Corporations
As defined in lexico, a corporation is a large company or group of companies authorised to act as a single entity and recognised as such in law. It is thus, an artificial person and has the authority to preserve certain rights in perpetual succession. The market value of any corporation can generally be studied by its market capitalisation, which is the price per share multiplied by the number of its shares. In ancient Rome, cities and over time some community organisations were treated as corporations. ‘Publicani’ were such private firms which served various community functions. These were contracted by the Roman republic to build public structures and collect taxes. This system however, collapsed gradually because of political and social leavenings.
It was in 1602 in Netherlands, ‘the first modern economy in the world’, that a company was listed in stock exchange for the first time, hence pioneering the concept of stock exchange with the Amsterdam Stock Exchange. The company listed was the Dutch East India Company and this was essentially done to finance it in its endeavours of the highly risky voyages to Asia, specifically India through which they brought spices, silks and other valuable commodities to Europe. There was at the time a furious race amongst influential European nations to establish their hegemonies over other resource rich regions in Asia, Africa and Oceania; hence this was soon followed by England issuing its own joint stock company. These changed the existing dimensions of investment by offering dividends on their stocks, which depended on all proceeds of the company rather than a single voyage, and this was alluring both for the investors and the companies.
Modern corporations are governed by the board of directors, who are elected by the shareholders and are deemed responsible for the company’s performance. They either hire or nominate a CEO who is in turn answerable to them. Hence, it is often called a shareholder democracy, where shareholders are essentially the owners of a corporation. Not for profit corporations, however are not owned by anyone and are not subject to corporate profits tax. Their central focus is not to generate profits, but work towards their founding goals. Such corporations are governed by a self-perpetuating board of directors and they do not issue dividends. Traditionally, the sole reason of buying shares was dividends- the earnings which the company periodically distributes to its shareholders. Dividends are also sometimes issued as stocks(stock dividends) instead of real money, and these are not subject to any taxes. But nowadays, many companies don’t offer any dividends at all as they believe in re-investing in the company, and the only way to earn money is through capital gains, which as a redemption isn’t taxed until one sells it. There are generally two types of stock pertaining to this- common and preferred. The firm is not legally obliged to pay either of them dividends, but if and when it does, it is contractually obliged to pay it first to the preferred stocks, which have a fixed dividend while that of the common stock is subject to change at the discretion of the firm. Sometimes, to pay back their investors, corporations just repurchase their shares from the investors. This maintains the percentage share of the investors in the company and such activity is not subject to any taxes.
A corporate is governed by a corporate charter, which in turn is directed by the principles of the constitution of the region it is serving in. By the principles of shareholder democracy and corporate charter-which is akin to a constitution, one could say that private or public corporations are by nature microcosms of a democratic country-which too could be viewed as a single entity. The charter generally doesn’t mandate dividend payments, share repurchases, warrant issuances and debt raising. All this is left to the discretion of the board, which is in turn elected by the shareholders. But here, voting is subject to several conditions that are stipulated by companies, like many corporations have different classes of voters and either the lower classes have lesser voting rights or they do not have any voting rights at all. Eg- companies like Alphabet and Under Armour do not grant any voting rights to their class C share holders.
What do corporations do to raise money? There are generally three ways to generate finances: retain earnings, debt and share issuance. The first method is simple and straightforward- to earn, save and then spend the money on the stipulated project, but sometimes companies do not have either the time or resources to execute this. The second is as it sounds, to borrow from banks or other entities or to issue bonds. There is another way and that is by issuing new shares and putting them on the market. This dilutes the share percentage of the existing investors, but can prove to be an effective mechanism to generate money.
