# An Answer to Nader **URL:** **By** Doug Bandow **Published:** July 1, 1981 --- “Hessen’s is a task often made thankless by present-day corporate America, with its support for statist politicians, government restrictions on competition, and taxpayer subsidies for unprofitable business ventures.” _In Defense of the Corporation_, by Robert Hessen. Hoover Institution Press, 133 pp., $7.95. “\[G\]iant corporations are a testament to the ability of free men, motivated by self-interest, to engage in sustained, large-scale, peaceful cooperation for their mutual benefit and enrichment. As a result, Americans today enjoy a standard of living… that is unprecedented in world history….” So begins Robert Hessen’s bristling — and at times, eloquent — defense of corporations. It is an abstract one: Hessen is defending only the legal structure of the corporation, not the sociological and political role that it has played in society. But the book dramatically answers those who question the corporation’s right to exist as a legal entity, demolishing _Taming the Giant Corporation_, by Robert Nader and his associates, in the process. Hessen’s is a task often made thankless by present-day corporate America, with its support for statist politicians, government restrictions on competition, and taxpayer subsidies for unprofitable business ventures. But he cheerfully and effectively fulfills the assignment he has set himself (which involves defending none of these activities), first challenging the myth, promoted by some conservatives as well as by Nader, that corporations are privileged creatures of the state, since they exist through government consent. He finds that this “concession” theory of the corporation began, appropriately enough, in 1066 A.D. with William the Conqueror, who confiscated all the lands he conquered and handed them out to his supporters, “conceding” them the use of lands which in theory belonged to the king. Various medieval kings “pursued a policy of systematic extortion” of the people, and continued to develop the theory that they had the right to turn the ex-torted property over to favored nobles because all property belonged to the crown. Incorporation today, of course, involves no such transfer of property, and is but a standardized formality. Hessen concludes, “It is ironic indeed that critics today seek to make corporations subservient by appealing to a theory created centuries ago to justify acts of extortion by absolute monarchs.” Another contention of Nader’s is that corporations must obtain a state charter, which is “in effect an agreement whereby a government gives the corporate entity existence and that entity, in return, agrees to serve the public interest.” But Hessen points out that a corporation’s charter—its articles of incorporation—is also a formality. Indeed, he notes that the filing process is akin to that for a birth certificate, or to legally validate a marriage. And “who, for that reason, would describe a marriage as a creation of the state, or claim that a marriage certificate contains a promise to serve the public interest?” Again, Hessen traces the history of Nader’s concepts, saying that “Nader’s devotion to this anachronistic concept \[the charter\] undoubtedly reflects his nostalgia for an absolute political philosophy. His idea that a charter contains a promise to serve the state is a car-ryover from the sixteenth and seventeenth centuries” when freedom of commerce was but a selective royal privilege. Hessen moves to the three specific corporate attributes which Ralph Nader argues are special privileges justifying special government control: **Entity status.** Hessen points out that entity status merely means that corporations can sue, and be sued, as a unit, and is not a special privilege, being roughly available to all unincorporated businesses. Indeed, he argues that the entity concept should be discarded and replaced by “the inherence theory of corporations — the idea that men have a natural right to form a corporation by contract for their own benefit, welfare, and mutual self-interest.” **Perpetual life.** This means that the articles of incorporation needn’t be renewed. Many partnerships, such as law firms, are also effectively permanent. **Limited liability.** Stockholder assets are not liable for corporate debts because of an implied contract between the corporation and corporate creditors. As Hessen points out, creditors can, and often do, require guarantees by the major stockholders before they will extend credit. Liability is also limited in tort cases, such as suits for negligence. There is no contract here, but Hessen argues that inactive shareholders should not be liable; instead, he believes that the legal doctrine of employer liability for employee torts should be applied only to those who exercise managerial control, regardless of the legal form of the business. Hessen reemphasizes the arbitrariness of the attack on the corporation by exploring the continuum between the corporation and the partnership. He argues that the corporation “consists only of individuals,” as does any other organization. Since only individuals can enjoy property and transact business, “anyone who proposes to deny or destroy the right of a corporation is really attacking individual rights.” Moving away from these theoretical discussions, Hessen spends the better part of three chapters debunking a critical element of Nader’s attack — that corporations, far from being run for the mutual benefit of shareholders and managers, are but a battleground between these groups of “mutual adversaries.” Indeed, Nader postures as an ally of the shareholders, opposing the officers who, with the acquiescence of the directors, allegedly are looting the corporation. Nader contends that, without his help, the shareholders are impotent and unable to control the autocratic