Social Innovation Centre

The Legal Ontology of the Corporation as a Description of its Goal, and its Role in Society

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David RONNEGARD 2011/16/ISIC (Revised version of 2009/09/ISIC)

The Legal Ontology of the Corporation as a Description of its Goal, and its Role in

Society

David Ronnegard *

Revised version of 2009/09/ISIC * Post Doctoral Fellow at INSEAD Abu Dhabi Campus Muroor Road – Street n°4 P. O. Box

48049 Abu Dhabi, United Arab Emirates. Ph: +97124460808 Email: david.ronnegard@insead.edu

This working paper was developed using funds made available through the Abu Dhabi Education Council, whose support is gratefully acknowledged. A Working Paper is the author’s intellectual property. It is intended as a means to promote research tointerested readers. Its content should not be copied or hosted on any server without written permissionfrom publications.fb@insead.edu Click here to access the INSEAD Working Paper collection

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Abstract

The purpose of the corporation in society has been an issue of contention ever

since the Berle-Dodd debate in the 1930’s and still resonates as part of the “basic-debate”

in the field of business ethics today. Prescriptions about the purpose of the corporation

(such as Stakeholder Theory) should be argued in relation to a robust description of the

purpose that the corporation actually has so that we know what change is being argued

for.

This paper provides a description of the purpose of the corporation in society

through an analysis of four primary attributes of the corporate legal form. These are the

shareholder primacy norm; that the corporation is a separate legal entity from the

shareholders; the transferability of corporate shares; and the limited liability of

shareholders. The paper explicates these legal attributes and describes their development

in the UK and the US. The economic function of these attributes is then analysed in the

context of the industrial revolution when they arose. It is maintained as a point of

description that the purpose of the corporation in society is to serve as a legal vehicle for

production and economic growth. A consequence of regarding the purpose of the

corporation in terms of its legal attributes is that its purpose can be changed by

augmenting the corporate legal form.

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1. Introduction

Ever since the Berle-Dodd debate in the 1930’s the purpose of the corporation has been

an issue of contention. Adolf Berle (1931; 1932) argued that corporate law should be

regarded as essentially a form of trust law thus placing focus on the fiduciary obligations

of managers to run the corporation in the interest of shareholders. Merrick Dodd (1932)

on the other hand thought that corporate law should be heading in the direction of

allowing corporate managers to take into account the interests of a wider set of

constituencies in their decision-making.

The issues at the heart of the Berle-Dodd debate still resonate today in the field of

business ethics. What is known as the “basic debate” in business ethics concerns whether

the corporation’s purpose should be to further the interests of its shareholders or whether

it should have responsibilities to a wider constituency of stakeholders. This is usually

referred to as the Freidman – Freeman debate due to Milton Freidman’s (2003) advocacy

of what has been called Shareholder Theory, which is usually considered opposed to

Edward Freeman’s (1984; Evan and Freeman 2003; Freeman et al. 2007) Stakeholder

Theory. These theories are primarily seen as prescriptive in business ethics arguing for

the purpose the corporation should have.1

Corporate law has an important contribution to make to the field of business ethics by

offering a solid foundation for a description of the purpose of the corporation in society.

The purpose of the corporation can be divided into two perspectives, its goal and its role.2

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The goal of a corporation is its purpose seen from the perspective of the corporation,

while the role of the corporation is its purpose seen from the perspective of society.3

The Berle-Dodd debate was primarily a discussion about the goal of the corporation

looking at whose interest’s managers should represent. This is also a central concern in

business ethics although it often gets intertwined with the role of the corporation. The

subject of corporate law is not much considered by those who engage in the field of

business ethics; however it is occasionally discussed with regard to the goal of the

corporation because some scholars claim that the shareholder primacy norm in the

common law constrains managers from considering the interests of non-shareholder

stakeholders in their decision-making (Boatright 1994; Campell 2007; Evan and Freeman

2003; Hinkley 2002; Freeman et al. 2007; Testy 2002).4 On the other hand corporate law

has been absent from any discussion on the descriptive role of the corporation in society.

Friedman (1962: 133) prescribed that the corporation should “use its resources and

engage in activities designed to increase its profits so long as it stays within the rules of

the game” whereas business ethics scholars like Freeman prescribe that the corporation

should be a vehicle for managing stakeholder interests. It is unclear whether Friedman

and Freeman intend their prescriptions to apply to the goal or role (or both) of the

corporation, they simply do not make this distinction. Irrespective of where one stands in

the prescriptive debate it is clear that the corporate legal form is a manifestation of law

and therefore a descriptive account of the legal ontology of the corporation can be given.

The purpose here is to provide a description of both the goal and the role of the

corporation. This is not only interesting as a descriptive insight in itself, but importantly it

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provides a starting point for any prescriptive argument about the purpose of the

corporation. These prescriptions should be made in relation to the goal and role that the

corporation actually has because it is only then that we understand what potential change

is being argued for.

Looking at the purpose of the corporation in society through its legal attributes does not

merely provide yet another descriptive perspective. The basis for the corporation’s

existence is the corporate legal form which places the description of the purpose of the

corporation in society through this perspective in a privileged position. Any other

descriptive perspective should at least not be inconsistent with this description.

I will give an account of the legal ontology of the corporation by explicating its primary

legal attributes. In turn, understanding the economic function of these attributes through

the historical context under which they arose provide us with a description of the purpose

of the corporation in society.

The corporate legal form has four fundamental legal attributes. They are the shareholder

primacy norm; that the corporation is a separate legal entity from the shareholders; the

transferability of corporate shares; and the limited liability of shareholders (Kraakman et

al. 2004).5 Nowadays these attributes are unique to the corporate legal form in most

jurisdictions in the world as a default position upon the act of incorporation.

