which large numbers of people are organized so that their labor and capital are combined in a single venture. They may enter or withdraw from the venture at any time, leaving it to others to carry on. In law, a corporation is a single entity, a "person" that may sue or be sued without its members being held liable. Modern corporations include not only profit-making firms but educational, scientific, recreational, charitable, and even religious organizations. Cities and towns incorporate themselves. Some activities of the federal government are carried on in corporate form, for example, the \TFederal Deposit Insurance Corporation\t and the \TTennessee Valley Authority\t. DEVELOPMENT OF THE CORPORATION The corporation is a result of two related yet distinct traditions. The first is the age-old penchant of people to join together in associations and engage in mutually beneficial activities. The second tradition began when the chartered company was established by sovereign states in western Europe in the late Middle Ages. Notable forerunners of the modern corporation were the great English trading companies of the 16th and 17th centuries, chartered by the crown or by act of Parliament. These \Ljoint-stock compan\lies had a legal existence separate and distinct from their individual members. They also had the right to engage in commercial activities, including the exploration and colonization of new lands. By the end of the 17th century English lawyers had devised a new form of corporate organization that did not need an act of Parliament or the permission of the monarch. Combining contract and trust law, they established unchartered joint-stock companies that had all the attributes of the modern corporate form: individuals joined in a voluntary association for commercial purposes; a group legally distinct from the personalities of the individual members; funds held jointly for common use; limited individual liability; a corporate legal personality extending beyond the life spans of individual members; ownership easily transferable from one individual to another in the form of shares in the company's capital or \Tstock\t; and a specialized administrative structure. In the United States, after it gained independence from Britain, corporations were chartered on an individual basis by state legislatures much as the English Parliament had done previously. Public dissatisfaction with this system grew. It placed a staggering burden on state legislatures; competing firms were jealous of the special privileges granted to some corporations; and the granting of special privileges was a concept alien to a democratic society. The result was a shift toward a general enabling statute under which any group of persons could achieve corporate status simply by satisfying certain legal requirements. New York passed the first general corporation statute in 1811, and other states followed. THE CORPORATE FORM OF ENTERPRISE The corporation is distinguishable from other common forms of business enterprise, notably the proprietorship and the partnership. The sole proprietorship is a business that is owned by one person, whereas the partnership is an association of two or more persons engaged in a business. Although the corporation is more difficult and costly to organize than the proprietorship or the partnership, it has several advantages. Limited Liability Stockholders in a corporation are not legally responsible for the debts of the enterprise. Although they can lose their personal investment, they cannot be sued by the corporation's creditors. Individual proprietors and partners, however, are personally liable for their companies' debts and may be forced to sell their other property in order to satisfy the debts. Legal Personality The law treats a corporation as a person entitled to enter into contracts, to sue, and to be sued. The employees of the corporation are not held personally responsible for the acts of the corporation as a legal entity, although, under the law, they may be held responsible for acts committed as individuals. Transferability of Ownership Interest Ownership of a corporation is vested in its stockholders, who may sell their shares on the market whenever they wish. Thus, except when stock is held by a few individuals who choose not to sell it, the ownership of a corporation is constantly changing. Continuity of Existence Proprietorships and partnerships exist only as long as their owners are alive and as long as they continue the proprietorships or partnerships. In contrast, a corporation exists independently of its individual stockholders. Although corporations do not last forever, they can continue indefinitely at the will of their stockholders and creditors. Concentration and Specialization of Management Large corporations can employ professional managers with training and skills, a capability proprietors or partners may not have. Many large corporations are, in fact, run entirely by their hired managers. LARGE CORPORATIONS The size and economic power of some industrial agglomerations has long been a subject of controversy. Many of today's corporations have thousands of employees and control billions of dollars in assets. In 1988 the combined sales of the 500 largest U.S. industrial corporations was just over $2 trillion. General Motors (GM), the world's largest corporation, had sales of $121 billion. GM was also the world's largest corporate employer with 765,700 employees and operating plants in virtually every state of the United States and in more than 45 countries. The 1988 combined annual revenues of the top five corporations was $402 billion, which is greater than the 1983 gross national product of all but a handful of countries in the world. Mergers Corporations began to grow large late in the 19th century. Between 1897 and 1902 a wave of mergers occurred, producing hundreds of large companies. These corporations subsequently grew larger, both by expansion and acquisition. A second wave of mergers occurred during the 1920s, reaching a peak of 1,250 in 1929. During the 1960s a third wave occurred; in 1969 about 2,500 mergers took place. Yet another wave that started in 1983 continued strongly through the 1980s; in 1985 alone a total of 3,165 mergers took place. Mergers among corporations take several forms. In the horizontal merger, a company seeks to extend its share of the