Content uploaded by Jean-Philippe Robé
Author content
All content in this area was uploaded by Jean-Philippe Robé on Aug 08, 2017
Content may be subject to copyright.
A preview of the PDF is not available
The Legal Structure of the Firm
Abstract
The notions of “firm†and “corporation†are very often confused in the literature on the theory of the firm. In this paper, the two notions are sharply distinguished: the corporation is a legal entity entitled to operate in the legal system and in particular to own assets, to enter into contracts and to incur liabilities. It is used to legally structure firms for numerous reasons, including the need to locate property rights key for the operation of the firm in the ownership of separate, “fictitiousâ€, legal persons. This avoids ex post-contracting bargaining by parties which otherwise would hold residual control rights over key assets used in the firm’s operations. The assets partitioning effect of corporate legal personality has also several economizing properties reviewed in the article. The firm is the economic activity developed as a consequence of the cluster of contracts connecting the corporation owning these assets to various holders of resources required in the firm’s operations. Numerous consequences deriving from this sharp distinction between corporation and firm are explained in this article, including the need to extend the circle of the beneficiaries of the firm management’s fiduciary duties.
... The orthodox belief that shareholders alone authorise management, in virtue of their ownership of corporate assets (Friedman, 1970;Sternberg, 2000) or their residual risk (Boatright, 2006;Jensen & Meckling, 1976;Sundaram & Inkpen, 2004), is frequently criticised for its failure to distinguish the corporate legal person from its shareholders. The widely held assumptions that shareholders are corporate owners and principals who authorise directors to act on their behalf and have a right to residual earnings have been undermined by an emphasis on legal facts: namely, the separateness of corporate assets from shareholder property and the autonomy of directors to pursue a distinct corporate interest (Chassagnon & Hollandts, 2014;Ciepley, 2013;Deakin, 2012;Ireland, 1999Ireland, , 2003Robé, 2011Robé, , 2012Sison & Fontrodona, 2013: 617;Stout, 2002Stout, , 2012Veldman & Willmott, 2013). This critique has been influential in business ethics (e.g., Phillips, 2003: 19-20;Sison & Fontrodona, 2013: 617) and is generally thought to support the conclusion that shareholder primacy 2 is morally untenable. ...
... On this point, therefore, the critique of the principal-agent relationship between shareholders and directors is mistaken. It is asserted that because they do not own corporate assets, shareholders cannot be principals (Deakin, 2012;Robé, 2011;Stout, 2012), and even if they were, directors would not be their agents because shareholders cannot control them (Blair & Stout, 1999;Stout, 2012: 42). Hobbes accepts both premises: citizens or shareholders do not own the assets of a state or 20 The idea of an incorporated membership is still present in UK and Delaware corporate law. ...
From where does management acquire its authority to act in the name of the corporation? The orthodoxy that shareholders alone authorise management is frequently criticised for treating the corporation as the property of shareholders, rather than as a distinct legal person in its own right (Ciepley, 2013; Deakin, 2012; Robé, 2011; Stout, 2012). However, Hobbes’s theory of incorporation in Leviathan shows this influential critique of shareholder primacy to rest on a non sequitur. It does not follow from the (correct) observation that the corporation is a legal person to the conclusion that its interests are distinct from those of shareholders. Just as individuals become citizens of a state when they authorise a sovereign, shareholders are incorporated when they authorise a representative assembly to act in their interests. Shareholders thereby form a single corporate person and are ultimately responsible for whatever is done in their corporate name.
... 6 All these types of corporations are firms. By contrast,Robé (2011Robé ( , 2022 claimed that corporations are not firms, which suggests that they are mutually exclusive categories.Deakin et al. (2021Deakin et al. ( , 2022 criticized this unusual view and showed that it amounts to a departure from the prominent use of the term firm in economics, management, and law. ...
... The economic firm is the factual institution of economic production, where labor is combined with capital equipment to increase output. The ontology of the economic firm refers the factual nature of economic production, where labor is organized, coordinated, performed, and supported by capital equipment to enhance productive capacity (Ellerman, 1990(Ellerman, , 2021Gonza, 2024;Robé, 2011Robé, , 2020. People who are actively engaged in production are members of the economic firm. 1 Production is the engagement of firm members in creating the labor product, which is expressed in value terms as the value added, the difference between total revenue and total non-labor costs used in production. ...
