Chapter 1 - What Are Corporations?

Section 9 of the Corporations Law defines "corporation" to include both local and foreign bodies corporate and companies, as well as foreign unincorporated bodies which "may sue or be sued, or may hold property in the name of [their] secretary or of an officer of the body duly appointed for that purpose." It is notable that this last part of the definition extends its application to bodies with attributes akin to those of corporate persons under Anglo-Australian law.

Subject to a caveat to be introduced later in this chapter, I propose to employ this definition for the purposes of this paper. I will treat a corporation as being either a body vested with corporate personality under such Acts as the Corporations Law, the Associations Incorporation Act 1987 (WA) and the Trade Unions Act 1902 (WA) (and equivalents), or a closely analogous body under foreign law. Having thus defined a corporation, the question posed by the title of this chapter remains, albeit now refined to, "What is a corporate person?" To answer it requires an analysis of the three major theories of corporate personality.

1. Corporate Personality

1.1. Fiction Theory

The fiction theory holds that corporations are simply legal fictions, created and sustained by an act of the state.1 They are endowed with corporate personality simply because this is a convenient form through which the natural persons behind the corporation may conduct their business.

Despite its instrumental conception of the corporation, the fiction theory still affords a sufficient basis for according corporations legal rights. Indeed, it is on the basis of the fiction that corporations are persons that they possess the legal rights they do, such as private property rights. However the fiction theory affords no basis for the recognition of moral rights of corporations. On the fiction view, "corporations, as creatures of the State, have only those rights granted them by the State."2

1.2. Contract Theory

According to the contract theory, a corporation is the product of an agreement to create a corporation entered into between its shareholders.3 It is the shareholders who employ managers for the corporation, and to whom these managers owe fiduciary duties. The state's recognition of the corporation's existence is no different in principle from its recognition of any other private agreement.

The contract theory affords as little basis as the fiction theory for the recognition of corporate moral rights. For adherents to the contract theory,

the expression "collective rights" is a contradiction in terms. Any group or "collective," large or small, is only a number of individuals. A group can have no rights other than the rights of its individual members. ... For instance, the right of an industrial concern to engage in business is derived from the right of its owners to invest their money in a productive venture - from their right to hire employees - from the right of the employees to sell their services - from the right of all those involved to produce and sell their products - from the right of the customers to buy (or not to buy) those products.4

Indeed, the contract theory offers even less justification than the fiction theory for the legal rights corporations presently possess by virtue of their corporate personality. For instance, if corporations are rightly considered to be simply contracts between their shareholders, why should they be able to bear property rights, and on what basis should the shareholders be accorded limited liability for the corporation's debts?5

1.3. Realist Theory6

On the realist view, the corporation is more than a legal fiction, and more than simply an agreement between its shareholders.7 It is an autonomous institution with a demonstrable extra-legal existence, analogous in some respects to a self-governing state. Like the contract theory, the realist theory recognises that the shareholders of a corporation delegate the powers of control over their property to the corporation's management so that the property can be pooled towards a unified purpose.8 Unlike under the contract theory, however, the shareholders are seen more as investors in the corporation than owners of it. This is why managers owe fiduciary duties not simply to the shareholders, but to the corporate person as a whole.9

Of the three theories, only the realist theory seems capable in principle of supporting moral rights for corporations, because only it grants them a real social existence apart from the concession of the state or the agreement of their shareholders. However it seems that the realist theory of corporate personality has fallen out of favour amongst modern academic writers.10 This may be because it seems to accurately describe only a limited subset of corporations. Many types of corporations which have assumed greater importance since the realist view gained prominence, including holding companies and trustee companies, sit uneasily within the realist framework.

Nevertheless I believe that the realist theory is potentially the most useful of the three set out above, so long as the subset of corporations to which it most accurately applies can be sufficiently delineated. By itself the theory seems incapable of providing any basis for such delineation. If the realist conception of the corporation is to be salvaged at all, its assumptions must be explicated by some other theory.

2. Why Corporations?

The above survey of the theories of corporate personality has revealed no complete conception of the corporation which justifies the recognition of moral rights of corporate persons. To some extent, this is hardly surprising. Corporate personality is a legal concept based on purely commercial considerations:

The concept of the juridical person is convenient to the conduct of business by providing for extended "life" and a limitation on liability, not to mention the right to own property and enter into contracts, which the law reserves to people. But laws might be fashioned to give corporations the same power to own property and sign valid contracts without terming them persons.11

There is therefore no reason why the types of bodies (if any) which deserve to be endowed with collective rights should coincide with those organisations allotted the status of persons by the law for purely instrumental reasons. For instance, corporations are classified as legal persons, but partnerships are not. Yet there is no obvious reason why the mere act of incorporation by a partnership should endow it with moral rights which it did not possess before.

