When I was little, what gave me one of the most beautiful childhood memories was snuggling in warm blankets in the living room and watching cartoons with my brother in the evening. Among our favourites was an animated movie titled Monsters Inc. We watched it over and over again and although we were not speaking English well at all back then, we began to understand that characters, the big blue fluffy one and the small round green one, were monsters. But what in the world meant this short word “Inc.”? Was it a name or perhaps a mistake?
The mystery of my childhood is now finally revealed. “Inc.” stands for “Incorporated”, meaning that Monsters was a corporation – one of the most successful ones in the monsters’ world, according to Pixar. A word corporation stems from a Latin term “corpus” meaning “a body”. It is a company that combines and is led by different members but is legally recognized as one – just as it would have its own “body”. The main idea is for a corporation to act like a single person and therefore also have many special rights like an individual would, for example it can borrow or lend money, hire employees, sign contracts, pay taxes and be considered as one legal body in legal proceedings.
All businesses or companies need leadership, and so do corporations. They are governed by a Board of Directors which is responsible for accepting all the important decisions for the firm. In addition, the board hires a CEO (Chief Executive Officer) or a president who holds the highest position in the company. The person’s job is to report to the Board of Directors and cooperate with it to manage the firm well.
All the decisions that the management makes need to be in accordance with the Corporate Charter, also known as the company’s constitution, which defines how the organization and processes within it are supposed to work. Even though a Board of Directors and a CEO can freely change it however they want, it still must follow laws of a country where the corporation has its headquarters (in other words, where it is incorporated).
There are two main types of corporations: for-profit and non-profit ones. For-profit corporations are owned by shareholders, who buy shares or a fraction of a company on a stock market. Therefore, they become owners of the certain fraction they have bought. Why do they invest their money? Because, if the value of the company they have invested in grows, so does the value of their shares. Then, they can sell them for a higher price and make a profit.
In for-profit corporations, where shareholder democracy rules, shareholders also have voting power. They elect all members of the Board of Directors. Owning one share typically means having one vote.
Running for-profit corporations is not easy, requiring a lot of time and especially a lot of money. Let us say that one of them wants to grow by building a new factory. No matter how excellent their idea is, it can not be executed without a greater amount of money. If the firm is already successful, like Apple, this would not be a problem, because so far, it has earned so much that it has a lot of capital saved up. But it may take years or even decades to reach this level of success. On the other hand, start-ups may raise money by borrowing it from banks and issuing debt. But that would make their business even more risky, because they would be owning a lot of money.
There is also a third way, with dilution. It is a process of issuing new shares and offer them on a stock market to investors, potential shareholders. Raising money this way is less risky for a corporation. A risk is carried by those who buy shares, so in a case of bankruptcy, a company does not have to return any amount of money.
What a corporation needs to persuade investors to invest into it is to have promising statistics and a solid business plan in the first place. But, how to keep them and become interesting to new ones? The answer is – by paying them dividends, meaning to give away some money from a corporation’s earnings to them. Companies are not obligated to pay dividends, but psychologically looking, it is a good thing to do because it signals to the stock market’s world that they are really making money. It is quite common to do so especially among larger corporations, because otherwise, investors start to ask themselves if they have invested into a real firm or is it maybe a fraud.
Another group of corporations are non-profit ones. When I heard of them for the first time, I was a bit confused. I knew that non-profit organizations existed and that they represented charity. But it was not clear to me how a corporation can be non-profit. I had always imagined that its main goal is to make a profit, and as far as I had known, charity and profit are the last things that go together.
Here is the catch: non profit corporations do make a profit – all types of corporations do. The only difference is, who or what the profit is for. For-profit ones share its earnings among the shareholders, who are also the owners. On the other hand, non-profit ones are not owned, and all their profits are spent for a good cause, to benefit individuals or communities in need.
Do not get me wrong, even non-profit corporations can have employees who get paid. But, their salary is fixed, so even if the company makes a lot of money, none of the staff earns more because of it – all the money that is left is kept in the company and is later spent on charity.
Considering everything I have written in this article, it seems that corporations are complex, yet very systematic and organized companies. But in reality, not all of them follow the rules. In the world of business, there is a lot of corruption nowadays. Many corporations are managed by directors who did not get to their position in a fair, democratic way. Sometimes, they bribe their colleagues, offering them nice jobs in exchange for a vote on an election into the Board of Directors. Another example of what sometimes happens is that if a non-profit corporation does really well, their goal of helping those in need might get lost and then employees find a loop in a law to accumulate collected money. Nevertheless, these are just exceptions. Most corporations treat their employees fairly, elect members democratically and, with their success, contribute a lot to this world. If they perform in a cartoon for children, they also bring a lot of siblings’ love, so even better.