The historical development of these four attributes have been discussed separately

before,6 but not synthesised. Furthermore, drawing on these legal developments in the

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light of their economic and social effects in order to yield a descriptive account of the

purpose of the corporation in society is new. I will argue that the purpose of the corporate

legal form is to serve as an instrument for production and economic growth. Although

business enterprise in any legal form is beneficial to production and economic growth the

corporate legal form has proven to be particularly well suited for the task and dominates

the business landscape of free market democracies. In making the argument of this

instrumental purpose of the corporation it is important to note that we are discussing the

corporate legal form and not the purpose that any single corporation may have. In other

words we are discussing the purpose of the corporation as a constructed legal institution

in society.7

In the first part of the paper (The Legal Ontology of the Corporation) I shall start with a

brief historical look at the development of the corporate legal form from the first

corporations that were granted Royal Charter in 15th century England. I will then in turn

explicate the four attributes of the modern corporate legal form by looking at their legal

development and their economic function. I will be focusing on the legal development of

the corporate form primarily in English law because the corporate form is by and large an

English development. I will also to some extent be looking at American corporate law

because America adopted the English law of corporations without change at the end of

the American Revolution (in 1784), and provides insight into the reasoning behind the

genesis of the modern corporate legal form.8

In the second part of the paper (The Goal and Role of the Corporation: The Corporation

as an Instrument for Production and Economic Growth) I will place the significance of

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the corporate legal attributes in the context their development, the industrial revolution, in

order to show how the corporate legal form as a whole serves as an instrument for

production and economic growth. I will consider the shareholder primacy norm as part of

a legal description of the goal of the corporation because it directly deals with the

governance of the corporation. I will maintain that the shareholder primacy norm is today

no longer efficacious as a legally enforceable norm, but is still alive as a business norm

among managers due to the structure of corporate law that vests sole voting rights for the

board of directors with shareholders. The other three attributes will be considered as part

of the role of the corporation in society because they have important financial effects that

are primarily of significance on the aggregate. I shall maintain that the goal of the

corporation is to serve the interests of the shareholders through profitable production,

while its role is to serve as a legal instrument to facilitate economic growth.

2. The Legal Ontology of the Corporation

A. The First Corporations

The first corporations were craft guilds and trading companies to which the English

crown granted Royal Charters in the 15th century (Blumberg 1993). It was through

charters that the crown transferred its powers to groups and individuals (for example

Magna Carta, simply means “great charter”). The chartering of a company was known as

“incorporation” because it united the members into one body under the charter. The

monarch would call upon a guild or company to perform a public task, such as building a

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bridge, and would grant it a Royal Charter throughout the duration of the task. Therefore

the public role of the corporation was at this time fairly straight forward.

The granting of Royal Charter often carried with it several privileges which were written

into the charter itself for each company. These privileges were granted because the

corporation was meant to contribute to the public good and because it sometimes

assumed public responsibilities as part of its operations. For example a charter could

confer the privilege of monopoly status to a company stating that company X had the sole

right to trade goods Y in territory Z. A legendary example is the English East India

Company which was granted Royal Charter in 1600 to trade in the East Indies and

eventually ended up governing large parts of India. A Royal Charter often brought with it

the benefit of transferable shares and limited liability. This was in contrast with

partnerships which did not allow the free transfer of one’s stake in the company and held

each partner legally liable to the full extent of his wealth.

With the growth of power of the English Parliament it eventually also became possible to

obtain a charter through a Special Act of Parliament, which essentially could confer the

same rights and privileges as a Royal Charter. It is however important to point out that

Royal Charters and charters through a Special Act of Parliament were by no means

commonplace. During the entire 18th century there were only about a dozen charters

issued for corporations in England (Blumberg 1993).

Joint stock companies emerged in the 16th century as a form of partnership. In 1688 there

were only 15 joint stock companies in England, but they started growing in numbers in

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the 18th century when charters were exceptionally difficult to come by. Up until the 18th

century and for much of the 19th century the term “company” was used as an abridgement

of “joint stock company” and denoted an association of a particular economic type rather

than a particular legal status (Ireland 1996). Griffiths and Taylors (1949: 3) write: “These

companies were treated in law as partnerships, and whilst the capital holdings of the

members were transferable, their liability for the debts of the company was unlimited.” In

the 18th century joint stock companies were the type of association that would usually

seek a charter, but they were unpopular because they were often associated with fraud

and consequently few charters were granted.

It is important to point out that English corporation law and English company law (the

law applicable to Joint Stock Companies) were separate legal domains towards the end of

the 18th century. As mentioned, Joint Stock Companies were unincorporated associations

and were treated legally as a form of partnerships. However, because incorporation was

so rarely granted, Joint Stock Companies became the common mode of economic

association which consequently led to modern English business law developing as

company law rather than corporate law (Blumberg 1993). As we shall see the Company

Acts that were enacted between 1844 and 1862 laid down the fundamental pillars of the

modern corporation as we know it today and it was done as a legal augmentation of the

Joint Stock Company (not the chartered corporation).9 For one, the 1844 Joint Stock

Companies Act provided for general articles of incorporation, which meant that any

association of individuals could now become incorporated by a simple act of registration,

eliminating the need for a Royal Charter or a Special Act of Parliament.

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Nowadays virtually all enterprises in Britain are incorporated by registration under the

Companies Acts and generally one would assume that the layman’s use of the term

“corporation” is a reference to such a registered entity. However, one should note that

corporations that are created by Royal Charter or a Special Act of Parliament are not

subject to the provisions of the Companies Acts,10 although the rights and duties

governing such corporations are often similar in content.

Although there have been several influential corporations pre 19th century, there were not

very many and they did not have the all pervasive economic and social influence that

they have in most of our societies today. The big rise of the corporation started with the

Industrial Revolution in England at the end of the 18th century and quickly spread to the

newly independent United States. As we shall see, the Industrial Revolution in Britain

sparked a demand to start Joint Stock Companies and the growth of these companies in

turn created pressure to augment the legislation governing such companies resulting in

the Companies Acts 1844-1862.

Next we shall go on to look at the legal development of the fundamental legal attributes

of the corporation, starting with the primacy of shareholders.

B. Shareholder Primacy

Historically, in both the UK (see, Lord Wedderburn of Charlton 1985) and the US, the

common law has recognized that the interests of shareholders are primary among

corporate constituents. This has come to be known as the shareholder primacy norm and

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is the part of the fiduciary duty of directors and managers to make decisions that are in

the best interest of shareholders (Smith 1998). The fiduciary duties of directors and

managers arose due to early judicial depictions of their relationship with shareholders as

one of trust. That is to say, the directors and managers were seen as trustees for the

shareholders who were the owners of the corporation.

Perhaps the most famous articulations of the norm comes from the US case Dodge v.

Ford Motor Company, 204 Mich. 459, (1919). In delivering the opinion of the court (in

favour of the Dodge Brothers) Chief Justice Ostrander said:

“A business corporation is organized and carried on primarily for the profit of the

stockholders. The powers of the directors are to be employed for that end. The

discretion of directors is to be exercised in the choice of means to attain that end,

and does not extend to a change in the end itself, to the reduction of profits, or to

the non-distribution of profits among shareholders in order to devote them to

other purposes.”

