Corporations

I've included below a message from a few years ago that give some taste of my earlier views on corporations and how corporate law might be changed to make corporations more responsible. After that I'll make a few comments about what is wrong with those comments and what ideas I'm thinking about today.


This is another in my series of messages about the use of systems engineering methods for social systems. I have previously noted my view that all of law, government, administration and business managment are forms of social technology, which is at a primitive stage compared with the physical technology we use to build airplanes and computers.

My focus in this message is corporate law and the concept of ownership, with particular attention to iterated owernship and control.

Our corporate law is based the very old idea of treating a corporation as a person, with very much the same rights as a human being, including the right to own property. But what happens if a corporation owns or invests in another corporation?

Suppose Mr. Magnus P. Capitalist owns 51% of Acme Investments, which owns 51% of Better Industries, while Mr. Richard Investor owns 49% of Acme Investments and also hold 49% of Better Industries. Who really owns Better Industries, and who controls it?

Under most corporate charters and agreements, as supported by the existing system of corporate law, Mr. Capitalist is not considered to own any of Better Industries, but he would control it, via his majority control of Acme Industries.

But there is a very real sense in which Mr. Capitalist does own some of Better Industries, regardless of the legal technicalities, since his 51% share of Acme Investments give him about 51% of the 51% of Better that Acme owns, or about 26 percent. By the same reasoning Mr. Investor's 49% of Acme would add about 25% to the 49% he of Better Industries that he owns personally, for a total of 74 percent.

So there is an obviously very real sense in which Mr. Investor owns almost three times as much of Better Industries as does Mr. Capitalist. Yet Mr. Capitalist has effective control of the company.

We might observe that corporate investment and control of other corporations is extremely common, and apparently fundamental to capitalism, even though we have abolished slavery and no longer allow a human person to own another person.

Corporate ownership of another corporation which in turn may own another corporation is what I term iterated ownership, and we might similarly talk about iterated control, where one corporate entity controls another.

The problem with iterated ownership and control is that a single power-hungry individual, human or corporate, can repeatedly use majority control of a smaller corporation in acquiring majority control of larger corporations, thus leveraging a very small investment into control of a very large corporate empire.

If an individual owns 51% of the voting shares of a corporation, he, she, or it can use effectively use all of that corporations assets, or whatever capital can be obtained by borrowing against those assets, in an effort to gain a 51% share of a larger corporation. Then the process can be repeated again and again to gain control of ever larger corporations.

This process depends on our interpretation of iterated ownership and control. If a person owns a corporation which owns another corporation, does he or she own that second corporation as well? What about control? If a person controls a corporation which controls another corporation, does he or she control that second corporation as well?

It seems to me that the answers to these questions are very important, and must make sure our corporate laws reflect the answers we want, and not just whatever answer has historically prevailed.

Two optional "dazzle them with science" paragraphs follow!

In using the term `iterated', I am thinking of modal logic, in which some operator like "possibily" or "necessarily" can be iterated: if something is necessary, is it necessarily necessary, or only possibly necessary? All the philosophical arguments that can arise from this sort of iteration have been boiled down to a set of logical systems which obey various combinations of axioms. One sequence of systems is the sequence labelled "S", from S1 through S5. In S1 all iterated sequences of modal operators have different meanings, whereas in S5 all such sequences collapse, and are equivalent either "necessarily" or "possibly". There is no one write answer, no one right system, but the various systems do help us understand what we mean.]

I think that the way corporate ownership and control generally work under capitalism, iterated control essentially collapses as do iterated modalities in an S5 modal logic. If a human or corporate individual has a controlling interest in Company A, which has a controlling interest in Company B, then that individual effectively controls Company B. But this is not the only possible interpretation of this type of iteration, and it would be possible for our corporate laws to support or enforce an entirely different interpretation, analogous to some different modal logic.

The scenario above seems rather unfair to Mr. Investor, who is deprived of control even though he really has the greatest investment and the greatest right to claim ownership. But the potential unfairness is not what worries me, so much as the overall effect of having a system which can provide so many rewards for predatory behaviour.

Ordinary common sense would suggest that people reduce risk and hedge their investments by spreading their money around several different companies. But a person who cleverly takes the opposite approach of trying to buy a controlling interest wherever possible and using that as leverage in the eventual takeover of more and more companies can reap enormous rewards, and in doing so can plunder the assets of companies and involve them in needless risks.

Since the system rewards such people, there will be some. The existence of a few such people more or less compels others to compete with them in the same game, for fear of being gobbled up. Thus, the system rewards predator behaviour in the first place and then forces others to engage in the same behaviour. The resulting system is highly unstable, and basically just doesn't work very well.