... The economic firm is the factual institution of economic production, where labor is performed in combination with capital equipment, which helps to increase the output. The ontology of economic firm is the factual nature of economic production where labour is organized, coordinated, performed, and supported by capital equipment to increase productive capacity (Ellerman, 1990(Ellerman, , 2021Gonza, 2024;Robé, 2011Robé, , 2020. People who are actively engaged in production are firm members of the economic firm. 1 Production is the engagement of firm members in the creation of the labor product, which is expressed in value terms as the value added, the difference between the total revenue and the total non-labor costs used in production. ...
A worker cooperative, if structured according to the principles of economic democracy (Ellerman 2021; Erdal 2012), is different from a conventional corporation in that the rights to profits and governance are defined as personal rights rather than a freely transferable property rights, and those personal rights are associated with the provision of labour in the firm. Worker cooperatives are a radically departure from capitalist firms in that they prevent the legal rights to be freely transferred on the market and concentrated in the hands of the few because they define these rights are personal rights of each worker in the firm. One of the problems that cooperatives face is that they do not have a standard gradual conversion mechanism but are generally established as new business startups or by an all-at-once conversion of a conventional company to a cooperative. Cooperatives are notoriously rare; however, contrary to the conventional explanation, research indicates that this is not due to inherent inefficiencies (Gonza 2016). One of the main challenges seems to be sluggish growth through starting-from-scratch creations on one hand, and legal, financial, and organizational complexities related to cooperative conversions on the other. We claim that the potential of scaling the cooperative sector is in the gradual cooperative conversion mechanism embodied in the concept of Cooperative ESOP (Ellerman, Gonza, and Berkopec 2022). We argue that the Cooperative ESOP can, with a help of strong supportive institutional environment, gradually create democratic ownership starting with existing capitalist firms without workers having to invest their own personal assets.
... Transformation also occurs in corporate law, particularly in the structure of corporate organization. The change from an organization of a company as an individual legal subject to an incorporated legal subject illustrates an evolution in legal theory that asserts that legal subjects are not only humans but also legal entities (Fahmi et al., 2024;Robé, 2011). This division of legal subjects has significant implications in corporate law, offering the public a choice between non-corporate entities and corporate entities. ...
This study discusses the transformation from a Trading Business (UD) to an Individual Limited Company (PT Perorangan) as an effort to empower micro and small enterprises in Indonesia. In the context of corporate law, this transformation provides a strong legal basis and good corporate governance, enabling a Trading Business to obtain legal entity status as well as broader access to funding sources and legal protection. Utilizing a normative legal research approach, this study analyzes related legislation and assesses its impact on the sustainability of micro and small enterprises. The findings indicate that this transformation not only enhances legal certainty but also offers opportunities for companies to grow more professionally and sustainably. Moreover, the obligation to report financial documents digitally increases transparency and trust among business partners. The findings of this study are expected to make a significant contribution to the literature on empowering small businesses and encourage the government to continue supporting the transformation of Trading Businesses into Individual Limited Companies as part of an inclusive economic development strategy.
How do wealthy families preserve their fortunes across generations? A historic peak in wealth inequality in the United States has inspired research on how economic elites benefit from markets, tax rates, and legal entities. However, the ongoing practices through which families maintain their fortunes across generations are less understood. Using six months of ethnographic observations at a wealth manager for the top 0.1 percent, as well as interviews with the manager’s clients and a wider sample of managers, I argue that wealthy families adopt what I call “bureaucratic practices”—activities like meetings, presentations, and signing documents—to preserve wealth intergenerationally. After erecting legal entities such as corporations, trusts, and foundations, wealth managers help wealthy families implement bureaucratic practices. These practices, which privilege bureaucratic form over substance, constitute a crucial behavioral layer atop the legal infrastructure, facilitating a greater degree of wealth preservation compared with using entities alone. Thus, preserving wealth at the top should be understood not merely as a set of discrete transfers from parents to children, but as an enduring multigenerational process of professional socialization that introduces new behaviors into family life.
The chapter deals with the nature of the firm. The question of the nature of the firm is posed here from the perspective of the firm as a cooperative actor. Based on arguments for a perspective of the firm as a corporate actor, the nature of the firm is the (corporate) intention of the corporate actor to realize shared value creation and therefore to relationalize stakeholders’ ability and willingness to cooperate in the process and to enable and ensure it in the form of legitimate governance of stakeholder resources and interests. This perspective requires a distinction between a traditional theory of the firm and a relational (constructivist) theory of the firm. Against the background of this distinction, the understanding of corporate intentionality must be defined, on the one hand, and questions of leadership and the logic of economic action within the firm as well as the consideration and involvement of stakeholders must be redefined, on the other. An alternative theory of the firm is necessary if we do not want to remain at the level of bonobo monkeys in economic theorizing.