In furthering the interests of shareholders the fiduciary duty of directors and managers is

seen as consisting of a duty of loyalty and a duty of care (Paine 2003). The duty of

loyalty means that directors and managers should further the interest of shareholders but

also that they should not put themselves in a compromising position where their

incentives might diverge from those of the shareholders. An example would be if a

manager were to receive direct remuneration from a corporate contract, as would be the

case for bribes and kickbacks. The fiduciary duty of care means that directors and

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managers are expected to make decisions that ordinary, prudent individuals in a similar

position would make under similar circumstances for the benefit of shareholders (Paine

2003). The norm of shareholder primacy is manifest in that they are, in the normal course

of events,11 the only corporate stakeholders to receive fiduciary protection by the courts

(Fisch 2006).

However, the shareholder primacy norm has become significantly diluted. In the US the

“application of the shareholder primacy norm to publicly traded corporations is muted by

the business judgment rule” (Smith 1998: 280). The business judgment rule is the

presupposition that directors and managers have not violated their fiduciary duty of care.

In the event of a lawsuit against directors or managers by shareholders for not furthering

shareholder interests the rule essentially implies that the court should not engage in

evaluations of the business judgment of the corporate leadership.12 The quality of

business decisions would generally be the primary evidence for a lack of care and

therefore the business judgment rule in effect makes the fiduciary duty of care

unenforceable.13

Furthermore, the shareholder primacy norm is constrained in both US and UK due to the

(relatively) recent introduction of non-shareholder constituency statutes. These corporate

statutes make explicit provisions allowing directors and managers to consider the

interests of other stakeholders in their decision making. In the UK this development

occurred with the Companies Act of 1985 c.6, where Section 309 makes a statutory

augmentation to the primacy of shareholders. It states that directors must take into

account the interests of employees when performing their functions for the company and

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that this duty is to be regarded as a fiduciary duty owed to the company. However, the act

does not give employees the right to challenge decisions of the directors in court if they

feel that their interests have not been taken into account. Because employees do not have

a right to challenge the decisions of directors this legal development would seem to

indicate that directors still only have fiduciary duties to shareholders, although they are

now also at liberty to take into consideration the interests of employees.

In the US the incorporation statutes of most states have also adopted non-shareholder

constituency statutes (McDonnell 2004). The state of Pennsylvania was first to adopt

such a statute in 1983, and states such as New York and Nevada have subsequently

adopted such statutes, although Delaware has notably not done so. These statutes do not

require managers to consider the interests of non-shareholders, but they make it explicit

that they are not prohibited from doing so.

Although the shareholder primacy norm is muted by the business judgment rule in the

US, and constrained by non-shareholder constituency statutes on both sides of the

Atlantic, the primacy of shareholders still remains strong. This is because the structure of

corporate law is geared towards shareholder primacy manifest by shareholders sole right

to vote for the board of directors.

The voting rights of shareholders gives them the power to elect and dismiss the board of

directors, which provides leverage for shareholders to exercise indirect control over

directors.14 This incentivises directors to consider the interests of shareholders as primary

among corporate stakeholders; quite simply, if they do not they may be dismissed.

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Kraakman et al. (2004: 12) write: “… the board of a corporation is elected – at least in

substantial part – by the firm’s shareholders. The obvious utility of this approach is to

help assure that the board remains responsive to the interests of the firm’s owners”. The

shareholder primacy norm may by and large be mute as a legally enforceable norm, but

so long as shareholders are the sole constituency that are afforded voting rights directors

will place them in a privileged position among corporate stakeholders.

To summarize, shareholders are afforded primary consideration among corporate

stakeholders. This is not due to the shareholder primacy norm (which affords fiduciary

duties solely to shareholders) because the norm is muted by the business judgement rule

in the US, and is further constrained by non-shareholder constituency statutes in both the

US and the UK. Instead, the primacy of shareholders is manifested through the structure

of corporate law which gives sole voting rights for the board of directors to shareholders

which ensures that their interests are given primary consideration by the corporate

leadership.

C. The Corporation as a Separate Legal Entity & the Transferability of Shares

In law the corporation is considered as a completely distinct entity from the shareholders

who incorporate the company. This means that the corporation is an independent legal

subject before the law. As we shall see this has led to the important legal development of

corporate shares being regarded as property in their own right, which in turn has

influenced the popularity and economic importance of the corporate legal form.

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The corporation was conceived as a separate legal entity several decades before Solomon

v. Solomon Co. Ltd, [1897] A.C. 22 (H.L.) (U.K.), but Lord Macnaghten’s articulation is

the most famous:

The company is at law a different person altogether from the subscribers to the

memorandum; and, though it may be that after incorporation the business is

precisely the same as it was before, and the same persons are managers, and the

same hands receive the profits, the company is not in law the agent of the

subscribers or trustee for them.

Nowadays, it is often assumed that the complete separation of corporation and

shareholder is a direct consequence of the act of incorporation. This was however not the

case in the late 18th century and only developed towards the middle of the 19th century.

Ireland (1996: 45) writes: “[W]hile incorporation had very important legal consequences,

for many years [early 19th century] a complete separation of company and members was

not among them.” Interestingly Ireland also mentions that the legal development of the

corporation as a separate legal entity was also followed by a similarly linguistic

development. The corporation nowadays is usually referred to in the singular “it”, but in

the early 19th century when shareholders were still regarded as forming the corporation it

was referred to in the plural “they”. Up until the 1856 Joint Stock Companies Act

corporations were referred to in the plural and said that persons “form themselves into an

incorporated company” with the implication that the persons were the company and thus

made of them. It was not until the 1862 that corporations were said to be made by people

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and not of people (Ireland 1996). The 1862 Companies Act clearly indicates that the

corporation is to be regarded as a completely distinct legal entity and this was rendered

25 years before Solomon v. Solomon & Co. Ltd.

Lee v. Lee’s Air Farming Ltd [1961] A.C. 12 (P.C.) (N.Z.) is an interesting case to

illustrate the corporate status as a distinct legal entity. Lee was the sole director, the main

employee and the controlling shareholder of Lee’s Air Farming Ltd in New Zealand.

