Essentially, corporation theories fall into three broad categories— contractual, communitarian,

and concessionary. Of these, contractual and communitarian theories are the two extremes of the

spectrum. They, respectively, present companies as products of free individualism bound by

mutual contracts, and as instruments of the society or the state, engaged in production and

delivery of goods and services for the benefit of the community. The concessionary model is in

many ways a middle-of-the-road approach to corporations between the two extremes; depending

upon the geography and the economic status of a country, a number of seamless compromises

between the extremes are also possible.

Contractualism

Dine sub-groups the contractual models into legal contractualism and economic contractualism.

In legal contractualism, two or more parties come together to make a pact to carry on

commercial activity and it is from this agreement that a company is born. "Internally, the

corporation is regarded as an association or aggregation of individuals; it comprises contractual

relations between members inter se, and members and management." In effect, this theory

supports the view that private enterprise should have the freedom to enter into entrepreneurial

contract in furtherance of business and private gain, and the regulatory role of the state to that

extent is circumscribed so long as the general requirements of the law of the land regarding

lawful objectives, fair competition and so on, are complied with.

This theory is enshrined in Indian company law, which stipulates:

"Subject to the provisions of this Act, the memorandum and articles shall, when registered, bind

the company and the members thereof to the same extent as if they respectively had been signed

by the company and by each member, and contained covenants on its and his part to observe all

the provisions of the memorandum and articles."

Economic contractualism is based on the premise that a company is a voluntary association

between shareholders rather than a creation of the state. Thus viewed, an incorporated company

is therefore fundamentally a nexus of contracts? Corporate constituents contract not with each

other, but with the corporation. A bond indenture is thus a contract between the corporation and

its creditors. An employment agreement is a contract between the corporation and its workers,

and a collective bargaining agreement is a contract between the corporation and the union

representing its workers. If there is default in meeting the obligations under these contracts, it is

the firm that will be sued, not its constituents, or those managers who decided not to perform. It

is the entity that is under obligation to perform, with failure leading to penalties which will be

paid out of the entity's resources rather than those of its shareholders or managers. The various

constituencies thus need to be linked to the nexus that is the firm, and not to each other.

The major implication of the contractual theory is that it supports the shareholders as the owners

of the corporation, with its concomitant obligation that the company, its board of directors and

the executive are all accountable to the shareholders to the exclusion of any other constituencies

or stakeholders. Within the contractual paradigm, shareholder primacy and managerialism sit on

opposite ends of the spectrum of control and authority, leading to the discussions on shareholder

primacy, board suzerainty and several shades of intermediate variations. The contractual theory

of the corporation is also at the root of the hard position taken by many eminent economists and

other academics that rule out any social responsibility being imposed on corporations. In

particular, "economic contractualism, by excluding the social responsibility of corporations,

rejecting regulation, and weakening control mechanisms within the corporation, has created

global monsters."

Communitarianism

This approach is premised on the basic assumption that grant of company status by society as

represented by the state, is not just a concession or privilege (especially with the added incentive

of limited liability to the shareholders), but is equally an instrument for the state to utilise for

public good. In this sense, this theory is positioned diametrically opposite the more individualist

and laissez faire approach of contractual theories. The standard of a corporation's utility to

society is not to be judged on the basis of individual wealth created for its shareholders but on

the criteria of whether it contributes to honouring individual dignity and promoting overall

welfare. This is in contradistinction to conventional wisdom, as articulated by Milton Friedman

and others, that "when profit maximization by stockholders had ceased to be the narrow focus of

the company, business people would not know what interests to serve."

This theoretical approach also lends credence to the oft-quoted sentiment that a corporation

exists and operates within a society, with its sanction and license, which can be withdrawn or

diluted if the societal expectations are not sub served.

This theory justifies state intervention.in, and regulation of, corporate operations. In its extreme

connotation, most communist and fascist regimes embraced this theory wholeheartedly, mainly

because it helped to rationalise and support the use of corporate and business resources for

advancing political ends of the state. In its more benevolent manifestations, this theory imposes

corporate responsibility and accountability to the stakeholders and society at large, and in many

ways acts as a sobering counter-weight to potential corporate abuses of power and inclinations

towards uncontrolled greed. But, as Deakin and Hughes caution, " a major difficulty with

stakeholder theory, at least as it has been applied in Britain, is that the term 'stakeholding' has

been used to refer to a very wide range of interests which are loosely related at best," and "if the

category of stakeholding interests is widened to include those of all potential consumers of the

company's products, for example, or to refer to the general interest of society in the sustainability

of the environment, there is a danger that the idea of stakeholding will cease to be relevant."

Concessionairism

As the name implies, this theory is based on the premise that incorporation especially with

limited liability is a concession granted by the state or the sovereign in case of kingdoms. This

approach is distinguished from the communitarian approach in that it recognises only the state or

the sovereign as having the authority to ensure that the corporate governance structures are fair

and democratic. There is no injunction that the company should realign its aims to reflect social

aspirations of the state.94 Organisations that were granted corporate personality by writ or letters

from the sovereign were labelled bodies politic, and derived all their powers and authority as

delegates of the sovereign or the state. Most of the chartered companies of the sixteenth and

seventeenth century fall into this category.

It would be interesting to reflect on whether state owned enterprises incorporated by

parliamentary legislation also fall into this category. Perhaps they would, since in a sense they

are chartered into existence by an act of the state. Many of the Indian public sector corporations,

banks, insurers and development financial institutions would thus qualify to the concessionaire

category, in that they derive their authority and operational domain, often monopolistic, by virtue

of their incorporating legislation. The problem arises, as it has already been observed, when such

concessionaire corporations invite and accept non-government shareholders in their capital

structure. The dilemma for the capital market regulator then is whether to protect the interests of

the external shareholders as required by the statute incorporating the regulator himself, or to

respect the exclusive authority of the state (as represented by the government of the day and its

administrative and financing ministries) to devise appropriate governance processes for such

corporations, even if they led to abridgement or infringement of non-governmental shareholders'

rights and interests.