The intuition which many lawyers seem to possess that corporations do possess rights can be explained as a psychological response to the "unified normative vocabulary"12 with which natural and corporate persons are described. That is, the personification of the corporation leads lawyers to indiscriminately apply concepts to it which are rightly applicable only to natural persons. However although this may be a convenient mode of analysis, it is clearly not conceptually consistent for rights to be accorded to bodies corporate (and to no other collectivities) purely because they bear that designation.

Nevertheless, that is precisely what I propose should be done. My rationale is that the present paper is not simply a normative, but also a descriptive study. It is apparent that corporate persons are already recognised as more appropriate bearers of rights than non-incorporated bodies under Australian law. It is for this reason that they have property and other common law rights which non-incorporated bodies lack. It is likely, therefore, that any extension of the rights recognised of collectivities under our law will employ this existing category. To extend the recognition of rights to non-incorporated bodies would require the recognition of a third type of personhood hitherto unknown to the law. However desirable this may be, it is not a realistic proposal for law reform.

Moreover, one of the conclusions of this chapter is that the construction of such a new category of person is not necessary. The bodies to which rights could plausibly be granted are by and large coincident with the bodies recognised as corporate persons by our law. These bodies may be called "organisations".

3. Corporate Organisations

Modern organisation theory fills the gap left by the realist theory of corporate personality in explaining why corporations are more than just a fiction or a contract. By synthesising organisation theory with the realist theory of corporate personality, it is possible to arrive at a theory of the corporation with wide (although not universal) application, and which forms a plausible basis for the recognition of corporate rights. Using this synthesis, developed below, a corporation may be viewed as a real entity, rather than a mere fiction or a contract between its members, so long as it is also an organisation.

A typical definition of an organisation from the organisation theory literature states: "organizations are social entities that are goal-directed, deliberately structured activity systems with an identifiable boundary".13 Because organisation theory is concerned with the structure and management of organisations rather than their rights, it is necessary to demonstrate that it is less arbitrary to adopt this definition of an organisation in examining corporate rights than the legal definition of a corporation which I have shown above to be inadequate. I will do this by examining each of the four elements of the definition in turn.

First, the fact that organisations are "social entities" overcomes the difficulty which exists in according rights to non-humans presented by the essentially humanistic framework in which rights discourse takes place. This point will be explained in the following chapter. Second, that organisations are "goal directed" provides the heterogenous set of individuals who comprise the organisation with the unity of purpose necessary for them to benefit from a collective set of rights. Third, the fact that organisations are "deliberately structured activity systems" gives them the ability to perform activities in pursuit of their goals, which constitutes the good for which protection by rights is (as I will argue) required. Finally, the "identifiable boundary" around organisations gives them the ability to assert their rights against other individuals and groups in society, and to demonstrate when these rights have been infringed.

To the extent that the definition of an "organisation" is broader than that of a "corporation", there will be organisations which (I will argue) possess rights that ought to be recognised, but falling outside the latter definition, do not possess the legal personhood through which they conveniently can be. Partnerships provide an obvious example. To some extent this concession to practicality is conceptually unsupportable. On the other hand, it does provide an incentive for those bodies which wish for their rights to be recognised to incorporate, as a way of registering their claim to rights with the state. Such an incentive is already provided by the other benefits which incorporation provides, such as limited liability.

4. Organisations as Intelligent Machines

Meir Dan-Cohen defines organisations as "large, goal-oriented, permanent, complex, formal, decisionmaking, functional structures."14 This broadly corresponds to the definition cited at p.8 above, except in one important respect. This is that Dan-Cohen does not require that an organisation be a social entity. Indeed, he claims that an organisation is nothing more than an "intelligent machine".15 He illustrates this by telling the tale of a hypothetical corporation, Personless Corporation, which repurchases all of its own shares, and sacks all its human personnel, replacing them with computers.16 Since the corporation is still able to function after this metamorphosis as it did before, Dan-Cohen concludes that the essential nature of an organisation is not human but mechanical.

