The joint stock company was a very important innovation in corporate structure and it has brought great benefits to many economies, including the UK’s. Increasingly, however, it has evolved to operate in ways which now attract public opprobrium rather than approval.
The aim of the project is to stimulate policy debate on this matter, and to consider what can be done to address the existing problems. The overall framework will be an evolutionary one, which looks at how the emergence of new forms, which are also capable of creating wealth and prosperity on the scale of the joint stock company, can be stimulated.
The project will include an analysis of the role of legislation in the economy, with specific regard to corporate structures. In the Wealth of Nations Adam Smith spoke of the science of the legislator, implying that the aim of legislation was to create structures that brought out the best in people, allowing for all their faults. Many writers think of laws as commands to follow instructions, others as requirements or prohibitions that must be obeyed on pain of punishment, and others view them as facilities for co-operation. We can be philanthropic without functioning via the legal ‘facility’ of a charity and we can trade without setting up a company. But legal structures help. So what is the role of the law in the context of corporate structures?
The report will include a review of the historical development of the various forms of corporate structure, with particular emphasis on the dominant form, the joint stock company. The role of legislation in this will be considered as will the benefits which the joint stock company has delivered, and why.
How has the joint stock company evolved? We will consider how many such companies now operate at present, and the main problems which are perceived to exist such as principal-agent problems (including shareholder & governance issues) and also free-rider problems in economies with highly dispersed share ownership (small shareholders wait for others to act, resulting in little or no accountability of management to owners).
Does the fact that this is now the dominant ‘species’ mean that it is necessarily the best? This section tackles head on the ‘£50 note on the pavement’ argument. The process is fundamentally an evolutionary one and not an equilibrium one.
Are there any barriers to entry which have emerged? These are the key ways in which the evolutionary process is constrained from working properly e.g. offsetting debt against tax.
Why have alternative forms of corporate structure, such as co-operatives, been less prevalent? What are the strengths and weaknesses here?
The changing nature of the economic process means that different corporate forms also have the potential to ‘go global’. When production was dominated by the need for large industrial plants, which realised economies of scale, structures which protected investors from total wipe out may have had an evolutionary advantage. Is this necessarily the case in the 21st century?
The project will consider an evolutionary approach to the emergence of new structures, including an examination of the new Community Interest Company (CIC), which may be more in tune with the values of young entrepreneurs. Is there a need for legislation and policy procedures which do not necessarily promote specific new forms, but which enables them and which creates a level playing field?
We will address the specific question of whether or not it would be useful to have a special-purpose legal structure that would allow for the creation of a corporation whose aim is to sustain and develop productive enterprise over the long term. This could involve broadly similar values to those associated with CICs but the purpose and scope of this new corporation would be sufficiently different as to warrant a new type of legal entity.