Daniel J.H. Greenwood

Outline of The Problem of Business Organizations

• I. What is a business organization
• A. Organization (a political, sociological entity to be governed)
• B. Property (a thing to be owned)
• C. Legal Fiction (really something else: its owners under a different name)
• D. Nexus of contracts
• II. What is a business organization
• A. Pursuit of profit?
• Legal or accounting profit? — no
• B. Production of goods or service for sale
• III. Types of organizations
• A. Classifications by ownership
• 1. Sole Proprietor (with or without employees)
• 2. Partnership
• 3. Cooperative
• Producer
• Consumer
• Employee
• 4. Corporation
• Close
• Public
• 5. Market (Lloyds)
• 6. Not-for-profit structures
• Self perpetuating board
• Membership organizations
• 7. Public or quasi-public (QUANGOs)
• B. Classifications by command structure
• 1. Bureaucratic
• 2. Market
• 3. Spokes
• 4. divisions
• C. Classifications by regulatory statutes
• 1. Agency (common law)
• 2. Partnership (UPA, RUPA)
• 3. Limited Partnership (largely obsolete)
• 4. Limited Liability Company and Limited Liability Partnerships (State LLC, LLP Acts)
• 5. Close corporations (state close corporations acts, IRC subchapter S, IRC subchapter C)
• 6. Public corporations (state corporations acts (RMBCA as a model only), 1934 Act, 1933 Act, state Blue Sky Laws, IRC subchapter C)
• 7. Regulated industries: Banking, insurance, etc. (State and Federal regulatory statutes; sometimes (e.g. banking) special incorporation statutes)
• 8. Not-for-profits (state statutes for cooperatives, condominiums, churches, and generic not-for-profits)
• 9. QUANGOs (special statutes)
• IV. Participants, inputs and the question of who is the firm
• A. Capital
• B. Labor
• C. Management
• D. Customers
• E. Suppliers
• F. Tort and pollution victims
• G. Neighbors, regulators and community at large
• V. Ownership
• A. Attributes of ownership:
• 1. to create and to destroy (close down)
• 2. to hire and fire
• 3. to make basic investment decisions
• 4. profit as opposed to wages
• a. entity-based pay vs. individual performance based commissions or wages/salary
• b. Economists speak of "right to receive residual return": is that meaningful?
• 5. right to manage: determine how job will be done
• 6. right to change the rules or to not be victim of rule changing (as opposed to employee at will)
• B. Not always easy to determine who has these rights
• 1. Like property law : BUNDLE OF RIGHTS
• 2. separation of management and control
• 3. Professional (or skilled labor)'s right to determine how to do job
• 4. Salesmen: profit-based pay (vs. sales based commissions), if based on entity profit, looks more like profit sharing than wages.
• 5. Tenure (property right in job?)
• 6. limited rights of shareholders
• a. no right to govern
• b. most fundamental shareholder rights can be changed without shareholder vote
• c. staggered boards and managment contracts -- no right to fire
• 7. Creditors rights
• a. formal: legal and contractual
• (1) in bankruptcy: to govern
• (2) fraudulent conveyance
• (3) covenants
• b. informal
• (1) close banking relationship
• (2) need to return to market for further financing.
• VI. Salomon Brothers Case Study:
• A. Ownership
• 1. looked like still a partnership
• a. shareholders had basically creditors rights
• b. but after scandal, ??
• 2. Some employees paid based on enterprise (or part of enterprise) profits
• 3. was it shareholders or creditors that led to the new regime?
• 4. A market or an organization?