Corporate Law and the Accumulation of Organizational Assets: Lessons from the 19th Century

Abstract

This essay argues that the popularity of corporate status as a way to organize production grew out of the unique ability of this legal form in the 19th century to promote and protect the interests not only of shareholders and other investors, but of a wide range of enterprise participants who made specialized investments in reliance on the continued existence and financial viability of the corporation. This ability grew out of the fact that a corporate charter created a separate legal entity, whose existence and governance were separate from any of its participants. Entity status and separate governance made it possible to do something more than engage in a series of business transactions, or relationships, or even projects. It made it possible to build lasting institutions. Investments could be made in long-lived and specialized physical assets, in information and control systems, in specialized knowledge and routines, and in reputation and relationships, all of which could be sustained even as individual participants in the enterprise came and went. And these business institutions, in turn, could accomplish more toward the improvement of the wealth and standard of living of their participants in the long run than the same individuals could by holding separate property claims on business assets and engaging in a series of separate contracts with each other.