The sheer size of the largest limited-liability companies, or corporations—especially “multinationals,” with holdings across the world—has been a subject of discussion and public concern since the end of the 19th century, for with this rise has come market and political power. While some large firms have declined, been taken over, or gone out of business, others have grown to replace them. The giant firms continue to increase their sales and assets by expanding their markets, by diversifying, and by absorbing smaller companies. Diversification carried to the extreme has brought into being the conglomerate company, which acquires and operates subsidiaries that are often in unrelated fields. The holding company, with the conglomerate, acts as a kind of internal stock market, allocating funds to its subsidiaries on the basis of financial performance. The decline or failure of many conglomerates, however, has cast doubt upon the competence of any one group of executives to manage a diversity of unrelated operations. Empirical evidence from the United States suggests that conglomerates have been less successful financially than companies that have had a clear product-market focus based on organizational strengths and competencies.

Open full sized image

John Kenneth Galbraith, 1968.

Ota Richter/AP Images

The causes of such vast corporate growth have found varying explanations. One school of thought, most prominently represented by American economist John Kenneth Galbraith, sees growth as stemming from the imperatives of modern technology. Only a large firm can employ the range of talent needed for research and development in areas such as aerospace and nuclear energy. And only companies of this stature have the capacity for innovating industrial processes and entering international markets. Just as government has had to grow in order to meet new responsibilities, so have corporations found that producing for the contemporary economy calls for the intricate interaction of executives, experts, and extensive staffs of employees. While there is certainly room for small firms, the kinds of goods and services that the public seems to want increasingly require the resources that only a large company can master.

Others hold that the optimum size of the efficient firm is substantially smaller than many people believe, and some research has shown that profit rates in industries having a large number of smaller firms are just as high as in those in which a few big companies dominate a market. In this view, corporate expansion stems not from technological necessity but rather from an impulse to acquire or establish new subsidiaries or to branch out into new fields. The structures of most large corporations are really the equivalent of a congeries of semi-independent companies. In some cases these divisions compete against one another as if they were separately owned. The picture has been further complicated by growth across national boundaries, producing multinational companies, principally firms from western Europe and North America. Their enormous size and extent raise questions about their accountability and political and economic influence and power.

While it is generally agreed that the power of large companies extends beyond the economic sphere, this influence is difficult to measure in any objective way. The processes of business entail at least some effort to ensure the sympathetic enactment and enforcement of legislation, since costs and earnings are affected by tax rates and government regulations. Companies and business groups send agents to local and national capitals and use such vehicles as advertising to enlist support for policies that they favour. Although in many countries companies may not legally contribute directly to candidates running for public office, their executives and stockholders may do so as individuals. In the United States, however, a 2010 Supreme Court decision gave companies the right to engage in political advertising. Companies may, however, make payments to lobbyists and contribute to committees working to pass or defeat legislative proposals. In practical terms, many lawmakers look upon companies as part of their constituency, although, if their districts depend on local plants, these lawmakers may be concerned more with preserving jobs than with protecting company profits. In any case, limited-liability companies are central institutions in society; it would be unrealistic to expect them to remain aloof from the political process that affects their operations, performance, and principles.

The decisions made by company managements have ramifications throughout society. In effect, companies can decide which parts of the country or even which parts of the world will prosper and which will decline by choosing where to locate their plants and other installations. The giant companies not only decide what to produce but also help to instill in their customers a desire for the amenities that the companies make available. To the extent that large firms provide employment, their personnel requirements determine the curricula of schools and universities. For these reasons, individuals’ aspirations and dissatisfactions are likely to be influenced by large companies. This does not mean that large business firms can influence the public in any way they choose; it is simply that they are the only institutions available to perform certain functions. Automobiles, computers, and electric toasters must come from company auspices if they are to be provided at all. Understanding this dependence as a given, companies tend to create an environment congenial to the conduct of their business.

Some company executives believe that their companies should act as “responsible” public institutions, holding power in trust for the community. Most companies engage in at least some public-service projects and make contributions to charities. A certain percentage of these donations can be deducted from a corporation’s taxable income. Most of the donated money goes to private health, education, and welfare agencies, ranging from local hospital and charity funds to civil rights groups and cultural institutions.

