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A Primer on Corporations for NationStates players

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Allanea
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A Primer on Corporations for NationStates players

Postby Allanea » Fri Dec 07, 2018 9:01 am

A Primer on Corporations for NationStates players

INTRODUCTION


The mental image of large corporations is one that dominates modern media. Corporations are the protagonists and antagonists of many a modern-day film. Weyland-Yutani is the antagonist of the Aliens franchise, and Wayne Enterprises is one of the main vehicles through which Bruce Wayne earns the resources he needs to protect Gotham and carry out his work of charity. The Green Goblin, Spiderman's adversary, is of course Norman Osborn, the CEO and majority owner of Oscorp. (In fact, his conflict with the members of Oscorp's Board of Directors is the motivation for his crimes).

Not all portrayals of corporations are realistic. Particularly in NationStates, we have had some particularly strange ones bounced around by some players, and, frankly, I have myself been guilty of some unreasonable stuff in the past.

So in view of this, I have been reading up and viewing lectures on corporate law, to try and make my portrayal of corporations more realistic. (In part this has been due to the encouragement of Crystal Spires, whose excellent roleplays we all enjoyed and miss dearly). It's true that I am not a professional corporate attorney, although I have done a lot of work in the corporate world translating legal documents and corporate bylaws. But since so far the actual professional attorneys who play NationStates have no time to write such a primer, I have taken it upon myself to write it. [That said, I've sought out the advice of the players of Xirnium, and New Dornalia in writing this. Any mistakes made in writing this are my responsibility and not theirs]

This is not intended by any means to be an exhausting guide to the different issues involved. But this does include an explanation of some of the most important terms of art which often come up in both fiction and the news.


AT FIRST, A BIT OF HISTORY


The term 'corporation' has been used in three significant ways historically. The difference between them is confusing to many, and the confusion comes up online to this days, so we need to address it.

One – largely outdated – way in which the word has been used is to refer to an organization representing all members of a given trade or profession, which were intended to share a given joint interest or code of conduct. The political term corporatism originally meant the organization of individuals into groups that would pursue the joint interests of members of given professions (rather then, as it is today, the political power of private corporations). This term describes, for instance, some aspects of medieval political systems (where, for example, lawyers, university students, monks, and others were accorded special privileges based on what 'corporation' they were members of) and that of the French ancient regime, were noblemen, clergy, and others were accorded 'corporate privileges'. Later on, a similar system was pursued (with, shall we say, mixed success) by Benito Mussolini's fascists, who organized 'corporations' of workers, large and small businesses, etc. that each were intended to have their interests represented with the government.

Another usage, one that is very common, defines 'corporation' as a large, typically privately-owned, commercial company. This is the one that is so often used in the mass media. Examples of this come up in the real world as Apple, Microsoft, Amazon, and of course in fiction as the many different examples we've already listed in the introduction.

Finally there is the legal term of art, 'corporation'. This is the one we need to focus on for this primer. 'Corporation' is broadly defined as a group of people who have the legal right to act as if they were a single body (thus, the word derives from the latin corpus, body). Corporate law achieves this through describing that group as an artificial person, the corporation.) These can be both privately and publicly owned (one of the world's largest and most successful corporations is actually the state-owned Equinor of Norway), for-profit or non-profit (the National Rifle Association, Greenpeace, and Radio Liberty are all corporations, too!).

The essential problem which corporate law comes to resolve is the observed truth that sometimes people form groups that are distinct in their actions from any individual that is a member of these groups. The groups can exist beyond any individual – a company or an organization can persist long after everyone involved in its original founding has died or quit, just as a band can continue touring after its drummer has been replaced. As such, starting with Ancient Rome, governments have tried to address this. Take, for instance the Exxon Mobil Corporation, with its 70,000 employees, 2.5 million shareholders and 10 million customers. Imagine the astounding number of contracts to which it is party, one with each of its employees, shareholders and customers, each embodying its own rights and duties. If Exxon Mobil were a mere voluntary assembly, which of all the individuals which compose it would be entitled to enforce its rights, and liable for the performance of its duties? Upon their death or resignation, how would they transfer the same identical rights and duties to another set of individuals? Consider how inconvenient and impractical this would be. Instead, all the individual members of Exxon Mobil that have ever existed or shall ever exist compose one person in law, and that person and its rights may never die.