Lee’s role as an employee was as a pilot. Following Lee’s accidental death his widow

brought a claim against the company. The question before the court was if Lee could be

considered as a “worker” for the purposes of the New Zealand Workers’ Compensation

Act of 1922. It was ruled that Lee’s duties as director were owed to the corporation itself

and that Lee’s contract of employment as a pilot was with the corporation itself. These

were considered two separate contracts with the corporate entity and therefore Lee was

not considered to be controlling himself as a director. Rather, it was deemed that legally

speaking Lee was being controlled by the corporation through its director, and

consequently Lee’s widow’s claim was successful. The example shows how an

incorporated one man company is at law nevertheless a completely distinct legal entity

from its only member who is at once director, employee and shareholder.

Alongside the legal development of the corporation as a separate entity was the

development of the corporate share as property in its own right. The first development to

this end was that the corporate share ceased to confer any right to the assets of the

corporation. The court’s decision in Bligh v. Brent (1837) 2 Y & C Ex 268 set the tone

that the shares of a corporation did not constitute a direct interest in the corporation’s

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assets. This meant that shareholders had no legal title to any of the corporation’s assets

and had no right to control how those assets were to be used. Justice Walton put the point

clearly with the following truism: “The property of the company is not the property of the

shareholders; it is the property of the company.”

The fact that shares no longer constituted a right to the corporation’s assets was important

with regard to the transferability of shares. It meant that the identity of the shareholders

was of considerably less importance than previously because they could not make claims

on corporate assets, which facilitated the transferability of shares to new shareholders. As

we shall see later, the granting of limited liability to joint stock companies in 1855 also

greatly helped to reduce the significance of the identity of the shareholders and thus

assisted the transferability of shares. These two developments together with the growth of

a proper stock market meant that shares were rapidly becoming commodities that could

be easily bought and sold. This in turn made corporate shares considerably more

attractive to investors and further helped contribute to the spread of the corporate form.

By the mid 1850s corporate shares were becoming truly liquid assets. It was this trading

of shares that above all else “established shares as an autonomous form of property,

independent from the assets of the company” (Ireland 1996: 68). Once shares were being

readily traded and they no longer conferred any rights to corporate assets it was fairly

uncontroversial for shares to be regarded as legal property in their own right, which they

clearly were by the 1860s. A corporate share is now itself a form of legal property that

primarily confers a right to dividends and voting rights.

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The separation of the corporation from its shareholders led to a greater independence and

empowerment of directors and managers. This in turn led progressive thinkers in the 20th

century, such as Dodd (1932), to regard corporate boards as possessing a great deal of

autonomy from the shareholders. This postulated autonomy led to the development of

different positions advocating the dawn of a new “socially responsible” corporation. The

hope was that a corporation would emerge that on managerial initiative would set the

goal to satisfy a variety of different interests and not primarily those of the shareholders.

These hopes never quite materialized, but they are still resonating in the CSR movement

of today.

At first sight the empowerment of management makes it seem plausible that the

corporation would try to satisfy several different stakeholders simultaneously without

giving primacy to shareholders. However, on closer inspection the separation of the

corporation from its shareholders would seem to further entrench the primacy of

shareholders. The central reason for this is that the greater autonomy of management

stretches to the running of the business, while the shareholders still have voting rights and

thus have decision-power over who sits on the board of directors. Further, when the

corporation is a separate legal entity and the corporate share itself is regarded as property,

then the interest of the shareholder is mainly to receive dividends. Previously

shareholders might have had an interest in the actual assets of the corporation, but a

consequence of downgrading the rights of shareholder is that the interest in holding

corporate shares becomes merely financial.

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When the interest in holding shares is merely financial it seems reasonable that investors

are unlikely to hold shares unless they are afforded primacy among corporate

stakeholders, otherwise there might not be sufficient residual for any dividends. With

such primacy in place the separation of corporation and shareholders only grants

managers the autonomy of choosing the means to realize the ends chosen by the

shareholders.

To summarizes, the corporation is an entirely separate legal entity from its members,

which has led to corporate shares as being regarded as property in their own right. These

legal developments have greatly contributed to the transferability of shares, which in

concert with the development of stock-markets has led shares to become readily traded

commodities. Although the separation of the corporation and shareholders led to a greater

autonomy for directors this was only an autonomy of decision-making pertaining to the

daily running of the business. In other words directors have the autonomy of choosing the

means but not the ends of the business enterprise.

D. The Limited Liability of Shareholders

Nowadays all corporations registered under the Companies Act are granted limited

liability. This means that the liability of the shareholders is limited to the value of their

shares so that a person who purchases a share in a corporation does not stand to lose more

than the value of his or her share. In other words if the corporation incurs large debts the

creditors cannot access the personal wealth of the shareholders to cover these debts. So to

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speak, the debts of the corporation are not the debts of the shareholders, they are the debts

of the corporation.

Limited liability is by many considered the most important feature of the corporate legal

form. In particular it is one of the most significant distinctions between the corporate

form and a legal partnership where the shareholders have unlimited liability. However,

limited liability was a relatively late characteristic to be granted to corporations. When

tracing the evolution of limited liability it is important to distinguish between on the one

hand corporations chartered by the Crown or incorporated by a Special Act of Parliament,

and on the other hand joint stock companies incorporated under general incorporation

statutes.

Corporations chartered by the Crown or incorporated by a Special Act of Parliament

could be granted limited liability but it varied from one corporation to another.

Nevertheless, with the passage of time limited liability became progressively more

associated with the act of incorporation and by the late 18th century “it became

increasingly accepted that where the charter was silent, shareholders had the benefit of

limited liability” (Blumberg 1993: 9).

The Joint Stock Companies Act of 1844 which introduced general incorporation statutes

for companies did not confer limited liability. It was not until the Limited Liability Act of

1855 and the Joint Stock Companies Act of 1856 that limited liability was conferred to

joint stock companies upon incorporation in Britain. The years between 1844 and 1855

were characterised by a long political struggle regarding whether or not the state should

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grant limited liability to joint stock companies. Blumberg (1993: 15) says that “the

political struggle over limited liability involved joint stock companies, not the handful of

existing corporations that already had such protection.”

The issue of limited liability caused controversy both in England and in America. In

England it created heated debates in parliament and in America it was debated state by

state. However, England’s adoption of limited liability in 1855 came three decades after

it was generally adopted in America (Blumberg 1993). So what was all the fuss about?

