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1.3 Stock Corporations as Civilization Elements

Enterprises are institutionalized as stock corporations. Why have stock corporations become standard? The answer can be found in the fact that the stock corporation system leaves governance of the production system to the shareholders. A stock corporation is a group of shareholders who have a common purpose of investing to establish a business to realize profits. They buy land, buildings, and facilities and hire employees to materialize a business. The executives of a stock corporation are involved in the actual operation of the corporation. The institution of a stock corporation generally falls under this form. In fact, many stock corporations align themselves to existing production systems.

Shareholders are investors on a quest for profits. Such governing entities always put pressure on production systems to produce profits. Putting pressure on production systems to generate profits means that stock corporations are not allowed to be merely sustainable. If profits are calculated by deducting costs from sales, to produce profits requires either increased sales or reduced costs. Cost reductions bring efficient production, while increased sales are achieved by developing new products and markets.

In short, our society may obtain an efficient and innovative production system by employing the stock corporation system and by continuously putting pressure on the entity to generate profits. Actually, this is clearly illustrated when compared to social enterprises, which as an enterprise are free from profit pressure. Social enterprises are less concerned about efficiency and lack motivation to develop new products. They lose global competitiveness and as a result, in some cases, may be reorganized into stock corporations.

In general, stock corporations are successful, so that most of today's businesses are converted to stock corporations. Meanwhile, such success is applied only in the range where profits are materialized by producing and selling products. If a method to produce profits other than producing physical products is realized, profits are produced regardless of efficiency and innovation. It becomes possible to produce profits by securitizing various rights, instead of tangible products. For example, Enron securitized the provisioning of energy for the next decade and made profits from sales. When stock corporations are subjected to excessive pressure to deliver maximum profits, they sometimes go out of control.

According to Micklethwait and Wooldridge (2003), the stock corporation system exhibits four features:

1. Joint investment. The system of running a business through funding by two or more entities is a time-tested method. Joint investment in trading in Phoenicia is well known. Merchants jointly purchased merchandise, sailed to a certain destination, sold the products there, and sailed back with merchandise purchased from there. It is said that through such round-trip, trading merchants produced profits of over 1,000 %. In such trading, local purchases were handled by ship captains; thus profits were significantly at the captain's discretion. When they successfully completed the voyage and produced profits, captains would receive a certain rate of profit sharing as compensation. The remainder of the profits were shared between cargo owners and ship owners. Since crews were employed regardless of profits, they were excluded from profit sharing.

This form of profit sharing has descended to today's stock corporations. In short, when stock corporations post profits, first-board directors receive compensation from after-tax profits, and then from the remainder of the after-tax profits, shareholders receive a dividend in accordance with the number of shares they own. At this time, employees are not involved in profit sharing.

Meantime in Japan, in most cases employees are included in profit sharing. In the Edo Period, for example, Mitsui divided profits equally into three parts: one third was paid to the Mitsui family (a total of 11 families of the main and cadet branches, the number of which varied over time), another third was reserved for future investment, and the remaining third was paid to employees as a bonus.

This practice continues today through the Japanese corporate system of awarding two bonuses per year. Joint investment is established in many companies, while including or excluding employees from profit sharing has not been studied in any categorical form.

2. A legal personality. With this concept, a company becomes a person with rights and responsibilities similar to a natural person. To tackle the thorny issue of the ownership of the properties of churches, James Samuel Coleman released the concept of a group of corporate actions, in which he said that a legal personality was required (Coleman 1990). To make church properties specific to a church itself instead of the Patriarch of the Occident, such properties were construed as belonging to saints, who were enshrined in each church. However, the idea that church properties belonged to saints was rejected to avoid situations in which action against a church was synonymous with taking action against the saint. Another theory held that the walls of the church owned the church property, but this was disputed on the grounds that the walls would be turned into bona vacantia (ownerless goods) and was also rejected. Finally, an idea was advanced to provide a charter of a legal personality consisting of collective persons.

Actually, legal personalities were used in various forms outside Europe before the church property issue. During the Middle Ages, autonomous cities held a legal personality and became a legal person with rights and obligations. In Japan, in the sixteenth century, the city of Sakai was considered to have a legal personality.

3. Limited liability. This did not occur outside Europe, while the other two features frequently occurred in other regions in the world. A profound change was that the system limited participation in a business to the range of investment and participants would not assume any other responsibility. When participants invested and participated in a business, it was common that liabilities incurred as a result of the failure of the business were unlimited. In a limited liability system, participants do not have to assume liabilities beyond the loss of their investment. This system, thereby, enabled participants to widely raise small amounts of funding.

In fact, businesses emerged that could not be realized without raising funds widely. Railroads epitomize such a business. To be operated, railroads must lay rail, build stations, and buy trains, which requires huge amounts of capital, while it is difficult to conduct sales activities and post revenues unless a certain amount of track is laid. This requires vast amounts of spending without income for years. As railroads cannot start on a small scale, it is impossible to run such a business without broadly raising funds. The more such businesses that required large-scale facilities were built, the more effectively the limited liability system functioned.

4. General incorporation. This permits anyone to establish a stock corporation if certain legal and regulatory requirements are met. Prior to this, it was necessary to be chartered by the king. On the contrary, establishment of a corporation by anyone without inhibition significantly expanded the freedom of economic activities and made it easy to establish a corporation with a legal personality and thus start a business.

The stock corporation system was established in the middle of the nineteenth century via the adoption of general incorporation under the Joint Stock Companies Act in 1844, yet, establishment of the system did not help corporations spring up and increase their influence. Especially in the manufacturing industry, mass production started at the beginning of the twentieth century. The major companies in the nineteenth century were maritime, railroad, and financial institutions.

The system did not spread rapidly as a new civilization element. The stock corporation system developed in Europe spread gradually. There seem to be more cases in which the form of stock corporation was added to existing production systems, as seen in Japan, where many large-scale businesses engaged in financing, trading, and mining. When the Tokugawa Shogunate collapsed and Japan began the process of modernization, these businesses employed the stock corporation form. However, they did not remodel their traditional governing system to a stock corporation system, but instead converted to a stock corporation. Thus there were no substantial and drastic changes.

In addition, a framework was built for a stock corporation system like this to function. To build a system for financing, individual financial institutions had a unique framework for the system. They were revised as needed by the implementation of the stock corporation system. When stock markets were established and stocks were traded, it became necessary to implement systems to govern them. Banks were also established and required a standard system. Stock corporations needed to raise capital from somewhere. For this purpose, it was necessary to establish a financing framework. There were moneylending businesses in many societies. It was necessary to create a business to respond to the demand for capital by enterprises and to create financing systems such as currency exchanges and checks.

Seen in this light, enterprises in the form of stock corporations as a civilization element had a strong connection with a series of economic systems. The civilization elements remained loosely coupled even in this aspect, and therefore, financial institutes had significant flexibility after the implementation of the stock corporation system. Since Islamic civilizations banned interest on loans, there was no general form of banks but the Islamic bank, most of whose functions could be substituted by those of non-Islamic banks.

The original purpose of the stock corporation system is considered as a framework to build an effective production system to allow shareholder groups pursuing profits to govern enterprises; thus governance became an issue again. When peripheral systems were established, corporations were given the opportunity to accumulate wealth in various areas beyond the scope of production.

Given this perspective, as observed by Karl Polanyi (1944), situations embedded in markets were tangled in the system. There seem to be subtle disparities between civilizations and the view of societies through responses taken by enterprises, respectively. Some societies assume an intentional stance for rein in regulation of favorable businesses, while other societies limit them. It is obvious that market systems do not sufficiently keep pace with the development of information technology.

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