Historians and economists differ on who comes first here – some argue that the phenomenon of corporations is solely a construct of the legal privileges and charters granted by governments and monarchs, others argue that the legal privileges and charters are a way to address a pre-existing human reality of people forming groups distinct from individual members. (This issue is not purely academic. Individuals who believe that corporations are a construct of the law tend to support more regulations of corporations, on the logic that, in exchange for the supposed 'privileges' granted to them by legislatures, corporations 'owe' it to society to submit to more controls, while individuals who believe that corporations are a legal reflection of pre-existing reality and tradition will not necessarily agree with such an interpretation).

What's clear, however, is that over the years, serious problems have showed up which corporate law gradually tried to address.

The first of these is the problem of debt. If a company is not legally the same as its shareholders, owners, or employees, to what extent do they need to be responsible for the company's actions? If the company ends up in debt, or ends up harming members of the public, to what extent can individual shareholders and officers be sued? Corporate law has gradually addressed this by creating complicated rules of liability and two forms of companies – unlimited liability and limited liability companies. In the former, shareholders can be made to pay the entirety of the company's debt. This can, in a unfortunate circumstance, lead to very serious losses for shareholders, and so is not a very popular form of corporation to adapt. In limited liability companies, shareholders typically cannot lose money beyond what they invested in the company, which of course makes it easier to raise money – but, as we will see, imposes additional restrictions on what the company may do with it.

The second problem is the problem of fraud. If the company is legally distinct from shareholders, and the shareholders do not directly control its operations, then there are obviously ample opportunities for fraud. The organizers may simply raise lots of money from investors and then disappear, or perhaps spend the money on lavish salaries for themselves and their relatives. As such, there are often strong legal rules that restrict the actions of corporations and their leadership.


KEY TERMS


Private vs. Public Company – In the world of corporations, these words mean something entirely different from what they do in the world of average people. A private company is one that is not traded on the stock market, but rather has its ownership split between investors (in smaller private companies these are often members of a family, or venture capitalists if the company is larger). The advantage of this structure is that the company's owners and investors have more control over who the other investors are going to be, and are typically subject to less regulations (in the USA, private companies with a net worth under $10 million are not regulated by the SEC at all!). However, exclusion from the stock market reduces members’ ability to transfer their shares. A public company is one that trades on the stock market, and average members of the public can buy and sell its stock, often just by clicking on a few buttons online. This means the company can raise a lot of money, but it has no control over who buys the shares. It is also subject to a lot more regulation (including more stringent disclosure and reporting requirements), typically intended to shield the general public from being defrauded.

Limited Liability – Strictly speaking, limited liability is the chief attraction of most modern corporations. Although incorporation need not necessarily imply the limited liability of a corporation’s shareholders, it makes it possible and facilitates it, by separating entrepreneurs from their enterprise, and placing another entity between them. In most cases (with the exception of unlimited-liability companies, covered below), the liabilities of the legal “person” that is the corporation cannot be transferred to its employees or shareholders. That is to say, unless there is significant evidence that a shareholder or employee personally did something deeply illegal, they cannot be personally forced by a court to pay the company’s debts, or sued to recover damages caused by the company. The only money that an investor can lose if the company is sued or breaks up is the money that they have invested, and an employee at the company cannot have their life destroyed by a massive lawsuit if the company ends up liable for damages (unless, again, this employee personally somehow caused the harm in question).

Limited liability has so long been a settled notion that it is easy to forget there was a time when it was not all but synonymous with incorporation. In Roman law, the persons constituting a corporation were obliged to contribute their private fortunes if the corporation became insolvent. It was not common for English and American corporations to be able to make assessments or “leviations” (from “levy”) for additional funds from their shareholders, and courts of equity often gave creditors the ability to enforce this right.

Obviously the personal liability of an investor is an inconvenience which might seriously hamper commerce, and the governments of the turn of the nineteenth century recognised it as such (although where they noted the impossibility of undertaking a railway or port without the limited liability of its members, we might add rocket companies and the like). Therefore it became common in this century for people to be able to register a corporation limiting the liability of its shareholders to the amount of their paid and unpaid share capital, and that a corporation so registered must add the word “limited” to its name for the attention of its creditors (a requirement which continues to this day).