Bakan writes: “On both sides of the Atlantic, critics opposed limited liability on moral

grounds. Because it allowed investors to escape unscathed from their company’s failures,

critics believed it would undermine personal moral responsibility” (Bakan 2004). People

were concerned that if anyone and everyone could start an incorporated company with

limited liability through a simple act of registration this would lead to people making

decisions without concern for negative consequences. Although this concern has proved

to be legitimate under certain circumstances,15 by and large these fears have been

unfounded. This is probably because limited liability does not mean that there is absence

of liability as many seem to mistakenly think. Shareholders are liable to the extent of the

entire value of their shares. The self-interest of shareholders should bring them to demand

corporate investment decisions that are expected to be profitable. This by itself means

that corporations will strive to retain and increase the value of shares rather than make

decisions that may be harmful to others which in turn may damage share-value through

litigation or loss of customers.

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A complaint that is often levied against limited liability is that a great share of the risk of

business failure is shifted onto creditors because they may not get paid in the event that

the corporation is declared bankrupt. This is usually referred to as a negative externality

of the rule of limited liability. However, this rests on a misconception. Voluntary

creditors (e.g. banks, bond holders and suppliers) are compensated for the greater risk

that the corporation might default on its payments prior to any such potential default,

therefore there is no externality. Easterbrook and Fischel (1985: 102) write: “The

creditors assume some of the risk of business failure, just as they would if they were

‘insurers’ as well as creditors. The legal rule of limited liability is a shortcut to this

position, avoiding the costs of separate transactions”. The general idea is that because

creditors are exposed to a greater risk of payment default they will demand a higher rate

of return on their credit to compensate for the extra risk they assume.

Despite some heated opposition to limited liability, it eventually emerged in England in

1855 as a political reaction to rapid industrialization that was taking place at the time.

Limited liability proved to bring with it several benefits to shareholders and the economy

as a whole. Five of the major benefits are:16

1. Lower Cost of Monitoring Managers: It is in the interest of shareholders that their

managers do not make poor decisions that might put the corporation into debt.

With unlimited liability corporate debt is a serious threat because the shareholders

may lose not just their corporate shares but also their personal wealth. With the

rapid progress of industrialization in the 19th century corporations were becoming

larger so those running and those owning corporate shares were increasingly

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becoming different groups of people. This meant that the shareholders were

incurring significant monitoring costs to make sure that poor decisions that might

endanger their personal wealth were not made. The introduction of limited

liability significantly reduced the costs of monitoring shareholders because now,

although managers might still make poor decisions, those decisions could not

affect the personal assets of shareholders.

2. Removal of the Cost of Monitoring other Shareholders: Without limited liability

the identity of the other shareholders was of financial importance. The reason is

that in the event of corporate bankruptcy, creditors would turn on the assets of the

shareholders to regain the payments they were due. This meant that it was

important to know the personal wealth of one’s fellow shareholders, because the

wealthier the other shareholders were the less likely it was that one would have to

shoulder the debt burden on behalf of other shareholders that could not pay. The

introduction of limited liability meant that the personal wealth of other

shareholders became irrelevant because creditors could no longer make any

claims on the personal wealth of shareholders. In turn this meant the removal of

the cost of monitoring other shareholders to make sure that they did not sell their

shares to people with little wealth.

3. Facilitates Pricing of Corporate Shares: Without limited liability the price of

corporate shares depends in part on the personal wealth of the current and

prospective shareholders. This is because the personal wealth of the existing

shareholders influences the risk of investment that a new shareholder incurs upon

his purchase. Limited liability makes corporate shares into homogenous

commodities because the market price of a corporate share is the same

24

irrespective of who owns them. This makes shares more easily transferable by

reducing information gathering costs that would be required for each purchase,

which in turn helps the stock market to be more responsive.

4. Enables the Diversification of Risk: Nowadays it is common for shareholders to

reduce the risk of investing in the stock market by holding a market portfolio of

shares. 17 This eliminates the industry specific risk of a shareholder’s investment

and leaves only the general market risk. However, this is only possible with a rule

of limited liability. With unlimited liability a diversified portfolio would mainly

serve to increase rather than decrease the risk incurred by the investor, because if

any one of the corporations went bankrupt the investor could stand to lose all his

personal wealth. Under a rule of unlimited liability investors are therefore unable

to avoid investment risk that could have been avoided under a rule of limited

liability.

5. Gives Managers the Incentive to Make Efficient Allocation of Resources: Some

investments that managers expect to be profitable may be dismissed as too risky

under a rule of unlimited liability. For example, some positive net present value

investments may bankrupt the corporation if they go wrong. Therefore

shareholders would not wish such investments to be made because it could result

in claims on their personal assets. Positive net present value investments are

regarded as an efficient allocation of resources and consequently to pass up on

such an investment would be a social loss. However, with a rule of limited

liability the personal assets of shareholders are out of reach from creditors and

therefore rational shareholders would endorse risky positive net present value

investments.18

25

The corporation as a completely separate legal entity from the corporate members

emerged at about the same time as that of limited liability in the mid 19th century. As

previously mentioned, this was a time of rapid industrialization when due to the size of

corporations it was becoming increasingly common to have a functional division between

professional managers running the firm and shareholders supplying the necessary

investment capital. The functional separation of management and investment influenced

the call for a separate corporate entity with limited liability and the granting of limited

liability further entrenched this separation. As we have noted above, this functional

separation implies monitoring costs for shareholders to guard against corporate debts.

The introduction of the rule of limited liability helped remove some of these costs and

encourage the efficient allocation of resources. Further, it was probably not a coincidence

that the corporation as a separate legal entity emerged in concert with limited liability. It

is difficult to consistently maintain that the corporation is a completely separate legal

entity from the shareholders if the courts at the same time are accessing the personal

wealth of shareholders for debts incurred by the corporation. In other words, it seems

inconsistent to hold the view that the assets belong to the corporation while the debts

belong to the shareholders.

