When people talk of corporations, it is usually joint-stock limited liability corporations that they have in mind. These share three characteristics:

  • Legal personality: Corporations are treated as artificial people, with a capacity for legal rights and obligations similar to those of natural persons.
  • Equity financing: Ownership is securitized as stock that may be held by multiple investors and traded in secondary markets.
  • Limited liability: The liabilities of the corporation are not liabilities of its owners, who can lose nothing more than the capital they have already committed to the corporation.

As the following history of corporations relates, it is the first characteristic that defines a corporation.

Roman Corporations

It is natural to think of an organization as having a collective identity distinct from that of any particular person who owns or belongs to it. The Romans recognized this with the notion of a corporation. The word corporation derives from the Latin word corpus for body, representing a body of people authorized to act as an individual. Cities were the first entities the Romans treated as corporations. Over time, the concept was extended to certain community organizations called collegia. These included artisan associations, religious societies and social clubs formed to provide funerals for members.

Most Roman corporations served exclusively community or religious purposes. Of course, distinguishing public from private interests can be difficult. A natural tension exists between the two in any society.

The Roman Republic relied on private contractors to perform a variety of tasks. Contracts to build aqueducts, manufacture arms, construct temples, collect taxes—even feed the geese on the capital—were granted to firms called publicani. These originated as loose associations among contractors who would pool their resources to bid on contracts. Over time, the publicani evolved into permanent companies with numerous investors, only a handful of whom served as managers. Larger publicani employed thousands of workers spread across Rome’s provinces. Fragmented evidence indicates that some of these received corporate status (habere corpus), which included a grant of limited liability for investors.

The publicani were well connected and, at times, extremely influential. Collusion with government officials was a lucrative way of business. If there was public indignation, it was balanced by investment enthusiasm. Polybius reported[1]

There is scarcely a soul, one might say, who does not have some interest in these contracts and the profits which are derived from them.

As early as records exist, the publicani were tainted by scandal. During the Second Punic War, the Republic agreed to insure the ship-borne cargoes of publicani willing to supply the legions on credit. Two years later, it came to light that old, rotting ships had been loaded with worthless goods and then scuttled at sea. The perpetrators organized a mob to disrupt a public enquiry. Eventually, it was only intervention by the Senate that brought them to justice.

Tax collecting was one of the publicani’s more controversial enterprises. Rome assessed a number of taxes, including taxes on pastures, grain and even the freeing of slaves. The publicani collected a number of these from Rome’s provinces. Essentially, they would buy future tax revenue from the state and then pocket whatever they could collect.

The system was ripe for abuse. Rome’s local governors oversaw the tax collections in each province. Some were corrupt, and the process became one of the governor and publicani together seizing whatever they could. Even when governors were honest, provincials understood they would be paying more than the percentages prescribed by law. Few governors would willingly antagonize their own financiers—publicani could work political mischief back in Rome.

Nicomedes III was king of Bithynia, a client state of Rome. When Rome’s senate asked him to contribute troops to help fight the Germans, he replied that he had none to spare. The publicani had enslaved most of his subjects! The enslavements may have been related to tax debts.

Livy commented[2]

Where there was a publicanus, there was no effective public law and no freedom for the subjects.

Under the emperors, the political landscape shifted, and the publicani were suppressed. New forms of corporations emerged. Charitable corporations were established to serve Rome’s growing indigent population. The emerging Catholic Church employed the corporate form as a vehicle for joint ownership of real estate and other property.

Trading Corporations

Roman law survived the fall of the Western Roman Empire to reemerge in aspects of the Church’s canon law and Europe’s secular bodies of law. During the Middle Ages, cities, guilds, monasteries and universities were all chartered as corporations, typically by sovereigns, local nobility or religious authorities. All served largely public or religious functions. For centuries, Europe witnessed nothing that resembled Rome’s publicani. This changed around 1600, when new business forms emerged to challenge the might of Spain and Portugal. The upstarts were chartered corporations.

There is something about representative government that allows people and their institutions to flourish. Is it coincidence that both Rome and the United States were republics? Consider the Dutch. From 1568 to 1648, they fought the Eighty Years War to cast off their Spanish rulers. In the midst of that war, they formed their own republic. This launched a period that has come to be known as the Dutch Golden Age. Art, trade and social tolerance flourished. This was the age of Rembrandt and Vemeer. The Dutch formed the first stock exchange. They sailed all over the world, even founding one notable outpost on the Southern tip of Manhattan Island.

Portugal had discovered the East Indies as the source of spices, and Spain was plundering the Americas for gold and silver. The Vatican legitimized this arrangement, ruling that lands discovered in the Eastern Hemisphere belonged to Portugal while lands discovered in the Western Hemisphere belonged to Spain. Holland and England flaunted the Vatican’s law. Not only did they practice a different religion, but they adopted different methods. While the Spanish and Portuguese sovereigns shouldered the expenses and risks of overseas ventures, English and Dutch traders formed private corporations to challenge them.