The concept of ‘limited liability’ is not the same as ‘liability caps’. These are laws established in some countries limiting the sums for which a company or individual can be sued. These laws are advocated on the logic that certain industries (for example, the petrochemical industry) may end up liable for massive sums of money in an accident, and if they are not protected against such losses, then it will be difficult to procure investment for these industries, which are viewed as crucial in some way. (Of course, the counterargument is that this kind of thinking renders a government open to lobbying by special interest, and that a company that causes enormous environmental damage or injures thousands of people needs to be held responsible for the full extent of the damage).

Limited liability, that is, limits the liability individuals - shareholders and employees - have for a company’s actions and inactions. It includes both a financial limit (shareholders cannot lose more money than they invested into the company), and a conceptual limit - the company is liable for the actions it undertakes as a company, but individuals who are its employees or shareholders are generally not.

Other Forms of Liability: - Although limited liability is now the standard practice, various liability structures exist. In the later half of the nineteenth century (and until the early twentieth), the shareholders of US banks were subject to double liability, which meant liability both for the amount they had invested in addition also to the extent of the par value (i.e. the “face” value recorded in the corporation’s charter) of their shares. Colorado imposed triple liability (why, this writer does not entirely know). California adopted unlimited liability, which means that, as in an unincorporated partnership, every shareholder is jointly and severally liable for all of the corporation’s obligations. There is another way, though: pro rata unlimited liability, in which shareholders are liable only in proportion to their shares in the corporation. Pro rata liability is the reason we have the unfinished cathedral of Siena (although the Black Death may have had a hand as well); after the city of Siena attempted to replace the unlimited liability of its members with pro rata liability, alarmed merchants in the other Italian cities refused to do business with the city. Australia knows a no liability company, which was a response to phantom shareholders with unpaid calls who were nowhere to be found when a corporation (specifically, a mining company) began to fail. Of course, it was not the corporation with no liability but the shareholder, who could choose either to pay and retain or not pay and forfeit his shares when calls were made, allowing forfeited share to be sold at auction. One may assume this brief survey has not exhausted every possibility.

One might wonder why one would ever elect voluntarily to organise a corporation (or any association) with unlimited liability, and with good reason. Unlimited liability will obviously reduce the costs of credit (since it ameliorates creditor concerns that the corporation will assume excessive risk, for which limited liability owners receive all the benefits of success while the creditors bear most of the costs of failure) but this rarely outweighs the cost of equity. Still, owners who do not “play with the bank’s money”, as it were, might be better off staying with the risk of unlimited liability and the savings of decreased credit charges (including bonding and monitoring). If the corporation is not publicly traded, these owners may have an even greater incentive to choose unlimited liability (since one of the benefits of limited liability, freely tradeable shares, is less relevant to them). Powerful creditors will target the wealthiest owners of limited liability corporations for personal guarantees; these guarantors might prefer that all owners were liable as well.

In professional firms, the quality of a firm’s work product may be so important and the firm’s capitalisation (sufficient to cover the costs in tort of malpractice) so small that, to ensure the protection of clients’ interests (upon which the firm’s goodwill is based), unlimited liability may be thought necessary. Ordinarily, the combined personal assets of the members of the partnership greatly exceed the firm’s marketable assets, so the savings obtained by unlimited liability from the reduced cost of credit are also magnified. Since partners in professional firms, whether limited or unlimited, are usually still liable for their own malpractice, and often vicariously liable for the misconduct of their partners (especially if they managed, supervised or even assisted the partners or their staff involved in the misconduct), adopting unlimited liability as an incentive for the members of the partnership to monitor each other might serve the interests of the partners better than limited liability.

Finally, owners may choose between limited and unlimited liability for tax or regulatory reasons (including satisfying the regulatory requirements required to obtain access to the firm’s profession in the first place), but thankfully these are well outside the scope of this primer.