The rule of limited liability is now an accepted and ingrained characteristic of the

corporate form having been available though a simple act of registration for a century and

a half. The rule generally protects the personal assets of shareholders from any claims

that might arise out of debts incurred by the corporation. However, over the years there

have been several rare occasions when the courts have gone behind the veil of

26

incorporation and held shareholders personally liable. There are no general or well

established rules for when courts may “pierce the corporate veil” (Easterbrook and

Fischel 1985), but one situation in which courts have disregarded the limited liability of

shareholders is when it has been intentionally abused. This has almost always involved

close corporations where there is often less functional separation between management

and investment. Close corporations are usually characterised by a dominant shareholder

who is also the director of the corporation. When the dominant shareholder and the

director are the same person then limited liability does not afford any extra advantage in

the reduction of monitoring costs. Further, the incentive for directors to engage in overly

risky activity is considerably greater in close corporations. The main reason is that if a

director is the main shareholder then he/she stands to gain handsomely if one of the risky

investment decisions pays off, but potential losses are limited by limited liability if the

investment goes wrong. On occasion when the courts have deemed that overly risky

investment decisions have been made by deliberately abusing the protection of limited

liability, they have decided to pierce the corporate veil and allow access to the personal

assets of the shareholders.

To summarize, the emergence of limited liability as part of general incorporation statutes

came into effect only after much heated debate in both England and America. The rule of

limited liability implies that the liability of shareholders is limited to the value of their

shares. It was feared that such restrictions on liability would lead to grossly irresponsible

behaviour. Although such fears did hold some substance, the many economic benefits of

limited liability were regarded to be of greater importance. In particular limited liability

helped to turn the stock market into a truly liquid market.

27

The rule of limited liability implies that creditors end up bearing a greater risk of business

failure, but this is not an externality because they are compensated upfront for this risk in

terms of a higher rate of return. It seems reasonable that creditors should bear this risk

rather than shareholders if we are to regard the corporation as a separate legal entity.

Therefore it is probably not a coincidence that the corporation as a separate legal entity

emerged at the same time as limited liability. The debts of the corporation belong to the

corporation itself, and if it cannot pay, this cost should be borne by those who gave it

credit.

3. The Goal and Role of the Corporation: The Corporation as an Instrument for

Production and Economic Growth

The aim of this section is to show how the corporate legal form, through the four legal

attributes discussed in this paper, provides a description of the goal, and role of the

corporation in society. I will first maintain that the goal of the corporate legal form is tied

to the corporate governance attribute of shareholder primacy. The corporate legal form

thus serves as a vehicle for furthering the interests of shareholders and these interests are

primarily taken to be profitable production of goods and services. I will then argue that

given this goal of profitable production combined with the three other (non-governance

related) attributes provides a description of the role of the corporation in society as a

instrument for production and economic growth. I will start the description of the

28

corporate role during the early years of the industrial revolution, which not coincidentally

is also the time period for the genesis of the modern corporate legal form.

A. The Goal of the Corporation

The goal of the corporation in society is its purpose seen from the perspective of the

corporation itself. There are two ways in which the corporate legal form provides a

description of the goal of the corporation. Firstly and primarily it does so by indicating

which stakeholder groups’ interests set the primary agenda for which the organization

should commit its efforts. Secondly it does so implicitly by the way it differs from other

legal forms of organization.

As we saw earlier the directors and managers of the corporation are bestowed with

fiduciary duties of loyalty and care to be directed to furthering the interests of

shareholders. The fact that these duties are owed solely to the shareholders of the

corporation is the shareholder primacy norm. Although the SPN is muted by the business

judgment rule in the US, and further constrained by non-shareholder constituency statutes

in the UK as well as a majority of US states, the primacy of shareholders is still

maintained due to the structure of corporate law which grants shareholders the sole right

to vote for the board of directors. The structure of corporate law vests ultimate control for

deciding who should direct the corporation with the shareholders, and therefore their

interests will carry primary importance. It is this primacy of shareholders among

corporate stakeholders which provides the goal of the corporation.

29

The goal of the corporation is therefore to satisfy shareholder interests. This does not

necessarily mean that the goal of every corporation must be profit maximization.

Shareholders may have any number of interests. However, the law does distinguish

between for-profit-corporations from non-profit-corporations (primarily for tax purposes)

and it is seems reasonable to assume that most entities registered as for-profit-

corporations actually have the goal of seeking profit. Whether profit should not merely be

sought but also maximized is also up to the interests of shareholders, but standard

economic theory suggests that any investor, qua investor, would rationally prefer a

greater return on investment over a lower return on investment.

It might seem obvious, but it should be pointed out that the corporation generates its

profits through the production and sale of goods and services. While the ultimate interest

of shareholders might be dividends on profits that the corporation generates, these profits

need to be generated by producing an output of goods and services that is valued by

customers by more than the cost of the inputs. In other words, the corporation is a vehicle

for furthering the interests of shareholders and those interests involve the profitable

production of goods and services. Therefore, as a point of pure description, based on the

attributes of the corporate legal form, the goal of the corporation is to satisfy the interests

of shareholders primarily through profitable production of goods and services.

B. The Role of the Corporation in Society

The role of the corporation is its purpose seen from the perspective of society. In order to

determine this role we may look at the function that the four primary legal attributes

30

serve in society. I shall here explain the functions that these attributes serve primarily by

showing the need for their development during the industrial revolution.

It is generally acknowledged that the industrial revolution began in the third quarter of

the 18th century in Britain and was characterised by a widespread replacement of manual

labour by machines, which led to an enormous increase in productivity. One might say

that it was technological innovation that sparked the industrial revolution. Examples of

the most important innovations in Britain at the time were the steam engine and the

spinning frame. However, several social, political and legal conditions were also present

to enable and encourage that these innovations be used for productive and commercial

purposes. For example, Britain had a stable political system with a functioning judiciary

which reduced the risk that the sovereign might arbitrarily seize private property. Further,

the security of private property and the existence of patents for innovations meant that

investors could plan long term which is crucial for economic growth. Finally, there

existed a developing corporate legal form that enabled the factors of production (land,

labour, and capital) to come together for commercial production. The combination of the

political, legal and innovative climate led to a brisk expansion of commercial activity on

a scale of mass production.

The economic success of Britain attracted a lot of attention and several European

countries tried to follow suit. However the most successful imitator came from the other

side of the Atlantic in the form of Britain’s ex-colony, America, which had newly gained

independence. America was quick to follow in Britain’s footsteps and jumpstarted its

own industrial revolution.

31

Now, where does the corporate legal form fit into this story of economic change and

growth? The industrial revolution would never have gotten started had it not been for the

possibility of engaging in business through collective enterprise, and the corporate legal

form in particular was instrumental to this process. Corporations achieve their goals by

organizing and directing the factors of production; land, labour and capital. The factors of

production achieve very little on their own and most certainly do not bring about an

industrial revolution. We shall now look at the role that the four primary legal attributes

of the corporation have played.

