Corporations are only human - at least in law

The legal privileges of the corporation are social, not natural. It is dangerous to slip into the thought that corporations are people. US Justice Brandeis saw this clearly: "Through size, corporations, once merely an efficient tool employed by individuals in the conduct of private business have become an institution - an institution which has brought such concentration of economic power that so-called private corporations are sometimes able to dominate the state."
Brian Landers
2 December 2010

The US Supreme Court has ruled that corporations can spend whatever they like on influencing elections. It could happen here too as courts insist that corporations have “human” rights.

Earlier this year the US Supreme Court ruled that Congress cannot limit corporate funding of independent political broadcasts in candidate elections (Citizens United v Federal Election Commission). The Court held that the 2002 Bipartisan Campaign Reform Act, also known as the McCain–Feingold Act, which had tried to limit such funding, infringed corporations' rights to free speech.

The decision was based on a fundamentally flawed theory of the corporation that is widely accepted in the United States and has crept without much debate into English law. The essence of the “natural entity” theory is that corporations are quasi-human and thus have human rights. Only this month three law lords in the case of Veolia and Nottinghamshire County Council unanimously held that provisions of the 1998 Audit Commission Act which allowed “any person interested” to inspect local council contracts violated a corporation's right to privacy under the European Convention on Human Rights.

The assertion that corporations should have the same rights as human beings would have amazed those first granting charters of incorporation. The original corporations were regarded as dangerous aberrations only to be permitted in exceptional circumstances. Their charters contained all sorts of safeguards, severely limiting what they could do and giving them a finite life. After the introduction of limited liability the need for such safeguards became even greater.

Early corporations were predicated on the principles of “grant theory”. Any rights they had were granted by the crown or parliament. Corporations were dependent on the state not only for their creation but for everything that allowed them to function as legal constructs. Effectively grant theory held that corporations were instruments of government policy. Towards the end of the nineteenth century corporations came to be regarded quite differently; grant theory, which had held for centuries, was replaced by natural entity theory. Under this new theory corporations were seen as having an inherent right to life; the state could regulate corporations just as it regulated its human citizens but no more so. Corporations were no longer creations of the state with whatever rights the government decided to allow them, rather they were the collective embodiment of the rights of their shareholders. In its final form natural entity theory held that corporations should have the same freedoms as real people. This transition was monumentally important.

The seeds for this development first sprouted in the era of booming railroads in the United States. When they were created the railway companies were frequently given massive state support including grants of public land or the right to compulsorily purchase private land. The quid pro quo was often that the rail corporations had to pay a special tax on that land. In a series of cases before the notoriously biased California courts in the 1870s the companies successfully argued that their "rights" were being infringed by having to pay a higher rate of tax on their land than human beings. From this small beginning, known as the Santa Clara case, American corporations grew a whole array of quasi-human rights. During the twentieth century executives of US corporations would succeed in blocking all sorts of government regulation by claiming that their corporations were being denied their constitutional rights. In 1978 for example the Supreme Court held that raids on factories by health and safety inspectors contravened the US Constitution, and in particular the Fourth Amendment, which protected citizens from having their homes searched without a judicial warrant. When the Pacific Gas & Electricity corporation included pamphlets with its monthly bills promoting the political views of its senior management the California state regulator instructed it to be more balanced by once a quarter also including pamphlets from consumer or environmental groups; in 1986 the Supreme Court ruled that this violated the corporation's “right” to free speech.

In the topsy-turvy world of American jurisprudence the First Amendment right of free speech, designed to ensure that the voice of every citizen could be heard, had been turned on its head through what Ted Nace calls a process of ‘judicial yoga’, to allow corporations to drown out the voices of their opponents in a sea of echoing dollars.

Thomas Jefferson speaking towards the end of his life about the perils facing his new nation declared "I hope we shall crush in its birth the aristocracy of our monied corporations which dare already to challenge our government to a trial of strength". He thought he had drafted a constitution that would protect against corporate power; in fact he had unknowingly enshrined it.

One of the best descriptions of how this happened is provided by the US Supreme Court itself. In 1933 the Court, in the case of Leggett v Lee, ruled on the question of whether state governments could discriminate in favour of small businesses; large corporations had claimed that to do so was a form of discrimination and thus contravened the Fourteenth Amendment (the constitutional amendment designed to stop discrimination against former slaves.) One of the more individual judges, Justice Brandeis, wrote a masterful summary of the position in the United States up to that time.

“The prevalence of the corporation in America,” he declared, “has led men of this generation to act, at times, as if the privilege of doing business in corporate form were inherent in the citizen; and has led them to accept the evils attendant upon the free and unrestricted use of the corporate mechanism as if these evils were the inescapable price of civilized life, and, hence, to be borne with resignation. Throughout the greater part of our history a different view prevailed. Although the value of this instrumentality in commerce and industry was fully recognized, incorporation for business was commonly denied long after it had been freely granted for religious, educational, and charitable purposes.”