These trading corporations had their roots in guilds. During the 14th and 15th centuries, guilds were chartered primarily to enforce a monopoly in certain businesses or geographic regions. In exchange for a grant of monopoly, a guild would make ongoing fee payments to its chartering authority. Members of a guild might compete with one another, but outsiders were excluded.

Traders also formed guilds. Their purpose was to secure from the government a grant of monopoly over trade with specific geographic regions. In England, such guilds were called regulated companies. They were often referred to by names reflecting their monopolies—the India Company, African Company, Russia Company, Turkey Company, etc.

The members of a regulated company might compete with one another, but they often formed short-term partnerships to conduct specific voyages. Also, a regulated company might sponsor voyages, which it would open to all members. Because these voyages were the company’s own ventures, participants enjoyed limited liability. Equity subscriptions were offered to members, but additional capital could be raised from outsiders, who would pay a nominal “membership fee” in addition to their investment. Members would then outfit and man the ships. Regulated companies that sponsored equity-financed voyages came to be called joint-stock companies.

Two early joint stock companies were Holland’s and England’s respective East India Companies, which were chartered to challenge Portugal’s dominance of the spice islands. Initially, neither company had permanent equity. Each voyage would have its own equity subscription. This proved impractical, and soon capital from one voyage was being rolled over to finance subsequent voyages. In this way, the companies evolved to become much like today’s business corporations. They had separate managers and investors. Members gradually became an anachronism, taking on more the role of an employee base.

The joint-stock corporations cultivated influence at the highest levels of government. The Queen and nobility had significant investments in the English East India Company, and they looked out for the company’s interests in the halls of government. The joint-stock companies continued the guild practice of making ongoing payments to the state. In this we may perceive the origins of corporate taxation, but the people of the day viewed it as more akin to graft.

When motivated by greed, managers’ behavior could be deplorable. While the English East India Company was negotiating trading rights with the kingdom of Achin, that nation’s sultan suggested it would be nice if he could have a couple European girls for his harem. The English managers felt uncomfortable facilitating polygamy, but they saw nothing wrong with presenting just one English girl for what would, in essence, be sexual slavery. One of the company’s managers offered his own daughter for this purpose. She was saved by King James II, who refused to approve the gift.

The Dutch were brutal in pursuing their trade interests. Holland was at war with Portugal, and their East India Company carried on that war. They attacked Portugese shipping and facilities wherever they found them. England and Holland were allies, but Dutch merchants didn’t care. As Holland’s de facto representatives in the East Indies, they put profits ahead of national interest and periodically employed the threat of violence as a competitive device against English traders.

The Banda Islands, West of New Guinea, were the world’s sole source of nutmeg. In 1620, the Dutch East India Company forcibly evicted the English from this prize. They then committed genocide against the natives, killing or deporting into slavery most of the population. In 1623, on the nearby island of Amboyna, the Dutch imprisoned about 40 individuals, whom they accused of plotting against them. Among the prisoners were ten representatives of the English East India Company. The Dutch merchants brutally tortured their prisoners and then executed most of them. When word of this atrocity reached London, it almost sparked a war.

Bubbles and Abuses

Most people have heard of the Mississippi Scheme and the South Sea Bubble. They were popularized in Mackay’s (1841Extraordinary Popular Delusions and the Madness of Crowds as early instances of speculative bubbles. What is not as widely known is the fact that these schemes—essentially frauds—were orchestrated and promoted by the French and English governments. In the early 1700s, both nations had large war debts they wanted to quickly retire. Both nations pursued a strategy of engraftment. Publicly owned government debt would be exchanged for stock in some corporation, which would then hold all the debt. The governments could then extract reduced interest rates from those corporations in exchange for generous monopoly grants. This was the theory. In practice, the French and English governments implemented their engraftment schemes with struggling corporations with questionable prospects. The French did so with the Mississippi Company, which was a struggling, mismanaged corporation with vague plans to promote emigration to the Americas and acquire a grant of monopoly over tobacco. The English did so with the South Sea Company, which was formed by the government specifically for the purpose of engraftment. It was granted certain monopolies over English trade with South America. Since Spain was in control of those regions, the company’s monopolies were probably worthless. The Mississippi and South Sea Companies’ only valuable assets would be government debt paying reduced interest rates. To induce investors to exchange their government debt for shares in the corporations, promoters and the French and English governments had to convince them that the corporations’ franchises were valuable. They manipulated the corporations’ stock prices so they would be higher than the par value of the exchanged government debt. Investors scrambled to make the exchange, and frenzied speculators bid the corporations’ stocks even higher. Speculative bubbles developed for both corporations’ stocks. The Mississippi Company bubble burst in the Summer of 1720. Fortunes were lost, and France’s semi-feudal economy was crippled. The South Sea bubble burst soon afterwards. Its impact on the more robust English economy was not as severe, but it had repercussions across all the economies of Europe.