At the other extreme, it is generally agreed that companies should reject the notion that they have public duties, that society as a whole will be better off if companies maximize their profits, for this will expand employment, improve technology, raise living standards, and also provide individuals with more money to donate to causes of their own choosing. A cornerstone of this argument is that management has no right to withhold dividends. If stockholders wish to give gifts themselves, they should do so from their personal funds. On the other hand, some critics complain that large companies have been much too conservative in defining their responsibilities. Not only have most firms avoided public controversy, but they also have sought to reap public-relations benefits from every sum that they donate. Very few, say the critics, have made more than a token effort to promote minority hiring, provide day-care centres, or take on school dropouts and former convicts. Companies have also been charged with abandoning the central cities, profiting from military contracts, misrepresenting their merchandise, and investing in foreign countries governed by repressive regimes. A perennial indictment has been that profits, prices, and executive compensation are too high, while the wages and taxes paid by corporations are too low.

In the late 20th century a new school of critics emerged who stressed the social costs of the large company. They charged that automobiles, pharmaceuticals, and other products were badly designed and dangerous to their users. The consumer movement, led by such figures as American lawyer Ralph Nader, was joined by environmental critics who pointed to the quantities of waste products released into streams and into the air. Local and national laws were passed in an effort to set higher standards of safety and to force companies to install antipollution devices. However, the costs of these measures are inevitably passed on to the consumer. If a nuclear power plant must have cooling towers so that it does not discharge heated water into an adjacent lake, for example, the extra equipment results in higher electricity bills. Most companies are hesitant to take such steps on their own initiative, fearing that they will need to raise prices without thereby increasing profits. Society, however, is already paying for the costs of traffic congestion, trash removal, and nutritional deficiencies. The prices charged by companies are far from reflecting the total impact that the manufacture and consumption of their products have upon human life.

John P. Davis, Corporations: A Study of the Origin and Development of Great Business Combinations and Their Relation to the Authority of the State, 2 vol. (1905, reprinted 1971), remains the definitive historical account of the corporate form in the medieval and mercantile periods.

Louis M. Hacker, American Capitalism, Its Promise and Accomplishment (1957, reprinted 1979), traces the rise of corporations in the United States in the 19th century. The divorce of ownership and management is analyzed in Adolph A. Berle and Gardiner C. Means, The Modern Corporation and Private Property, rev. ed. (1968); and the implications of this development are treated in John Kenneth Galbraith, The New Industrial State, 3rd ed. rev. (1978). Analysis of the competitive powers of the free market is continued in Nicholas Wolfson, The Modern Corporation: Free Markets Versus Regulation (1984). Wilbert E. Moore, The Conduct of the Corporation (1962, reprinted 1975), focuses on internal operations; while Richard J. Barber, The American Corporation: Its Power, Its Money, Its Politics (1970), concentrates on external aspects. Osborn Elliott, Men at the Top (1959), examines the backgrounds and behaviour of company executives. Joseph Livingston, The American Stockholder, new rev. ed. (1963), evaluates the individuals and institutions that own corporate shares. Milton Friedman, Capitalism and Freedom (1962, reprinted 1982), is a plea for noninterference by public agencies; while Estes Kefauver, In a Few Hands: Monopoly Power in America (1965), supports further regulation and antitrust action by government. Edward S. Mason (ed.), The Corporation in Modern Society (1960, reprinted 1980); and Andrew Hacker (ed.), The Corporation Take-Over (1964, reprinted 1970), contain theoretical analyses and research findings. Managerial styles of the modern corporation are examined in Bruce Henderson, The Logic of Business Strategy (1984); A.L. Minkes and C.S. Nuttall, Business Behavior and Management Structure (1985); Johannes M. Pennings (ed.), Organizational Strategy and Change (1985); and Edgar H. Schein, Organizational Culture and Leadership (1985).

The growth of corporations in Europe is discussed in Michael M. Postan, An Economic History of Western Europe, 1945–1964 (1967). Ephraim Lipson, The Economic History of England, vol. 1, 12th ed., and vol. 2–3, 6th ed. (1960–64), provides a full exposition of joint-stock companies and chartered companies. Also relevant are P. Sargant Florence, Ownership, Control and Success of Large Companies: An Analysis of English Industrial Structure and Policy, 1936–1951 (1961); and John Sheahan, Promotion and Control of Industry in Postwar France (1963).