Corporations he argued engendered fears. “Fear of the subjection of labor to capital. Fear of monopoly. Fear that the absorption of capital by corporations, and their perpetual life, might bring evils similar to those which attended mortmain. There was a sense of some insidious menace inherent in large aggregations of capital, particularly when held by corporations. So at first the corporate privilege was granted sparingly; and only when the grant seemed necessary in order to procure for the community some specific benefit otherwise unattainable. The later enactment of general incorporation laws does not signify that the apprehension of corporate domination had been overcome. The desire for business expansion created an irresistible demand for more charters; and it was believed that under general laws embodying safeguards of universal application the scandals and favoritism incident to special incorporation could be avoided”.

He then expounded at length on how the limitations on corporations had gradually disappeared. For much of American history there were limits on the amount of capital corporations could raise. These limits continued in many states well into the twentieth century. Indeed at the time he was writing Texas still limited the maximum amount of authorised capital corporations could raise.

Similarly Brandeis noted that “Limitations upon the scope of a business corporation's powers and activity were also long universal. At first, corporations could be formed under the general laws only for a limited number of purposes, usually those which required a relatively large fixed capital, like transportation, banking, and insurance, and mechanical, mining, and manufacturing enterprises. Permission to incorporate for 'any lawful purpose' was not common until 1875; and until that time the duration of corporate franchises was generally limited to a period of 20, 30, or 50 years. All, or a majority, of the incorporators or directors, or both, were required to be residents of the incorporating state. The powers which the corporation might exercise in carrying out its purposes were sparingly conferred and strictly construed. Severe limitations were imposed on the amount of indebtedness, bonded or otherwise. The power to hold stock in other corporations was not conferred or implied. The holding company was impossible.” He noted that in Pennsylvania where, unusually, holding companies had been allowed a series of scandals had led to the State constitution being amended to forbid any more being created.

Brandeis went on to make clear that “The removal by the leading industrial states of the limitations upon the size and powers of business corporations appears to have been due, not to their conviction that maintenance of the restrictions was undesirable in itself, but to the conviction that it was futile to insist upon them; because local restriction would be circumvented by foreign incorporation. Indeed, local restriction seemed worse than futile. Lesser states, eager for the revenue derived from the traffic in charters, had removed safeguards from their own incorporation laws.” Companies incorporated “in states where the cost was lowest and the laws least restrictive”. The state of New York for example was forced to liberalise its incorporation laws because of the lax controls in nearby New Jersey.

The next part of Brandeis’ judgement is the most famous and, in the context of post-Thatcher politics, sounds the most anachronistic.

“Discerning scholars have pictured for us the economic and social results of thus removing all limitations upon the size and activities of business corporations and of vesting in their managers vast powers once exercised by stockholders - results not designed by the states and long unsuspected. They show that size alone gives to giant corporations a social significance not attached ordinarily to smaller units of private enterprise. Through size, corporations, once merely an efficient tool employed by individuals in the conduct of private business have become an institution - an institution which has brought such concentration of economic power that so-called private corporations are sometimes able to dominate the state. The typical business corporation of the last century, owned by a small group of individuals, managed by their owners, and limited in size by their personal wealth, is being supplanted by huge concerns in which the lives of tens or hundreds of thousands of employees and the property of tens or hundreds of thousands of investors are subjected, through the corporate mechanism, to the control of a few men. Ownership has been separated from control; and this separation has removed many of the checks which formerly operated to curb the misuse of wealth and power. And, as ownership of the shares is becoming continually more dispersed, the power which formerly accompanied ownership is becoming increasingly concentrated in the hands of a few. The changes thereby wrought in the lives of the workers, of the owners and of the general public, are so fundamental and far-reaching as to lead these scholars to compare the evolving 'corporate system' with the feudal system; and to lead other men of insight and experience to assert that this 'master institution of civilised life' is committing it to the rule of a plutocracy ..... Other writers have shown that, coincident with the growth of these giant corporations, there has occurred a marked concentration of individual wealth; and that the resulting disparity in incomes is a major cause of the existing depression. Such is the Frankenstein monster which states have created by their corporation laws.”

The image of the corporation as Frankenstein was a popular one and laws were widely instituted that aimed to curb above all the sheer size of corporations. Brandeis insisted that “Businesses may become as harmful to the community by excessive size, as by monopoly or the commonly recognized restraints of trade. If the state should conclude that bigness in retail merchandising as manifested in corporate chain stores menaces the public welfare, it might prohibit the excessive size or extent of that business as it prohibits excessive size or weight in motor trucks or excessive height in the buildings of a city”.