A solution would be to change our interpretation of iterated ownership and control, by changing our corporate laws to encourage or even enforce the idea that control should reflect ultimate invested ownership, according to which Mr. Investor would have 74% of the votes and thus effective control of Better Industries.

I'd appreciate comments on this!


That was what I had to say about this a few years ago, and the only real change is that I no longer see myself as pushing a change in corporate law now. My current view is that we need a social technology to model and simulate laws so that we can test them.

If I arrive at a proposed change in corporate law, based on some analysis like that above, what I'd like to be able to do is run some simulation of a national economy that is sensitive to changes in underlying rules. I think it should be possible to test legal changes on the computer, to see if they really work. I'm trying to figure out ways to do that using some knowlege-base system.


Copyright © 1998 Douglas P. Wilson      



Copyright © 2009   Douglas Pardoe Wilson

Other relevant content:

New: Social Technology through Diagrams

New: Social Techs novel online

New: Social Technology Blog

New: Social Technology Wiki

Please see these web pages:

The main Social Technology page.

Find Compatibles , the key page, with the real solution to all other problems explained

Technological Fantasies , a page about future technology

Social Tech a page about Social Technology, technology for social purposes.  I think I was the first person to use this phrase on the Internet, quite a long time ago.


Roughly corresponding to these web pages are the following blogs :

Social Technology the main blog, hosted on this site, with posts imported from the following blogger.com blogs, which still exist and are useable.

Find Compatibles devoted to matching people with friends, lovers, jobs, places to live and so on, but doing so in ways that will actually work, using good math, good algorithms, good analysis.

Technological Fantasies devoted to future stuff, new ideas, things that might be invented or might happen, such as what is listed above and below.

Sex-Politics-Religion is a blog about these important topics, which I have been told should never be mentioned in polite conversation.  Alright that advice does seem a bit dated, but many people are still told not to bring up these subjects around the dinner table.

I believe I was the first person on the Internet to use the phrase Social Technology -- years before the Web existed.

Those were the good old days, when the number of people using the net exceeed the amount of content on it, so that it was easy to start a discussion about such an upopular topic.  Now things are different.  There are so many web pages that the chances of anyone finding this page are low, even with good search engines like Google.   Oh, well.

By Social Technology I mean the technology for organizing and maintaining human society.  The example I had most firmly in mind is the subject of  Find Compatibles , what I consider to be the key page, the one with the real solution to all other problems explained.

As I explained on my early mailing lists and later webpages, I find that social technology has hardly improved at all over the years.   We still use representative democracy, exactly the same as it was used in the 18th century.  By contrast, horse and buggy transporation has been replaced by automobiles and airplanes, enormous changes.

In the picture below you will see some 18th century technology, such as the ox-plow in the middle of the picture.  How things have changed since then in agricultural technology.  But we still use chance encounters, engagements and marriages to organize our home life and the raising of children.  

I claim that great advances in social technology are not only possible but inevitable.  I have written three novels about this, one preposterously long, 5000 pages, another merely very very long, 1500 pages.  The third is short enough at 340 pages to be published some day.  Maybe.  The topic is still not interesting to most people.   I will excerpt small parts of these novels on the web sometime, maybe even post the raw text for the larger two.


This site includes many pages dating from 1997 to 2008 which are quite out of date.  They are included here partly to show the development of these ideas and partly to cover things the newer pages do not.  There will be broken links where these pages referenced external sites.  I've tried to fix up or maiintain all internal links, but some will probably have been missed.   One may wish to look at an earlier version of this page , rather longer, and at an overview of most parts of what can be called a bigger project.

Type in this address to e-mail me.  The image is interesting.  See Status of Social Technology

Copyright © 2007, 2008, 2009, Douglas Pardoe Wilson

I have used a series of e-mail address over the years, each of which eventually became out of date because of a change of Internet services or became almost useless because of spam.  Eventually I stuck with a Yahoo address, but my inbox still fills up with spam and their spam filter still removes messages I wanted to see.  So I have switched to a new e-mail service.  Web spiders should not be able to find it, since it is hidden in a jpeg picture.   I have also made it difficult to reach me.  The picture is not a clickable link.  To send me e-mail you must want to do so badly enough to type this address in.  That is a nuisance, for which I do apologize, but I just don't want a lot of mail from people who do not care about what I have to say.


Cross-References:

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Copyright © 2009   Douglas Pardoe Wilson