At the height of the South Sea bubble, England’s Parliament passed an act severely restricting the formation of new corporations. This has come to be known as the Bubble Act. There is a common misperception that it was passed as a response to the bursting of the South Seas bubble. In fact, it was passed while the bubble was forming in an attempt to block new corporations from competing with the South Seas Company for investors’ capital. For almost a hundred years following the bursting of the bubble, the Bubble Act and a general anti-corporate sentiment severely limited the formation of new English corporations.

Incorporation by Registration

A recurring theme in the history of corporations is that they should exist to serve some public purpose, and they are granted certain privileges to facilitate this. The state would charter corporations that it deemed worthy. At first, the most important privilege was a grant of some monopoly—say a monopoly over trade with some region or an exclusive right to build a certain canal. Over time, transferability of shares and limited liability became more important. These gave corporations an enormous advantage in raising capital over sole proprietorships and partnerships. Investors with modest holdings and limited liability were comfortable letting specialists run their corporations, so the separation of investors and management became one of the great strengths—and great weaknesses—of limited liability joint-stock corporations.

The building of highways, canals and railroads was a quintessential public need, and numerous corporations were chartered for these purposes. For other businesses, the state’s monopoly on granting corporate status proved onerous. When entrepreneurs tried to form a new corporation, competitors could oppose their petition for incorporation. Inevitably, the process was marked by political intrigue. When incorporation was denied, entrepreneurs had meager options. They might buy a failing corporation as a shell and then raise capital for a business unrelated to that corporation’s original monopoly. This practice was called charter abuse. With the supply of failing corporations limited, a more common solution was to simply issue stock in unincorporated companies. This legally perilous practice became widespread in England during the late 1700s. Many respectable firms were formed in this manner. In the early 1800s, competitors started challenging their legality in court.

The English industrial revolution was taking off, and the courts and governments found themselves making increasingly arbitrary decisions about which businesses to favor. Something had to be done. The solution was a new concept: incorporation by registration. In various countries, legislation was passed allowing entrepreneurs to incorporate any firm they liked by simply filing paperwork. No longer would corporations be privileged associations granted monopolies by the state to pursue some public purpose. They had become a standard business form—along with sole proprietorships and partnerships—that was available to all.

The United States emerged from its civil war in 1865 poised for growth. She was wealthy in land and natural resources. She had a well educated populace, liberal social and legal systems and an abundance of cheep labor arriving at her shores. The industrial revolution then underway was one of explosive growth unprecedented in earlier history. Mark Twain called this America’s Gilded Age. Incorporation by registration made it easy for businessmen to form corporations and raise capital. A lack or regulation facilitated unsavory business practices. Businessmen with the least scruples or the most vision rose to lead industry. They were disparagingly called robber barons and came to include Andrew Carnegie, who dominated steel, Jay Gould in railroads, John D. Rockefeller in oil and John P. Morgan in banking.

Managerial Capitalism

The agency problem has existed as long as men have allowed others to act on their behalf. In corporations, it arises between stockholders and managers, and this was one of the reasons Adam Smith (1776) denounced corporation. Commenting on managers, he complained[3]

… being the managers rather of other people’s money than of their own, it cannot well be expected, that they should watch over it with the same anxious vigilance with which the partners of a private copartnery frequently watch over their own … Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company.

Writing 150 years later, Berle and Means (1932) noted a fundamental change in this agency problem. The age of the robber barons had passed, and ownership of American corporations was becoming more widely dispersed. This phenomena is called the democracy of capitalism. It meant that stock holdings were dispersed, and individual shareholders were losing the ability to influence how corporations were managed. Berle and Means noted:[4]

Under such conditions, control may be held by the directors or titular managers who can employ the proxy machinery to become a self-perpetuating body, even though as a group they own but a small fraction of the stock outstanding.

Berle and Means were witnessing the beginnings of a phenomena called managerial capitalism. In Adam Smith’s day, this didn’t exist. Shareholders still controlled corporations, and the agency problem was a matter of managers not exercising “anxious vigilance.” Under managerial capitalism, shareholders have surrendered control to managers, and the agency problem is one of managers enriching themselves to the extent applicable laws will allow. Berle and Means identified a variety of devices by which managers might do so. Laws have evolved since, but similar devices still exist. Perhaps the most straightforward is for managers to pay themselves exorbitant compensation.

