The corporate veil. The standard use the term refers to the ability of individuals who own or work for corporations to protect themselves from lawsuits by invoking the laws and clauses which regard the corporation as a separate and distinct entity, apart from the individual. That is to say if you slip and fall at McDonald’s the manager, employees and shareholders of the corporation are not personally liable for your injuries and only the assets held in the corporation’s name are at risk for seizure (assets ranging from dollars in the bank to actual physical assets).

On some occasions, however, when it appears a corporation has been formed solely to protect the assets of individuals from seizure when wrong doinging knowingly occurs, the legal system can strip the shareholders of their immunity of liability and personal assets can be ceased. This known as piercing the corporate veil.

Over the last one hundred and fifty years corporations have grown in stature and power to become one of the most influential and transformative institutions in our lives. In the United States they dominate everything from the allocation of resources, to entertainment, to politics. Given the immense role they play in our lives, it is absolutely critical to understand the benefits and limitations transformative organization.

The corporate veil has evolved from being a legal mandate of limited liability to the defining characteristic that forms the basis of the corporate identity. That is to say when Google, GE, or Federal Express act or engage in an activity, we think of and refer to the company by its legal registered trade name and rarely consider the hundreds or thousands of people who are mobilized to make such an action a reality. There is nothing wrong with this of course, it does not really hurt anyone, and far easier to say Google than to list the employees of the Adwords division of Google. However, given the power and efficiency it gains through the leveraging and organization of employee time, large corporations can be considered giants among men, seemingly acting under a will of their own. One man outside the corporate has little hope in changing the chosen course of a corporation. From first hand experience I’ve seen that even high level executives within large corporate organizations have difficulty adroitly steering the direction of corporations. The reason? Historical actions and procedures have inertia, changing them takes a great deal of energy, even from inside. In fact there is an entire discipline of management focused on this problem– change management.

So how does the modern manifestation corporate veil effect small business owners and entrepreneurs? Simply put, the same mechanism that forms corporate identity and shields individuals within organizations from personal liability also shields corporations from innovation from the outside. As a small business owner or entrepreneur it is extremely difficult to engage corporations in any type of meaningful dialogue. Let’s be honest here, a corporation doesn’t see eye to eye with an individual and unless the individual is well connected and knows who to contact within an organization. The average innovator cannot sit down and have lunch with the corporation to talk about a great idea that will throw off an additional three million dollars a year for the both parties. For most individuals the only contact within a corporation they have is the public relations department’s general e-mail contactus@yourcorporation.com , and who knows if their idea or concept will be passed to the appropriate party if given to them.

Currently the way outside ideas flow into corporations is through the acquisition of companies. In industries where innovation drives market share and profit this process makes sense as people with innovative ideas join with venture capitalists to form companies that are purchased by corporations when they mature enough. The problem, however, is that not every good or more efficient idea warrants the involvement of venture capitalists. Odds are a start-up cannot be formed if idea is as simple as improving or adding additional functionality to a process specific to an organization’s particularities. This leaves leave thousands of would be good ideas and innovators neglected, disenfranchised, and alienated.

That said, given my belief in the market’s ability to close inefficency gaps and the immense leveling abilities of the internet, it is only matter of time before this clear inefficiency is addressed. If done well, someone will become very wealthy. Hell, I’m thinking about it so there must be something to it…

Just idea…

Filed under: Corporate America, Musings |
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