Let us start with the attribute of shareholder primacy which provides the goal of the

corporation. What is the role of the goal of the corporation? In other words what function

does the goal of the corporation serve in society? The primary benefit of a private

property free market economy is that it allocates resources where they are most valued.

Corporations’ contribute to this by producing goods and services that are valued by

customers at more than the cost of production, thus demonstrably allocating resources

efficiently by creating value. Therefore by having a goal of profitable production to serve

the interests of the shareholders, the corporation fulfils a role as an economic actor that

allocates resources efficiently in society (Jensen 1994). Although a free market economy

can exist without corporate actors (with only individuals engaging in economic

exchanges), we shall see there are economic benefits to be had in a goal oriented

organization related to the reduction of transaction costs.

32

The early corporate legal form that existed at the start of the industrial revolution was

shareholder focused and suitable for coordinating land and labour efficiently, but suffered

from a lack of capital. It is with regard to the addressing the issue of capital solicitation

that the three non-governance related attributes of the corporation play their primary role.

The industries that drove the industrial revolution were very capital intensive, for

example the textile and mining industries. Therefore a lack of capital was a great

hindrance for continued economic growth. Above anything else it was this that applied

pressure for reforming the corporate legal form, which led to the release of vast sums of

capital.

The Industrial Revolution sparked an increased demand to start Joint Stock Companies as

a form of association in which resources could be pooled and commercial enterprise

carried out. As we shall see the growth and success of these companies in turn created

pressure to augment the legislation governing such companies resulting in the Companies

Acts 1844-1862.

Ronald Coase is one of the few economists that have specifically written about why

companies exist in economic terms. His theory will help us understand why the growth of

Joint Stock Companies during the industrial revolution exerted such economic pressure

for corporate reform. Coase’s (1988: 14) theory can be put quite briefly as: “[I]n the

absence of transaction costs, there is no economic basis for the existence of the firm.”

According to Coase (1988:6) transaction costs are “search and information costs,

bargaining and decision costs, policing and enforcement costs.” Coase (1988: 7)

explains: “[T]he fact that it costs something to enter into these [economic] transactions

33

means that firms will emerge to organize what would otherwise be market transactions

whenever their costs were less than the costs of carrying out the transactions through the

market.” In other words people come together to form a company in order to reduce the

transaction costs that exist in the market.19 The absence of economic transaction within a

company in effect implies that internal company transactions involve a suppression of the

price mechanism.

The need to suppress the price mechanism indicates that there is a cost involved in using

it. One of these costs is the very act of finding out what the relevant prices are. Another

important cost is the making of contracts with all parties that are to be involved in an

enterprise. In the open market each actor must make a contract with every other actor

with which he or she is cooperating. In this economic sense the company is a cost

efficient way of internalizing the nexus-of-contracts that otherwise would need to be

bargained as independent market transactions.

The company’s economic raison de être is founded on reducing transaction costs. The

pressure on the state to ease the transferability of shares and grant limited liability

towards the middle of the 19th century can be viewed in terms of reducing transaction

costs. Clark (1985: 55) concurs with this view and says: “[S]tructural features of the

corporate form of organization, such as limited liability of stockholders and free

transferability of shares... result from (fairly slow, crude) processes of legal evolution that

favour rules that reduce transaction costs.” At the start of the industrial revolution in

Britain it was possible for virtually any group of people to start a Joint Stock Company.

This in itself created many benefits with regard to reducing transaction cost for

34

coordinating land and labour. However, the Joint Stock Company had practical

limitations with regard to its ability to pool funds for investment.

The 1844 Joint Stock Companies Act provided for general articles of incorporation and

allowed shares to be transferred without the express consent of all the co-partners. This

by itself increased the transferability of shares and thus reduced the transaction cost of

anyone wishing to transfer a share in a Joint Stock Company. This enabled newly formed

corporations to obtain funds for the commencement of an enterprise far easier than was

the case when the Joint Stock Company was considered a form of partnership and the

transfer of shares required the consent of all the co-partners.

Although the 1844 Joint Stock Companies Act was a manifest improvement for pooling

resources it still had limitations. Without limited liability investing in a Joint Stock

Company was very risky for investors as their personal wealth was accessible in the event

of bankruptcy. This meant that in practice only people of great wealth, who could bear

the potential consequences of unlimited liability, would be willing to part with their

financial resources. Industrialisation meant that companies were growing larger and

needed further capital to expand and so the pressure to confer limited liability upon

incorporation increased. In Britain this was finally granted with the Limited Liability Act,

1855, 18 & 19 Vict. C.133 (Eng.) and the Joint Stock Companies Act, 1856, 19 & 20

Vict. c. 47 (Eng.). This presented a significant decrease in the risk of investment and thus

decreased the transaction cost for the further pooling of resources. Corporations were

thus able to solicit more financial resources from a wider public to finance their capital

intensive investments.

35

Limited liability was by no means an essential component of the industrial revolution,

shown by the fact that English industry expanded enormously during the first hundred

years of the revolution without it (Blumberg 1993). However, by the middle of the 19th

century Britain had come to a point in its industrial development were limited liability

was sorely needed if its economic growth was to continue. Further, limited liability also

provided a host of other benefits. Among the most important being that it firmly

cemented the separation of the corporation from shareholders which allowed the

corporate share to develop into a form of property in its own right. Without this

development we may never have seen the liquid stock markets of today.

Each legal attribute has served and continues serve an important economic function. The

primacy of shareholders sets the goal of the corporation and serves the role of allocating

resources efficiently. The three attributes of separation of the shareholders from the

corporation, the transferability of corporate shares, and limited liability have all served to

reduce transaction costs and greatly ease capital solicitation. When these attributes are

taken together the corporate legal form has and does serve as an instrument for

production and economic growth.

From a legal perspective this descriptively is the purpose of the corporation in society. If

CSR advocates (or anyone else) wish to prescribe a different purpose they should do so

with regard to the goal and role it has. In particular any prescriptive argument should

reflect on how the prescription will affect its current goal and role and whether that

change is on the whole preferable.