En el marco de un cuestionamiento teórico general del modelo dominante de gran empresa y del monopolio de su sistema de gobierno por los accionistas mayoritarios, el artículo destaca en primer lugar la naturaleza originalmente en buena parte pública de las empresas societarias precedentes de las actuales sociedades anónimas, sintetizando sus características básicas, que suponían privilegios sustanciales frente a las empresas normales y que respondían a los objetivos de interés general o público que justificaban su creación (y que constituían finalidades de obligado cumplimiento para el mantenimiento de los privilegios). Tras ello, y ante los problemas cada vez mayores que las grandes sociedades anónimas vienen generando —en buena medida, por esos privilegios, que posibilitan e impulsan una irresponsabilidad social estructural—, el artículo pone de relieve que un número creciente de expertos viene considerando que podría ser conveniente en nuestro tiempo recordar ese carácter de empresas excepcionalmente privilegiadas, recuperando en alguna medida un control público diferencial en su funcionamiento, de forma que se posibilitara una contribución más positiva al interés general (para lo que la filosofía de la responsabilidad social voluntaria resulta claramente fútil).
Cet article propose un état des lieux des débats autour du potentiel critique de la conception rawlsienne de la justice pour la gouvernance de l’entreprise, et de la façon dont ce potentiel a été exploité depuis une vingtaine d’années. Il met en évidence deux entrées d’inspiration rawlsienne dans la question de la gouvernance, l’une institutionnaliste, l’autre centrée sur l’idée de l’entreprise comme agent porteur d’obligations de justice. Pour chacune, il précise les éléments de continuité et ceux qui relèvent d’un rapport critique à la doctrine rawlsienne. Ces deux approches débouchent sur des recommandations pratiques distinctes. L’approche institutionnaliste va dans le sens d’une participation des salariés aux organes de gouvernance. La notion d’entreprise porteuse d’obligations va plutôt dans le sens de l’intégration de membres externes représentant une raison publique dans un nouveau conseil. Ces options et leur articulation sont au cœur des débats contemporains sur la gouvernance d’entreprise.
In this chapter, I will integrate the basic concepts of a relational theory of the firm discussed in Chaps. 3 and 4 into a theoretically consistent and, hopefully, practically useful version of a relational business model. It is a business model that structures and realises the entrepreneurial process of private and public value creation. Business models are formal and informal governance structures. The concepts of the cooperation corridor and the cooperation rent are united in a theory of stakeholder value or shared value creation and their management building blocks.
Contemporary corporate scholarship generally assumes that the central economic problem addressed by corporation law is getting managers and directors to act as loyal agents for shareholders. We take issue with this approach and argue that the unique legal rules governing publicly-held corporations are instead designed primarily to address a different problem - the "team production" problem - that arises when a number of individuals must invest firm-specific resources to produce a nonseparable output. In such situations team members may find it difficult or impossible to draft explicit contracts distributing the output of their joint efforts, and, as an alternative, might prefer to give up control over their enterprise to an independent third party charged with representing the team's interests and allocating rewards among team members. Thus we argue that the essential economic function of the public corporation is not to address principal-agent problems, but to provide a vehicle through which shareholders, creditors, executives, rank-and-file employees, and other potential corporate "stakeholders" who may invest firm-specific resources can, for their own benefit, jointly relinquish control over those resources to a board of directors. This alternative to the principal-agent approach offers to explain a variety of pivotal doctrines in corporate law that have proven difficult to explain using agency theory, including: the requirement that a public corporation be managed by a board of directors rather than by shareholders directly; the meaning and function of a corporation's "legal personality" and the rules of derivative suit procedure; the substantive structure of directors' fiduciary duties, including the application of the business judgment rule in the takeover context; and the highly-limited nature of shareholders' voting rights. The team production model also carries important normative implications for legal and popular debates over corporate governance, because it suggests that maximizing shareholder wealth should not be the principal goal of corporate law. Rather, directors of public corporations should seek to maximize the joint welfare of all the firm's stakeholders - including shareholders, managers, employees, and possibly other groups such as creditors or the local community - who contribute firm-specific resources to corporate production.
Strategic Management: A Stakeholder Approach was first published in 1984 as a part of the Pitman series in Business and Public Policy. Its publication proved to be a landmark moment in the development of stakeholder theory. Widely acknowledged as a world leader in business ethics and strategic management, R. Edward Freeman’s foundational work continues to inspire scholars and students concerned with a more practical view of how business and capitalism actually work. Business can be understood as a system of how we create value for stakeholders. This worldview connects business and capitalism with ethics once and for all. On the 25th anniversary of publication, Cambridge University Press are delighted to be able to offer a new print-on-demand edition of his work to a new generation of readers.