market by acquiring another firm in the same industry. In the vertical merger, a company moves forward or backward in the productive process, acquiring others engaged in producing raw materials or in selling to the final consumer--as, for example, when a steel company acquires coal mines and oil fields (a backward merger) or buys a bridge-building firm (a forward merger). In the 1960s mergers began to take place among companies in substantially different industries. For instance, Greyhound, a bus company, acquired Armour, a meat packer. These are called \Tconglomerate\t mergers. Mergers do not necessarily involve smaller companies trying to combine their resources, or larger companies absorbing smaller companies to acquire specialized niches or new technologies. They also involve major corporations that are forced to restructure or acquire. During 1970-80, 8 companies among the top 50 U.S. industrial corporations were taken over by other corporations. They represented such venerable names as Continental Oil, Swift, and Rapid-American. Among the major companies that lost their individual identity during the 1980s were Continental Can, Gulf Oil, and \TRCA\t. Merger Language The growth of corporate mergers and takeovers has brought an associated set of buzz concepts and strategies--and new terms. "Junk bonds" are corporate bonds lacking an A rating from Moody's and Standard and Poor's investors' services. They are rated lower because the companies are deemed too highly leveraged in debt or their earnings are too low. "Leveraged buyout" is the purchase of assets or stock of a privately owned company, a public company, or a subsidiary or division of a private or publicly held company in which the purchaser uses a significant amount of debt and very little or no capital. The widespread, and controversial, use of debt to finance takeovers was underscored in 1988 with the record $25 billion leveraged buyout of RJR Nabisco Inc. A "poison pill" is an action by the management of a company threatened by takeover that makes acquiring the firm so expensive that the predator goes off to seek other game. "Shark repellants" are other measures used to fight off a pursuing firm, including changing the bylaws to make it more difficult to acquire the company. Thus the corporate charter and bylaws might be amended to require the controlling shareholder to obtain 80 to 95 percent approval for a takeover (a "super majority"). "Corporate raiders" are individuals who attempt to make a hostile takeover of or bids for a company at exorbitant prices. "Arbitragers" are securities specialists who buy stock of a target company on the hunch that a takeover effort will be successful or will elicit bids from the target or from another suitor. "Green mail" is the premium paid by a company above the market prices to buy back stock from a corporate raider. "Golden parachutes" are financial benefits that a company guarantees its top managers in the event of a hostile takeover of the corporation, when the managers might lose their jobs. Growth and Regulation As corporations grew, many people in the United States became concerned that they were becoming too powerful. In 1890, Congress passed the \TSherman Anti-Trust Act\t, which made illegal any combination of or conspiracy among companies in restraint of trade. The meaning of "restraint of trade" was not clear. The Supreme Court adopted what it called the "rule of reason," holding that bigness alone was not in restraint of trade but only combinations that were intended to coerce or attack competitors. The Court did not condemn growth that was achieved by superior efficiency in management and production. Applying the rule of reason in 1911, the Court ordered the American Tobacco Company and Standard Oil to be broken up into separate companies; it left Eastman Kodak and International Harvester intact, however. Through other laws, such as the \TClayton Anti-Trust Act\t and the \TRobinson-Patman Act\t, Congress has sought to prevent large companies from using their power unfairly against competitors or consumers. The contention that the growing size of corporations means that the larger corporations control a greater proportion of the economy than they did formerly, is in dispute. Some argue that the concentration of industry has not changed much in recent years because, as the larger corporations grew, the economy grew with them. According to others, the answer seems to depend on whether the economy is viewed as a whole or as separate industries. Clearly, the giant corporation is becoming increasingly important in the lives of average Americans, whether they are employees, consumers, or voters. Defenders of the corporation point to its efficiency as a form of economic organization, arguing that the size of a corporation is no indication of its power, since every company faces competition within its particular industry. The three giants of the automobile industry--General Motors, Ford, and Chrysler--compete vigorously for their share of the market, as well as facing strong competition from foreign manufacturers. The same is true of other industries in which a few large companies control 60% or more of the market; on the average, the share of the large companies in the total sales of their industries has not changed much over a period of time; in some cases it has decreased as other companies participated. OWNERSHIP AND CONTROL In addition to size, a striking characteristic of the modern corporation is that those who own it have little say in how it is run. Legally, stockholders have the power to determine the main policies of a company, since it is they who elect the board of directors. Ostensibly, the board of directors oversees the actions of the managers, whose job it is to carry out the board's decisions. In reality, the average person with a few shares of stock of GM or Exxon has no effective control over the company's policies. In many large corporations effective control is in the hands of management, which may select or change the board of directors as it sees fit. Management exercises control by use of the proxy mechanism--a provision that allows stockholders who cannot attend the annual meeting to authorize management to cast their votes for them. Most stockholder meetings are so sparsely attended that a serious challenge to company policy can only come from