The historical development of the Japanese economy is discussed in William W. Lockwood, The Economic Development of Japan, expanded ed. (1968, reprinted 1970); and Henry Rosovsky, Capital Formation in Japan, 1868–1940 (1961), which cover the period from the Meiji Restoration to World War II; and Ryutaro Komiya (ed.), Postwar Economic Growth in Japan (1966; originally published in Japanese, 1963), for the postwar period. For a statistical analysis of Japan’s economic growth since the 1860s, Lawrence Klein and Kazushi Ohkawa (eds.), Economic Growth: The Japanese Experience Since the Meiji Era (1968), is useful. The characteristics of entrepreneurs in the early Meiji period, when modern capitalism rose in Japan, are given in Johannes Hirshmeier, The Origins of Entrepreneurship in Meiji Japan (1964). Kazuo Noda, “The Postwar Japanese Executive,” in the work edited by Ryutaro Komiya, cited above, explains the role of business executives in the post-World War II period. Some aspects of Japanese industrial labour are described in Ezra F. Vogel, Japan’s New Middle Class, 2nd ed. (1971); and in a comparative study by Arthur M. Whitehill, Jr., and Shin-Ichi Takezawa, The Other Worker: A Comparative Study of Industrial Relations in the United States and Japan (1968). Regarding the Japanese industrial structure, Joe S. Bain, International Differences in Industrial Structure: Eight Nations in the 1950’s (1966, reprinted 1980), is recommended, though rather outdated now. Japan’s bureaucratic establishment is described in Marshall E. Dimock, The Japanese Technocracy (1968). Japan’s management system is viewed in Michael Y. Yoshino, Japan’s Managerial System (1968, reprinted 1971); Thomas F.M. Adams and Noritake Kobayashi, The World of Japanese Business (1969); and Robert J. Ballon (ed.), Doing Business in Japan, 2nd ed. rev. (1968). In addition, James C. Abegglen, The Japanese Factory (1958, reprinted 1979); and Solomon B. Levine, Industrial Relations in Postwar Japan (1958), are considered semiclassics in the management field. James C. Abegglen, The Strategy of Japanese Business (1984), is also useful.

International Labour Office, Co-operative Management and Administration (1960, reprinted with revised bibliography, 1978), is a comprehensive introduction and guide. Robert Oakeshott, The Case for Workers’ Co-ops (1978), discusses the principles and reviews the experience; while Jaroslav Vanek (ed.), Self-Management: Economic Liberation of Man (1975), provides a collection of readings.

Growth of multinationals and the political implications of the phenomenon are reviewed in Christopher Tugendhat, The Multinationals (1971, reissued 1984); Ian M. Clarke, The Spatial Organization of Multinational Corporations (1985); and Thomas A. Poynter, Multinational Enterprises and Government Intervention (1984).

L.C.B. Gower, Gower’s Principles of Modern Company Law, 4th ed. (1979); Robert R. Pennington, Company Law, 4th ed. (1979); and Robert R. Pennington and Frank Wooldridge, Company Law in the European Communities, 3rd ed. (1982), are textbooks written primarily for students but may also be used by practitioners. Robert R. Pennington, The Investor and the Law (1968), is primarily a comparative study of the laws of the United States and the western European countries on investment law, with consideration given to questions relevant to business associations. M.A. Weinberg, M.V. Blank, and A.L. Greystoke, Weinberg and Blank on Take-Overs and Mergers, 4th ed. (1979), is a practitioner’s textbook on English law. Two works intended for the general reader are A. Rubner, The Ensnared Shareholder (1965); and G. Goyder, The Responsible Company (1961). Henry Winthrop Ballantine, Ballantine on Corporations, rev. ed. (1946); George D. Hornstein, Corporation Law and Practice (1959); and Richard W. Jennings and Richard M. Buxbaum, Corporations, Cases and Materials, 5th ed. (1979), are standard student textbooks. Edward Ross Aranow and Herbert A. Einhorn, Proxy Contests for Corporate Control, 2nd ed. (1968); and Edward Ross Aranow, Herbert A. Einhorn, and George Berlstein, Developments in Tender Offers for Corporate Control (1977), are detailed practitioner’s books that the experienced reader will find interesting. Wolfgang G. Friedmann and Richard C. Pugh (eds.), Legal Aspects of Foreign Investment (1959); Robert R. Pennington, Companies in the Common Market, 2nd ed. (1970); and Edgar M. Church, Business Associations Under French Law (1960), are suitable works for the reader who has no knowledge of the company law of overseas countries. G. Ripert and R. Roblot (eds.), Traité élémentaire de droit commercial, 11th ed., vol. 1 (1983); A. Hueck, Gesellschaftsrecht, 17th ed. (1975); and Alessandro Graziani, Diritto delle società, 5th ed. (1963), are standard students’ textbooks on French, German, and Italian company law.