Bonds vs. Shares – These are the chief methods in which a company can raise money. To be brief, bonds are simply loans raised from the general public or from investors. Generally, buying into a loan does not entitle one to any rights to controlling the company. A bond is essentially a loan instrument, entitling an individual to whatever part of the company’s loan they own, plus whatever interest is outlined in the bond’s terms. Each issue of bonds is called a Bond Series, and has specific terms, outlining the collateral a company attaches to the bond, the dates of repayment, etc.

The more prominent - at least in media - method of fundraising is called ‘shares’. These are literally small shares of the company that one can buy and own. Regularly, one’s shares entitle one to voting in shareholders meetings, as well as other shareholder rights. However, companies sometimes issue different ranks of shares entitling one to different privileges - for instance, shares that do not entitle a shareholder to a vote, or shares that entitle a shareholder to a larger proportion of the vote than the shares they own. (The Ford Motor Company has such privileged shares issued to members of the Ford family, which entitles the Fords to a large share of the vote in any shareholder votes or director elections. Other companies will often issue privileged shares to their founders.) This is done to ensure that a company does not undergo a hostile takeover, or that the founders of a company retain control of it in the long term.

Bylaws - As the astute reader may have noticed previously from the introduction to this primer, shareholders in a corporation (or members and donors of a non-profit organization) typically do not oversee its daily operations. They are often incapable of doing so, because they have day jobs and regular lives, and their share of the corporation or their involvement in the non-profit is too small to justify daily involvement even if they were capable somehow of affecting the corporation’s behavior. To avoid fraud or mismanagement, a corporation has a specific set of rules (called its bylaws), which govern exactly how decisions must be made. Typically, the country where the corporation is registered will provide anyone wishing to incorporate (register a corporation) with a standardized set of bylaws, which they can modify somewhat when incorporating.

The bylaws typically decide what kind of shares the company has (at a minimum, defining the specific privileges that go with every type of share), how they are transferred between shareholders, what authority the Board of Directors has and how it is appointed. Typically speaking, the Board of Directors is elected by a vote by the company’s shareholders, and major decisions (such as issuing additional shares, allowing the company to be bought out by another company, and certain others) are decided by the shareholders, while the Board of Directors engages in the daily running of the company and reports to the shareholders. The next section describes the functions of the Board of Directors in more detail.

Board of Directors - These are the corporation’s uppermost and most senior executives, responsible directly to the shareholders, and to the country’s corporate regulators. All of the day-to-day decisions of the corporation are ultimately the responsibility of the Board of Directors, even though they usually delegate a lot of their actual authority to subordinates. However, the Board of Directors typically cannot choose to reorganize the company, make decisions about merging with another company, hire or fire members of the Board itself. The shareholders’ approval is often also required for other significant decisions. Further, the Board is typically required to make quarterly and annual reports to the shareholders and the tax authorities about the company’s performance and financial status. (In many countries, the senior directors must swear to the accuracy of these reports.

The CEO – A chief executive officer (CEO) is the highest-ranking executive in a company - a bit like the leader of a nation. Their primary responsibilities include making major corporate decisions, managing the overall operations and resources of a company, and acting as the main point of communication between the board of directors and corporate operations. A CEO often has a position on the board; in some cases, they're also the chairperson. This person, along with the CFO, is often also charged with reporting to the Company's shareholders annually on its operations (this typically means the CEO signs, and is legally responsible for, an annual report).

The exact levels to which CEOs are involved in the company vary from company to company, depending on both the company's bylaws, and also depending on practical realities. A CEO in a small corporation might actually be involved in every significant day-to-day decision, such as hiring and hiring employees, making purchases, etc. In big companies like Intel or TexaCo, they might have to delegate most of these things.




The CFO – A chief financial officer (CFO) is the senior executive responsible for managing the financial actions of a company. The CFO's duties include tracking cash flow and financial planning as well as analyzing the company's financial strengths and weaknesses and proposing corrective actions. The CFO is similar to a treasurer or controller because he is responsible for managing the finance and accounting divisions and for ensuring that the company’s financial reports are accurate and completed in a timely manner. In other words, he’s essentially the company’s chief accountant. In many countries, he bears direct responsibility for the company’s financial reports in the sense that he’s legally liable for the accuracy of any financial reports he signs.