corporate rulers. To redress this perceived imbalance, Nader proposes draconian measures to ensure “corporate democracy.” He would strip officers of their decision-making powers and thrust the shareholders—willing or not—into active control of the corporation. Nader goes so far as to argue that his proposal would lead to the “abolition of the most rigid, totalitarian system that comes under the guise of democratic election.” Hessen ridicules Nader’s notion of corporate democracy, noting that “Equating the options open to shareholders and Soviet citizens would be comical if it were not so morally obscene.” He goes on to demolish Nader’s utopian view of nineteenth century corporate democracy, and concludes that “\[f\]ar from being the antithesis of free choice and continuous accountability,… the publicly traded giant corporation is the highest embodiment and expression of these ideals.” Hessen also disputes the contention that shareholders are victimized by corporate officers and directors, arguing that, “in fact, officers and investors are allies, not adversaries.” He points out that there is no reason to believe shareholders want to spend their time managing the company, and that the threat of a swift, massive, sell-out is one of the most powerful safeguards for shareholders. In moving to the related issue of the relative permissiveness of state incorporation statutes, Hessen catalogues the inaccuracies of many of Nader’s claims, throwing the accuracy of Nader’s entire work into question. He also dissects the inconsistency of Nader’s contentions that, for instance, stockholders are poor and unfairly deprived of their dividends, while simultaneously rich and feasting off the helpless consumer. Hessen confronts the demagogic charges as well. Nader contends that, among other things, competition has been lessened, advertising artificially maintains market shares, large firms are immune to competitive pressures, consumer choices are restricted, and economic stagnation has set in—all because of the existence of corporations. Hessen demolishes the factual foundations of these contentions, as well as Nader’s proposal for an antimonopoly court to break up large companies. After exploring the impracticalities of Nader’s scheme, Hessen acidly points out: > But if one company holds more than 12 percent of the market, or if four companies hold more than 50 percent, whose rights have been violated? Who has been wrongfully deprived of anything? By what right and in whose name does Nader propose to veto the verdict of the marketplace? And why are the rights of producers to be denied in the name of his axiom? If a man described as a consumer advocate proposes to break up companies that have supplied products of proven excellence and acceptability, what would a “consumer enemy” do? Hessen’s final chapter shows no mercy in ridiculing Nader’s proposals and behavior. Typical is his comment on Nader’s appeal to the United Nations for international control of multinational corporations: > To whom did Nader address his attack on corporate oligarchy and his plea for international corporate democracy? To the representatives of Leonid Brezhnev of the U.S.S.R.,... of Idi Amin Dada of Uganda...and other world leaders whose everlasting devotion to democratic principles and institutions was beyond doubt. He also scores the far-reaching potential of Nader’s proposals, which could be extended to churches, unions, educational institutions, and the media. He suggests that once the “subjugation” of the corporation “is accomplished, the forces of goodness can nominate other candidates for federal chartering.” Finally, Hessen exposes the sophistical use of the phrase “private governments” to characterize corporations, which eliminates the distinction between economic and political power. He points out that, unlike government, business cannot coerce, _unless_ it is able to grab control of the levers of political power to shield itself “from both foreign and domestic competition by means of subsidies, loan-guarantees, protective tariffs, import quotas, and arbitrary licensing requirements.” Even then, Hessen points out, the solution is not greater federal regulation, but less government power to bestow special favors. Hessen concludes with a look at Nader’s utopian society — decentralized, opposed to affluence, and governed through mandatory civic obligations. A society where the arbitrary standards of a few govern. A society where freedom is a low priority. Indeed it is a view of society shared with the kings of England, who Hessen notes, failed to “recognize the principles of individuals rights \[and\]freedom of association.” This disregard for freedom threatens all Americans. Hessen says of Nader: Instead of holding that government is the protector of man’s inalienable rights, he believes that government is the creator of rights, which it can revoke at will. His persistent use of the vague and rubbery phrase “the public interest” serves the same purpose as the theory of the divine right of kings to justify the government’s exercise of arbitrary and unlimited powers. This book does provide the definitive answer to Ralph Nader and his fellow “miscorporatists.” But it is limited in scope: it should be followed by volume two—written by Hessen, of course—tracing the historical role of the corporation in America. The enduring strength of _In Defense of the Corporation_ is its emphasis on morality. Hessen does not get lost in pretentious discussions of legality and efficiency; instead, he boldly declares, “A proper defense of corporations must stress that they are created and sustained by freedom of association and contract, that the source of freedom is not governmental permission but individual right....” It’s a message worth repeating. Doug Bandow is an attorney and writer, who is now working at the White House.