Britannica Money

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Modern trends

The sheer size of the largest limited-liability companies, or corporations—especially “multinationals,” with holdings across the world—has been a subject of discussion and public concern since the end of the 19th century, for with this rise has come market and political power. While some large firms have declined, been taken over, or gone out of business, others have grown to replace them. The giant firms continue to increase their sales and assets by expanding their markets, by diversifying, and by absorbing smaller companies. Diversification carried to the extreme has brought into being the conglomerate company, which acquires and operates subsidiaries that are often in unrelated fields. The holding company, with the conglomerate, acts as a kind of internal stock market, allocating funds to its subsidiaries on the basis of financial performance. The decline or failure of many conglomerates, however, has cast doubt upon the competence of any one group of executives to manage a diversity of unrelated operations. Empirical evidence from the United States suggests that conglomerates have been less successful financially than companies that have had a clear product-market focus based on organizational strengths and competencies.

The causes of such vast corporate growth have found varying explanations. One school of thought, most prominently represented by American economist John Kenneth Galbraith, sees growth as stemming from the imperatives of modern technology. Only a large firm can employ the range of talent needed for research and development in areas such as aerospace and nuclear energy. And only companies of this stature have the capacity for innovating industrial processes and entering international markets. Just as government has had to grow in order to meet new responsibilities, so have corporations found that producing for the contemporary economy calls for the intricate interaction of executives, experts, and extensive staffs of employees. While there is certainly room for small firms, the kinds of goods and services that the public seems to want increasingly require the resources that only a large company can master.

John Kenneth Galbraith, 1968.

Ota Richter/AP Images

Others hold that the optimum size of the efficient firm is substantially smaller than many people believe, and some research has shown that profit rates in industries having a large number of smaller firms are just as high as in those in which a few big companies dominate a market. In this view, corporate expansion stems not from technological necessity but rather from an impulse to acquire or establish new subsidiaries or to branch out into new fields. The structures of most large corporations are really the equivalent of a congeries of semi-independent companies. In some cases these divisions compete against one another as if they were separately owned. The picture has been further complicated by growth across national boundaries, producing multinational companies, principally firms from western Europe and North America. Their enormous size and extent raise questions about their accountability and political and economic influence and power.

The impact of the large company

While it is generally agreed that the power of large companies extends beyond the economic sphere, this influence is difficult to measure in any objective way. The processes of business entail at least some effort to ensure the sympathetic enactment and enforcement of legislation, since costs and earnings are affected by tax rates and government regulations. Companies and business groups send agents to local and national capitals and use such vehicles as advertising to enlist support for policies that they favour. Although in many countries companies may not legally contribute directly to candidates running for public office, their executives and stockholders may do so as individuals. In the United States, however, a 2010 Supreme Court decision gave companies the right to engage in political advertising. Companies may, however, make payments to lobbyists and contribute to committees working to pass or defeat legislative proposals. In practical terms, many lawmakers look upon companies as part of their constituency, although, if their districts depend on local plants, these lawmakers may be concerned more with preserving jobs than with protecting company profits. In any case, limited-liability companies are central institutions in society; it would be unrealistic to expect them to remain aloof from the political process that affects their operations, performance, and principles.

The decisions made by company managements have ramifications throughout society. In effect, companies can decide which parts of the country or even which parts of the world will prosper and which will decline by choosing where to locate their plants and other installations. The giant companies not only decide what to produce but also help to instill in their customers a desire for the amenities that the companies make available. To the extent that large firms provide employment, their personnel requirements determine the curricula of schools and universities. For these reasons, individuals’ aspirations and dissatisfactions are likely to be influenced by large companies. This does not mean that large business firms can influence the public in any way they choose; it is simply that they are the only institutions available to perform certain functions. Automobiles, computers, and electric toasters must come from company auspices if they are to be provided at all. Understanding this dependence as a given, companies tend to create an environment congenial to the conduct of their business.

The social role of the large company

Some company executives believe that their companies should act as “responsible” public institutions, holding power in trust for the community. Most companies engage in at least some public-service projects and make contributions to charities. A certain percentage of these donations can be deducted from a corporation’s taxable income. Most of the donated money goes to private health, education, and welfare agencies, ranging from local hospital and charity funds to civil rights groups and cultural institutions.

At the other extreme, it is generally agreed that companies should reject the notion that they have public duties, that society as a whole will be better off if companies maximize their profits, for this will expand employment, improve technology, raise living standards, and also provide individuals with more money to donate to causes of their own choosing. A cornerstone of this argument is that management has no right to withhold dividends. If stockholders wish to give gifts themselves, they should do so from their personal funds. On the other hand, some critics complain that large companies have been much too conservative in defining their responsibilities. Not only have most firms avoided public controversy, but they also have sought to reap public-relations benefits from every sum that they donate. Very few, say the critics, have made more than a token effort to promote minority hiring, provide day-care centres, or take on school dropouts and former convicts. Companies have also been charged with abandoning the central cities, profiting from military contracts, misrepresenting their merchandise, and investing in foreign countries governed by repressive regimes. A perennial indictment has been that profits, prices, and executive compensation are too high, while the wages and taxes paid by corporations are too low.

In the late 20th century a new school of critics emerged who stressed the social costs of the large company. They charged that automobiles, pharmaceuticals, and other products were badly designed and dangerous to their users. The consumer movement, led by such figures as American lawyer Ralph Nader, was joined by environmental critics who pointed to the quantities of waste products released into streams and into the air. Local and national laws were passed in an effort to set higher standards of safety and to force companies to install antipollution devices. However, the costs of these measures are inevitably passed on to the consumer. If a nuclear power plant must have cooling towers so that it does not discharge heated water into an adjacent lake, for example, the extra equipment results in higher electricity bills. Most companies are hesitant to take such steps on their own initiative, fearing that they will need to raise prices without thereby increasing profits. Society, however, is already paying for the costs of traffic congestion, trash removal, and nutritional deficiencies. The prices charged by companies are far from reflecting the total impact that the manufacture and consumption of their products have upon human life.