holders of large blocks of stock or, as often happens, from banks to which the company owes money. Some corporations are controlled by family groups that own a sizeable share--10% or more--of a corporation's common stock. In recent years a new kind of stockholder has emerged: the large financial institution that holds stock for its clients. Included in these institutional investors are insurance companies, mutual funds, savings banks, employee pension funds, and the trust departments of commercial banks. In the late 1980s the institutional investor had about $2 trillion in assets in publicly owned corporations, primarily in the form of the pension fund. Pension funds own one-third of the equity of all publicly traded U.S. companies and 50% or more of the equity of the large ones. U.S. stock ownership has become more concentrated than ever before. For example, in 1986, institutional investors owned over 58% of Exxon stock and 70% of the total outstanding shares of General Motors. MULTINATIONAL CORPORATIONS The corporation has come full circle since it began. Just as the English trading companies of the 17th century set out to seize the commercial opportunities of overseas trade, the large industrial corporations of today look beyond the borders of their home countries for commercial opportunities. During the 20th century the multinational corporation, one that owns plants or business enterprises in more than one country, has emerged. These corporations began in the oil industry and in the mining of copper and nickel. In the years following World War I, American automobile manufacturers began to acquire subsidiaries overseas, producing cars aimed at local markets. The multinational movement grew rapidly after World War II. Direct foreign investment, as the U.S. Department of Commerce calls investment by U.S. companies in other countries, grew from $11.8 billion in 1950 to $309 billion in 1987. Investment in Canada, in European countries, Japan, and in other developed countries accounted for about three-quarters of the total; the flow was not one way. Foreign corporations also acquired subsidiaries in the United States. Corporations form foreign subsidiaries for a number of reasons. Perhaps the major reason is to overcome barriers to foreign trade, such as tariffs and import quotas. This is evident in such countries as Canada, where subsidiaries of U.S. companies account for a large percentage of total investment in manufacturing, and also in Britain. The formation of the \TEuropean Economic Community\t was a great incentive to investment by American companies in Europe, because it opened up an international market about the size of the U.S. market. Another motive in forming multinational corporations is the adaptation of products for local markets. The growth of the multinationals has been viewed with alarm by some and hailed by others as a step forward. The French publisher Jean-Jacques Servan-Schreiber wrote in The American Challenge (1968) that U.S. business interests in Europe had acquired the dimensions of a superpower, penetrating deeply into certain critical high-technology industries, such as computers and integrated circuits. In France, he wrote, they controlled two-thirds of the photographic film, paper, farm machinery, and telecommunications industries. Multinationals have also been criticized for pursuing their own interests while disregarding those of the countries in which they operate, as well as the interests of their home countries. The catastrophe that occurred at a chemical plant in \TBhopal\t, India, in 1984 brought renewed focus on this question. In some cases they have bribed government officials. In 1976 the managements of Exxon, Northrop, Gulf Oil, and United Brands Co. admitted making clandestine payments to officials of foreign governments, concealing these acts from their directors and stockholders. That same year, the exposure of Lockheed Aircraft's bribery of high officials in Japan, the Netherlands, Italy, and Turkey caused an international scandal. Corrupt activities are not peculiar to multinational corporations, however. On the positive side, the multinationals are viewed as a unifying force in the world economy, enabling entrepreneurs of all nations to compete wherever economic conditions exist that are favorable to business. Thus a watch company based in Hong Kong may combine Swiss technology and an Asian work force with a sales organization in the United States. In this view, the old international economy dominated by importing and exporting, and subjected to nationalist passion and shortsighted government intervention, may someday be replaced by one of international organizations in which capital and managerial ability may be easily moved from country to country. The world of the 1980s and 1990s is different from the one described by the critics of the multinationals in the 1960s and 1970s. Instead of dominating the world, the U. S. multinationals are struggling to hold their own--not only in foreign markets but also in their home markets. Multinational corporations have emerged from such Asian countries as Japan, South Korea, Taiwan, Hong Kong, and even India and the Philippines. Moreover, new global forces have appeared in the form of international agencies and internationally linked religious and other public interest groups that monitor the performance of multinational corporations to ensure that their activities benefit all concerned parties. S. Prakash Sethi Bibliography: Bandrowski, James F., Corporate Imagination (1990); Barham, Kevin, and Rassam, Clive, Shaping the Corporate Future (1989); Bradley, J. W., and Korn, J. H., Acquisition and Corporation Development (1981); Caves, Richard E., American Industry: Structure, Conduct, Performance, 6th ed. (1987); Goldberg, Walter, Mergers: Motives, Modes, Methods (1983); Kantrow, Alan, The Constraints of Corporate Tradition (1987); O'Neill, G. K., The Technology Edge: Opportunities for America in World Competition (1984); Ronen, S., Comparative and Multinational Management (1986); Schneider, Alan L., What to Know about Corporations (1988); Sethi, S. Prakash, et al., The False Promise of the Japanese Miracle (1984); Tsurumi, Yoshi, Multinational Management, 2d ed. (1983). See also: \Tbusiness administration\t; \Tcartel\t; \Tgovernment regulation\t; \Tmonopoly and competition\t; \Tpublic utility\t.