Scholarly apologists for managerial capitalism have tried to redefine the very concept of the corporation in order to legitimize managerial abuses. Ignoring a definition that dates to Roman times, not to mention 400 years of common law, these scholars have proposed their own definition of a corporation, which is called the contracts theory of the firm. It is also called the contractarian or nexus of contracts theory of the firm. It posits that, instead of being a legal entity, a corporation is merely a collection of contracts—contracts between shareholders, board members, managers, employees, suppliers and customers. Under this theory, shareholders don’t own corporation, because there is nothing to own! Instead, shareholders’ stock represents a contract under which they provide capital to board members and receive dividends in return. There is much wrong with this reinterpretation of the corporation. Perhaps the fatal flaw is the fact that not all corporate obligations are contractual. Board members have always had a fiduciary—as opposed to contractual—obligation to shareholders.

Corporate Governance Movement

Managerial capitalism spread during the 20th century. As it did so, boards lost relevance. Many CEOs had themselves appointed chairman of the board. Managers took board seats for themselves. On many boards, they took most of the seats. Short of setting strategy and overseeing managers, boards were increasingly becoming appendages to management.

There is an old joke about two campers who are startled by a bear. When one of the campers starts lacing up his running shoes, his partner asks “What are you doing? You can’t outrun a bear.” The other camper responds “I don’t have to. I just have to outrun you!”

Managers don’t really maximize shareholder value. This often-cited goal is an absolute ideal that is impossible to assess. As a practical matter, managers strive to outperform—or at least keep up with—competing corporations. A corporation’s stock can drop 5%, but managers are heroes so long as the market drops 10%. This relativist way of thinking is indefensible except for the fact that there are no good alternatives.

Cast on a relative sea and rudderless without strong board leadership, American corporations drifted. A wakeup call came in the 1980s, when Japanese corporations flooded US markets with high quality goods at reasonable prices. The Japanese offered a unique opportunity to understand—in an absolute sense—how far US corporations had strayed from maximizing shareholder value.

One response was hostile takeovers. Financed with junk bonds, raiders would seize control of a firm, fire management, slash expenses, and then sell off a reorganized firm at a profit. That was the theory. In practice, the takeover market of the 1980s was marred by kickbacks and insider trading, but proponents justified the market in ways that resonated with the public. Michael Milken was the messiah. Bruck (1988) explained:[5]

Milken had long professed contempt for the corporate establishment, portraying many of its members as fat, poorly managed behemoths who squandered their excess capital and whose investment-grade bonds, as he loved to say, could move in only one direction—down.

Takeovers threatened the prerequisites of managers, and some started to act—slashing expenses and refocusing their firms. When management didn’t act, boards might. The boards of General Motors, IBM and American Express all fired underperforming CEOs. Delaware courts and the SEC clarified the responsibilities of boards. Institutional investors also acted, pressuring boards to fire underperforming CEOs or to reform themselves. These efforts coalesced into a corporate governance movement that promoted reforms such as

  • requiring that a majority of directors be independent;
  • separating the roles of CEO and chairman, or failing that, appointing a “lead” independent director to play a role similar to that of chairman;
  • requiring that key board committees be composed exclusively of independent directors.
  • elimination of poison pills, golden parachutes and other anti-takeover devices.

Following the corporate scandals of 2001-2002, some of the reforms promoted by the corporate governance movement were adopted in legislation or in stock exchange rules. Minor legislative reforms were also implemented following the 2008 financial crisis.

Special Purpose Vehicles

Today, corporations are widely employed as special purpose vehicles in structured finance. In this role, corporations may be little more than receptacles for property—perhaps leased property or collateral backing a securitization. As a special purpose vehicle, a corporation has little in common with the Roman corporations, not to mention the great trading corporations of the 1600s or the industrial corporations of the robber barons. Special purpose vehicles generally have no employees. In some cases, ownership is mostly concentrated in a single sponsoring corporation, in which case the concept of a group of people acting as one hardly applies. Special purpose vehicles don’t have to be implemented as corporations, but doing so is a convenient means of achieving limited liability.

Special purpose vehicles serve many valuable purposes, but they also offer opportunity for abuse. This became starkly apparent in the Enron scandal, in which special purpose vehicles were widely used to hide that firm’s massive debts.


  • [1] Polybius, book IV. See translation by Scott-Kilvert (1979), p. 316.
  • [2] Livy XIV, 18,4
  • [3] Smith (1776), Book V, Chapter I, Part III, Article 1.
  • [4] Berle and Means (1932), p. 8.
  • [5] Bruck (1988), 12.


  • Berle, Adolf A. and Gardiner C. Means (1932). The Modern Corporation and Private Property, New York: MacMillan.
  • Bruck, Connie (1988). Predators Ball, London: Penguin.
  • Livy, History of Rome.
  • Mackay, Charles (1841). Extraordinary Popular Delusions and the Madness of Crowds.
  • Polybius, The Histories.
  • Smith, Adam (1776). An Inquiry into the Nature and Causes of the Wealth of Nations.