The significance of this is that it is largely because he sees organisations as essentially mechanical and instrumental that Dan-Cohen dismisses their capacity to bear rights on their own behalf. This question would have to be examined at greater length17 if Dan-Cohen's definition of an organisation was amended to take account of its social character. It is not the purpose of this chapter to deal with the substantive questions involved here (whether organisations as intelligent machines can bear rights, or whether they could if they were also social entities); these will be addressed in chapters 2 and 3 respectively. Rather, I propose here to challenge Dan-Cohen's denial of the social character of organisations in his definition.

Dan-Cohen constructs his intelligent machine metaphor painstakingly, but it is submitted that the endeavour is nevertheless logically flawed. This is because assuming that Dan-Cohen is correct in arguing that an organisation can, "conceptually and legally",18 exist independently of its human stakeholders, this does not mean that this conceptually and legally minimal organisation must be taken as the paradigm organisation for the purposes of considering whether organisations should be accorded rights. If by defining organisations more restrictively, the stated objection to their capacity to bear rights can be overcome, surely it is unimportant that the organisation thus defined does not correspond to its conceptually and legally minimum form.

Thus, even if Dan-Cohen is correct in stating that an organisation defined as an intelligent machine cannot bear rights, there is no reason why he has to define an organisation in that way in deciding whether organisations have rights. Given that my alternative conception of an organisation (or corporate organisation) as a social entity is both closer to reality19 and also, incidentally, better supported by the organisation theory literature as a minimum conceptual definition,20 I see no barrier to my adoption of it as the paradigm of a corporation for the purposes of this paper.

5. Corporations as Social Entities

5.1. What is a Social Entity?

A social entity is a group which is irreducible to the sum of its individual members, and so must be studied as a phenomenon in its own right.21 That a corporation (or corporate organisation) is such an entity is an insight explained by organisation theory, but which was anticipated by the realist view of corporate personality. Thus, where Daft (an organisation theorist) said, "When people are organized into a company to accomplish a goal they become a social entity distinct from other companies,"22 Dicey had much earlier said:

When a body of twenty or twenty thousand or two hundred thousand men bind themselves together to act in a particular way for some common purpose, they create a body which by no fiction of law but by the very nature of things, differs from the individuals of whom it is composed.23

5.2. Who are the Members of a Social Entity?

It is impossible to determine exactly which individuals form part of a social entity without examining their particular circumstances. "Subjective factors are crucial; it is the existence of a shared understanding that makes diverse individuals into a group."24 On this basis, almost all employees will rightly be considered as part of the corporations they work for, but few creditors of the corporation will. Other stakeholders will fall in between. For instance, some shareholders (such as those who attend general meetings and involve themselves in the company's affairs) may be part of the corporation whereas others (such as stock market speculators) may not. From now on I will refer to these various groups collectively as the "members" of a corporation.25

The relationship between a social entity and its members is a complex one, whereby

[a]lthough organisations are not synonymous with individuals (or their interests or goals), neither are they entirely distinct from the individuals who comprise them.26

The most important repercussion of this is that the personal objectives of each individual member of a corporation need not correspond to (although they will influence) the objectives of the corporation as a whole. Cyert and March first theorised that organisational objectives are formulated through a coalition of stakeholders in the organisation, rather than being simply imposed by management.27 Since the interests of managers, workers, shareholders and others rarely coincide, the objectives they set for the organisation will represent a compromise.28

5.3. Non-Organisational Corporations

Since this paper proposes that rights be granted to corporations at large rather than only those which also qualify as organisations, there may be some corporations to which I would grant rights which are not social entities. The paradigm example is Dan-Cohen's Personless Corporation. Closer to reality, incorporated sole proprietorships with only one active member could not be classified as social entities, and neither could many holding companies or companies incorporated solely for taxation or other strategic purposes. Although as a matter of corporate law a company must have at least two or three directors,29 and these must be natural persons,30 corporations which make no use of their directors except as the Corporations Law requires could not accurately be defined as social entities merely on this account.

Assuming that these corporations ought not to be accorded rights because they are not also organisations, the arguments to be advanced in favour of corporate rights in this paper are deprived of some of their cogency.31 My only defence is the suggestion that non-organisational corporations ought not to be accorded some of the other benefits of their corporate personality either, such as limited liability.32 Corporations are accorded such rights nevertheless for reasons of administrative convenience. The purpose of legal categories such as "corporate persons", "fiduciaries", "murderers", etc. is to enable the application of uniform rules across disparate but comparable circumstances. It may be that the boundary for the application of collective rights is drawn as well at corporations as it could be anywhere else.

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