Brandeis made an interesting legal distinction which has wider implications. He argued that there is a clear distinction between the equality clause and the due process clause of the Fourteenth Amendment. The due process clause provides an absolute right to due process; the right is universal and applies to human beings and corporations. The equality clause is not universal, it applies to what Brendeis calls classes; all human beings are equal before the law and all corporations are equal, but human beings and corporations are not equal with each other because they belong to different classes.

Grant theory would have gone further. Not only are corporations not in the same class as humans but they are in a class that only exists because the state has granted it the right to exist. Corporations only have the rights granted to them by the state; to suggest that corporations have rights that the state is not allowed to infringe is therefore nonsensical.

A minority of the US legal establishment have continued to follow the Brandeis line. Supreme Court conservative Justice Rehnquist said when dissenting from the Pacific Gas & Electricity decision, ‘Extension of the individual’s freedom of conscience decisions to business corporations strains the rationale of those cases beyond the breaking point. To ascribe to such artificial entities an “intellect” or “mind” for freedom of conscience purposes is to confuse metaphor with reality.’

More recently in Citizens United v The Federal Election Commission Justice Stevens in his dissenting opinion argued powerfully a view that would have struck the writers of the First Amendment as obvious. “The basic premise underlying the Court’s ruling is its iteration, and constant reiteration, of the proposition that the First Amendment bars regulatory distinctions based on a speaker’s identity, including its “identity” as a corporation. While that glittering generality has rhetorical appeal, it is not a correct statement of the law. Nor does it tell us when a corporation may engage in electioneering that some of its shareholders oppose. …. The conceit that corporations must be treated identically to natural persons in the political sphere is not only inaccurate but also inadequate to justify the Court’s disposition of this case”.

“In the context of election to public office”, he continued “the distinction between corporate and human speakers is significant. Although they make enormous contributions to our society, corporations are not actually members of it. They cannot vote or run for office. Because they may be managed and controlled by non-residents, their interests may conflict in fundamental respects with the interests of eligible voters. The financial resources, legal structure, and instrumental orientation of corporations raise legitimate concerns about their role in the electoral process. Our lawmakers have a compelling constitutional basis, if not also a democratic duty, to take measures designed to guard against the potentially deleterious effects of corporate spending in local and national races.”

However Brandeis, Rehnquist and Stevens have been in a minority in the US and it is doubtful that they would be much better received here.

The idea of corporations as natural entities is now firmly embedded not just in legal theory but in everyday life. News reports can assert that “Google believes” or “ "Exxon's position is" without a second thought. But in reality a legal construct cannot believe anything, only people can believe. To say that a corporation has a position on a political issue merely provides someone's personal opinion with a spurious stamp of authority. For the chief executive of Exxon to say that his corporation has a “view” on energy policy because it processes oil is as meaningless as saying that his car has a “view” for the same reason.

That corporations are not humans may be common sense but it is not legal sense on either side of the Atlantic. The recent Veolia and Nottinghamshire County Council case was determined by reference to the European Convention for the Protection of Human Rights and Fundamental Freedoms. That convention uses the term “everyone” when describing who has “human rights” without feeling it necessary to define “human” although an indication may be given by Article 34. In setting up the European Court of Human Rights Article 34 defines who can claim protection from the Court: – “any person, non-governmental organisation or group of individuals claiming to be the victim of a violation”. To use Ted Nace's term it requires some judicial yoga to extend that to include corporations.

The equating of corporations and human beings has profound public policy implications. Commentators routinely divide society into public and private with human beings and corporations as the private goodies and the state as the public baddie. The public and private sectors are expected to have fundamentally different values. For example being “public” implies transparency, being “private” implies privacy. The Veolia case was about making a contract between a public body and a corporation open to inspection and the court held that, whatever Parliament may have decreed, the human right to privacy trumps the public right to know how their money is being spent even though the “human” in this case - Veolia ES Nottinghamshire Limited – is not a natural entity but a legal construct existing only by virtue of a charter granted to it by the authority of Parliament.

How long then before we hear the executives of the global banks and multinational corporations on this side of the Atlantic demanding to exercise their “human right” to free speech by spending company millions to support their favourite politicians?

There are of course significant differences between the free speech provisions of the US Constitution's First Amendment and Article 10 of the ECHR and the latter has qualifications that the European Court of Human Rights has used to develop useful precedents, for example giving a lower value to the protection of commercial speech than to the protection of political speech. As a result most would consider that proportionate limitations on election expenditure, if they are not so great as to wipe out the essence of free speech, are not likely to be fall foul of the ECHR. But then the US Founding Fathers thought the same thing about their efforts.

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