36

For example, advocates of Stakeholder theory, such as Freeman and Phillips (2002), want

the role of the corporation to be a vehicle for organizing stakeholder interests rather than

primarily furthering the interests of shareholders. To achieve this, the primacy of

shareholders would need to be removed which would require changing the structure of

corporate law such that shareholders’ right to vote is removed.20 By changing the

attributes of the corporate instrument you can change its purpose. However, whether or

not such a change is desirable will depend on what benefits it brings (e.g. stakeholder

empowerment) versus the potential cost (e.g. diminishing the effectiveness of the

corporate form as an instrument of production and economic growth). Such an argument

should be made in relation to the descriptive goal and role it has. Only then can we

analyze and understand what the potential costs and benefits are of change. Only then can

we make an informed choice.

37

4. Conclusion

I have aimed to explicate the development of the four fundamental attributes of the

corporate legal form and show how these provide a description of the goal and the role of

the corporation in society. I have maintained that the goal of the corporation is provided

by the attribute of shareholder primacy which is manifest through the structure of

corporate law that extends sole voting rights for the board of directors to shareholders.

The goal of the corporation is to satisfy the interests of shareholders, which primarily

involves profitable production of goods and services.

The role of the corporation in society is provided by the function of all four attributes.

The role of the goal is to direct the efficient allocation of resources in a private property

free market economy. The role of the attributes of transferability of shares, the separation

of the corporate entity for the shareholders, and the limited liability of shareholders serve

to ease capital solicitation for investments for individual firms, but more significantly

enable stock markets that provide a forum for capital solicitation. The efficient allocation

of resources together with the facilitation of raising capital for investment suggest that the

role of the corporation is to serve as a vehicle for economic growth. Combined with its

goal, the purpose of the corporation (goal + role) is to serve as an instrument for

profitable production and economic growth.

I have not argued for a particular purpose of the corporation, but merely described the

purpose it has through its fundamental legal attributes. These attributes have been

instrumental to the process of industrialization and economic growth of nations, and

38

today the corporate legal form continues to serve as a vehicle to facilitate business

enterprise. A consequence of realizing that the goal and role of the corporation is

contingent on its legal attributes is that these attributes can be augmented with the strike

of a legal pen should we opt for a different purpose of the corporation in society. Let the

current prescriptive debate about the purpose of the corporation in society make its

argument in relation to the purpose it has; only then will we know what change is being

argued for.

39

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42

End Notes

1 Although these theories about the purpose of the corporation in society are primarily prescriptive they can

also have descriptive interpretations. See, e.g. Donaldson and Preston (1995).

2 Please note that I will use the term “purpose” throughout this text to collectively refer to the terms “goal”

and “role”.

3 An example of this type of goal vs. role distinction is how the goal of each actor in a competitive market

is to further their own interest, but the role this competitive behaviour plays in society is to achieve efficient

allocation of resources. Note that the goal and role of the corporation are not independent from each other.

In particular the goal of the corporation will influence how corporations operate with regard to their

stakeholders and thus affect the role of the corporation in society. Conversely, given the role that we desire

the corporation to have in society one may then evaluate what this requires from the goal of the corporation.

4 It has however been convincingly argued by Smith (1998) that the shareholder primacy norm is no longer

efficacious as a legal norm because it is muted by the business judgment rule.

5 Note that I account for Kraakman et al’s attributes of “delegated management” and “investor ownership”

through the attribute of shareholder primacy as it is involves the relation of management to the owners of

the corporation. Also note that Kraakman et al’s characteristic of “corporate personality” is equivalent to

my characteristic of “corporation as a separate legal entity”.

6 See Smith (1998) on the shareholder primacy norm; Pickering (1968) on the development of the

corporation as a separate legal entity; Ireland (1996) on the development of the transferability of corporate

shares; and Easterbrook and Fischel (1985) on the development of limited liability.

7 One might reasonably ask how this argument is different from simply saying that business enterprise in

general is beneficial to production and economic growth. The important difference is to view the goal and

role of the corporation in society from a legal and economic perspective rather than merely an economic

one. Business enterprise is not conducted in a legal vacuum; all types of business enterprise are conducted

through one legal form or another. The corporate legal form dominates the business landscape and by

viewing the corporation through this legal perspective it allows us to describe the role of the corporation in

society as an intentional construct for society to make use of (rather than just focusing on the individual

43

corporation as our unit of analysis). In particular, as a legal construct the corporation exists to serve our

purposes, and as such it can be augmented if we so desire it.

8 Where there is a significant difference between UK and US law this will be explicitly addressed.

9 The Acts between 1844 and 1856 are generally referred to as the “Joint Stock Companies Acts” while the

1862 Companies Act and onwards are referred to as the “Companies Acts”. When referring to the Acts

collectively, both prior and after 1862, I will simply be using the term “Companies Acts”.

10 The 1844 Joint Stock Companies Act says: “[T]his Act shall not extend to any Company incorporated or

which may hereafter [be] incorporated by Statute or Charter.” An Act for the Registration, Incorporation,

and Regulation of Joint Stock Companies, 1844, 7 & 8 Vict., c. 110 (Eng.).

11 It is generally accepted that an incentive problem occurs when a corporation is near insolvency. This is

because the closer the corporation is to being insolvent, the less the corporation is worth, and therefore due

to limited liability the corporation has “nothing to lose” in making very risky decisions. In the US, this has

been addressed by directing fiduciary duties to creditors when the corporation is near insolvency.

12 The courts have found that it is not their place to evaluate the quality of business decisions as this is not

their primary competence. Rather such judgments are best left to the market to decide.

13 It is generally only the duty of loyalty that courts will consider when derivative suits are brought against

directors or managers, and then courts will primarily consider whether any self-dealing has occurred.

14 The legal concept of “agency” implies a relationship in which the principal has the power to control and

direct the activities of the agent (Clark 1985). Shareholder voting rights do not therefore provide sufficient

control to characterize directors as the legal agents of the shareholders.

15 See, supra note 11.

16 These five points are inspired by points made by Easterbrook and Fischel (1985: 94 – 97).

17 A market portfolio of shares is a portfolio that mirrors the proportions of all the shares in the market.

18 Arguably a risk neutral rational investor would not pass up on a positive net present value investment

irrespective of the risk and possibility of having claims made against his personal assets. However, it seems

reasonable to assume that real investors are not risk neutral about their personal assets in a way that they

might be about their shareholdings. People tend to regard their shareholdings as assets disposable for

speculation while personal wealth is needed for living.

44

19 A consequence of this is that the theoretical ideal of a perfect market (characterized by an absence of

transaction costs) would not have any companies.

20 Alternatively, shareholder primacy could theoretically be removed by giving all “relevant” stakeholders

an equal right to vote, although in practice this would seem to be unrealizable.