[Reporter’s Reading] The Owner of a Company Is the Company Itself

[Asia Economy Reporter Byunghee Park] "What is a Company?" is a book that explains how companies are created and operated. Ultimately, it makes readers think about the perspective from which companies should be viewed.

The author, Professor Jangseop Shin of the Department of Economics at the National University of Singapore, emphasizes that understanding the essence of companies, the core of the economy, is essential to overcoming prejudices and misunderstandings about economics and business, and calls for economics centered on "theory of the firm."

The book starts with the simple and clear proposition that "shareholders are not the owners of the company." Shareholders only own shares, but the company itself is the owner. A company exists as a corporate entity in the form of a corporation. Today, most companies take the form of joint-stock companies through corporations. The concept of a corporation dates back to Roman times. A corporation is a conceptual entity created because it is necessary for conducting economic activities.

To explain easily, Professor Shin writes a fictional growth story of an AI pet company called "Nae Sarangi" like a novel. The founders of Nae Sarangi are three: scholars Kim Jeonjin and Lee Salpim, who hold patents related to AI puppies, and Park Hyunchal, a tycoon with assets of 30 billion KRW who invested 5 billion KRW as startup capital.

They decide to follow a lawyer's advice to establish Nae Sarangi as a corporation and divide the corporation's issued shares among themselves. After creating the corporation, actual economic activities became possible. Without a corporation, hiring employees would require each of the three to sign individual employment contracts. But after establishing the corporation, only one contract under the company name is needed.

Although a corporation is only a conceptual entity, it becomes a social entity as the subject of substantial economic activities such as labor, financial transactions, and production. This is similar to how the state, religion, or ethnicity exists as important social entities that cannot be directly seen or touched.

Importantly, when establishing a joint-stock company, the patents of Kim Jeonjin and Lee Salpim and the money of Park Hyunchal become the company's assets, and ownership transfers to the corporation, that is, the company. Asset division takes place. Thus, the three founders as shareholders only hold ownership of the shares.

The Company as a 'Person' Owning Necessary Assets
Through Asset Division After Corporation Establishment
Founders Have Limited Liability in Company Crisis
Company Assets Protected in Founders' Personal Crisis

The company exists as a separate corporate entity owning the assets necessary for business. This method is also beneficial for the founders. If problems arise in the company, only the company’s assets are liable. In Park Hyunchal’s case, even if the company faces issues, losses do not occur beyond the initial 5 billion KRW investment out of his total 30 billion KRW assets. Asset division functions to protect the entity by limiting the founders’ liability in case the company fails.

Conversely, if one of the founders causes personal problems, the company’s assets are protected. Even if Kim Jeonjin has personal financial troubles, because assets are divided, creditors who lent money to Kim cannot touch the Nae Sarangi company.

The Nae Sarangi group grows rapidly. It conducts the largest initial public offering (IPO) since the establishment of the Korea Exchange and quickly rises to the ranks of the top five conglomerates. Among the three founders, Kim Jeonjin, who takes on the role of CEO, faces unexpected difficulties. The media labels Nae Sarangi as a chaebol (conglomerate), and the Fair Trade Commission designates Kim Jeonjin as the head of the group. Kim, a computer engineer who has spent his life in research, suddenly has to explain his position frequently.

The author points out the media’s prejudice against companies and the unfairness of government regulations while describing the difficulties Kim Jeonjin faces. He also expresses discomfort with regulations on cross-shareholding and circular shareholding.

For example, Toyota Motor Corporation in Japan has the founding Toyoda family owning only about 2% of shares. However, the Toyoda family maintains stable group control through cross-shareholding and circular shareholding. Moreover, family management or major shareholder management is much more common worldwide, including in the U.S., than professional management systems. Family management has been shown to be more efficient than professional management.

Criticism of the Unreasonableness of Cross-Shareholding and Circular Shareholding Regulations
Desirable Governance is One That Produces Good Management Results

Professor Shin criticizes the unrealistic assumption that a professional management responsibility system is the ideal that Korean companies should achieve. He points out that this unrealistic ideal forms the basis of Korea’s fair trade policies. In the U.S., professional management systems are only a small minority, with most companies under major shareholder management. He argues that a special case has been generalized and set as an ideal in Korea.

The author ultimately emphasizes that the history and environment of corporate growth are diverse, so this diversity and the inevitably formed various governance structures must be recognized. He also stresses that management should be practical and realistic, and that governance producing good management outcomes is good corporate governance.

He emphasizes that companies should strive to provide cheap and high-quality products and services and pursue sustainability because the existence of companies itself creates social value such as job creation and income distribution.

The author stresses that companies should aim for long-term prosperous communities by sustaining themselves. To this end, companies must establish their own ideology. Having a philosophy is also to prepare against extreme attacks from shareholder value theorists and stakeholder theorists.

Shareholder value theorists think of businesspeople as slaves who must earn as much money as possible and deliver it to shareholders. Stakeholder theorists criticize companies and businesspeople for focusing only on making money and neglecting society.

The author points out that most people who studied advanced management at famous Anglo-American business schools are indoctrinated with shareholder value theory, while most scholars and educators criticizing shareholder value theory are biased toward stakeholder theory, resulting in extreme behaviors on both sides. Ultimately, companies must strike a balance between the two, and for that, having their own philosophy is important.

(What is a Company? / Written by Jangseop Shin / Bookscope)