The General Meeting is a meeting of a company’s shareholders where they vote on important matters of the company - changes of the company’s bylaws, issuing more shares, or appointing a CEO or a Board of Directors are some of those. There are typically laws that require a company to hold a General Meeting once every year, but your nation’s mileage may vary. The shareholders may demand a special meeting to take place that was not scheduled (for example, to respond to a scandal or an emergency), which requires some fraction of the shareholders (say, the holders of 10% of the shares) to demand a meeting.

Unusually, most shareholders don’t directly attend these meetings (it would be impractical in the case of a giant company such as AT&T to have its millions of shareholders all attend), and instead, voting rights are relegated to a proxy who votes on the shareholder’s behalf.

Types of Shares - Sometimes, corporations issue different levels of shares. While typically a share allows its owner voting powers and benefits proportional to its share of the value of the company - you own 10% of the company’s shares, you get 10% of the vote and benefits. But that isn’t always so. Some companies issue special types of shares - for example, non-voting shares, which allow thet

Fiduciary Duty - This term actually means a range of duties which a person may sometimes have towards another person. When one individual is empowered to act on behalf of another person or group (such as a guardian of a disabled person, or in our case a corporate officer), they’re required both by the law and by industry standards to act in certain ways that would justify the trust placed in them. For corporate officers, this means principally that they must do their best effort to carry out their duties to benefit the company and shareholders financially (both in the sense that they must act in the shareholders’ interest as opposed to their own, and in the sense that they must operate as professionally as they can). Other types of fiduciary duties can be found here.

Hostile Takeover - A hostile takeover is something that’s often portrayed very dramatically by the film industry, and arguably it’s one of the most dramatic events in business. It involves a company trying to takeover ownership of another company against the wishes of its management. For this purpose, companies will try to contact shareholders directly with offers, or contact a significant subset of shareholders to try and replace the company’s management. The management of the target company by using various strategies, up to and including trying to buy the company that’s taking the hostile takeover!

Runaway Board - This is a derogatory term, serving to imply that the board of a corporation is no longer under the meaningful control of its shareholders, and is perhaps incompetent or corrupt, serving its own interests and not those of shareholders. Of course, a shareholder seeking more input on the corporation’s actions will tend to call the board a runaway board sometimes if he doesn’t get his way!

Corporate Raiding - Taking over a corporation against the wishes of the board, and sometimes against the company’s best interest. In some cases, it is done as ‘resource raiding’, when the company is purchased at a lower cost than the price of the assets it owns (for example, if the company has run into financial or legal trouble). In countries with corrupt or dysfunctional law enforcement, corporate raiders use various illegal measures to drive down the value of companies they wish to ‘raid’, even going as far as paying off officials or law enforcement to schedule ‘inspections’ or ‘searches’, or even armed SWAT raids of the target company, to reduce its value before the buyout.


SHAREHOLDERS AND THEIR RIGHTS


Obviously, with the advent of corporations, particularly those owned by shareholders, a serious problem arose. A company’s board, or a group of people selling shares of a new company (once called ‘promoters’) could, hypothetically, easily defraud the public by various means, of which the simplest was just raising the money and leaving with it.

To guarantee the interests of shareholders, various ‘shareholder rights’ were instituted by law. One of these was of course the right to vote - shareholders, as we covered, can vote in the corporation’s general or special assembly, to elect members of the company’s Board, issue new shares, or on various other issues (the exact items may different in different legal systems and in different companies).

Another important right is the right to information. Shareholders have the right to be informed on the company’s matters. There are two important ways this is realized - first, a company must publish different forms of quarterly and annual reports on its business matters, as well as financial reports. These reports must be signed by the company CEO and CFO, and providing false information on them is usually a serious crime.

Moreover, corporations are usually obligated by the law to allow their shareholders access to various company documents (for example, minutes of Board of Directors meetings). However, to prevent abuse, this right is typically circumscribed - much like Freedom of Information laws that apply to governments - to prevent theft of commercial secrets, as well as requiring the shareholder to pay for the expenses in procuring, preparing, and sending him the documents (which may be as cheap as the price of mailing a CD with the relevant files, or as expensive as paying a professional to prepare and organize the documents).


THE PRIVATE-PUBLIC BOUNDARY


An important issue to consider when creating a plot involving corporations is the issue of the private-public boundary. A lot of the success industrialized nations have enjoyed economically is by gradually creating a distinction between governments - the entities that make and enforce the law - and private entities. In general, governments are seen as serving the interests of the entire public pursuant to the law, while private companies or non-profits serve only the interests of their owners, or the causes they are intended to promote.

However, this boundary isn’t always as clear-cut as we described. Beyond the fact that governments often own for-profit companies, for-profit companies historically sometimes were granted many of the powers that are usually seen as reserved to governments. The easiest to think of are private security companies and military contractors, but these are actually not the most extreme examples (these companies usually just take up some government function, but act on the detailed directions of the government - prison companies, for instance, can’t decide whom to imprison).

But there are more extreme historical examples. The British Empire, in particular, used to grant private companies authority over huge areas of land - the East India Company is the most obvious example. Less known are the Virginia and London Companies, which were joint stock companies founded to establish British settlements in North America. An awful example is the Congo Free State, established privately by King Leopold.

A keen reader will note that in a situation where private actors own entire governments for their private interests, what we can often have is something quite akin to medieval feudalism. Whether or not medieval knightly orders can be seen as corporations is of course debatable.


SO YOU WANT AN EVIL CORPORATION


Once we have arrived to this chapter, it’s obvious that many NS players want to roleplay as an evil corporation. So to start this out, we will say that many of the evil corporations seen in fiction are significantly unrealistic. Not because corporations never do evil things - obviously there are any number of examples in which companies committed fraud and even murder in pursuit of profit. Corporations may, for example, conceal potential harms from their product, threaten critics, and even sometimes bribe entire government agencies or legislatures, or hire violent paramilitaries to suppress union action or competitors.

However, there are significant problems with corporate villains like Lex Luthor or Umbrella, primarily because real-world companies rarely have the resources for the vast corporate armies seen in fiction. They’re just not that profitable. The average S&P company (i.e., counting only the wealthiest most successful companies in the USA) makes a profit of just about 10%. While there are obvious outliers, it’s difficult to imagine a corporation that can fund a military force that can contend with its own government’s military - no matter how big Apple gets, the US has more money at its disposal.

That said, there are two obvious options for you to roleplay a company that has state-like resources to do its evil stuff in. Either the company commands some legal privilege (a government-granted monopoly, for example), or it is in fact contending with opponents in a far smaller country or some other local issue where it can command overwhelming resources (a mercenary force of 1,000 cannot affect the policies of a large company, but it can easily command a small town, or overthrow a small, poor country’s government).

Finally, of course, you could roleplay a corporation which is a government, milking the oppressed locals for profit. In this set-up, taxes the company collects go into its private coffers, and it is entirely possible it may even extract forced labor from the population to fill production goals. The East India Company, the Congo Free State, and other similar companies may be your reference points here.


THERE IS NO DIFFERENCE BETWEEN A CORPORATE STATE AND STALIN’S SOVIET UNION


One common, and frankly entirely unrealistic, NS trope, is societies where a single corporation owns all (or most) industry in a country, and all citizens are its employees, buying all their goods in company stores, and otherwise depending totally in one company. This is sometimes touted as being extremely capitalist, but really it is not - it is at best a form of ‘state capitalism’, and suffers from the same problems, economically, as Soviet society did.

A capitalist society depends on price signals to know what goods and services are more or less needed at any given point, and companies increase or decrease production of different goods based on how much other companies and consumers want to pay for them. In a society without competing companies, there is no price competition and no reliable price signals - prices on goods are just set by the same company’s officers - causing the same economic inefficiencies as thhe USSR established. You might be calling your General Secretary a CEO, and your People’s Comissar of Defense your Chief Security Officer, but in effect you’re doing the same thing.
Last edited by Allanea on Fri Dec 07, 2018 9:02 am, edited 3 times in total.
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Allanea
Postmaster of the Fleet
 
Posts: 22799
Founded: Antiquity
Capitalist Paradise

Postby Allanea » Fri Dec 07, 2018 9:03 am

RECOMMENDED READING MATERIAL


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#HyperEarthBestEarth

Sometimes, there really is a money on the sidewalk.


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