Not only is there no God but try getting a plumber on a Sunday.
Woody Allen
The reason why the Congregation’s treason should never be forgot is that what they had rejected was not a donation, building, or business school but something much more significant—the study of one of the most important ideas in the history of mankind. The idea is not science, the state, or religion. It is not an idea that is attributed to any particular inventor, author, or scholar, or whose origins can be dated with accuracy. But it is an idea that clothes, feeds, and houses us, employs us, and invests our savings. And it is the source of our economic prosperity and the growth of nations around the world.
It is a remarkable idea because it involves conceiving of a person that is of neither flesh nor blood. It is a person like us but not of us, with neither physical presence nor human form. It can contract and be contracted, employ and be employed, sue and be sued, just like us. It is the creation of parliaments not parents, of statute not sex, of the law not lust. It is our doppelgänger and to signify its human form we have given it a name that derives from the Latin for body—corpus. It is the corporation.
The corporate enterprise has its origins in the parallel evolution of two institutions. Remarkably it is a story that has never been very clearly told, and an understanding of it provides important insights into the nature and purpose of the organization we possess today. The first institution is the corporation and the second is the partnership.
The origin of both institutions can be traced back to Roman times.1 In Ancient Rome, there were two types of legal contracts by which people could be joined together. The first was the societas and the second was the collegium. A societas was formed by the consent of the partners, socii, to undertake commercial and other activities. Examples include clothes, financial services, grain, maritime transport, and wine. The partners made a contribution in the form of money, labour, skill, or in-kind goods. They were responsible for the liabilities of the societas and had a right to its claims. They could determine their shares of profits and losses, and some partners could be excluded from losses, though no partner could be entirely excluded from a share of the profits. The societas was dissolved on the agreement of the partners or in the event of the withdrawal or death of a partner.
The societas therefore lacked permanence and did not possess legal personality. There was one exception: the societas publicanorum. It owes its existence to distrust in Ancient Rome of bureaucrats. To avoid them, public services were contracted out to publicani, public contractors, who built and maintained public buildings, minted coins, and collected taxes. Their functions included the feeding of the white geese on the Capitol, which had been recipients of government-sponsored meals ever since 390bc when their honking forewarned the Romans of the approaching Gauls.
These long-term, large-scale public projects required an organizational structure that could persist beyond the term of office of any one publicanus. A solution was found with the creation of the societas publicanorum, whose life continued indefinitely after the departure of any particular partner. It could own property and be bound by contracts arranged by one of its partners. In that respect it bore a close resemblance to the second type of legal form in Rome, the collegium—an association, corpus habere, or corporation—formed by three or more people bound together in office for a common purpose. The collegium could hold property, employ and be employed, and sue and be sued. It was in particular associated with trade guilds of, for example, doctors, dyers, painters, shoemakers, and weavers, and religious associations.
The societas publicanorum could raise finance from shareholders, participes, who traded their shares, partes, just like a modern corporations. By the second century bc, stock ownership in the societas publicanorum was widespread with ‘almost every citizen’ invested in government leases.2 Not only were privatization and contracting-out invented two millennia before Margaret Thatcher, so too was popular capitalism.
The Roman conception of the corporation was an arrangement for the delivery of public services. Corporate property was described as res universitatis, universal property owned by all the citizens of a town or municipality, to distinguish it from individual property. The importance of organized bodies over individuals had of course been well understood by many civilizations over a long period of time. What Roman law introduced was the idea that such organizations could be legal entities in their own right with a legal personality that was distinct from the individuals who comprised them.
It is unclear whether this personality was a legal fiction that depended on the law for its existence or a reality on which the law just conferred certain rights but, in any event, its effect was profound. ‘The corporation law of every modern nation, whether its system of general law be the Civil Law or the so-called English Law, is based on this conception of the Roman Law.’3 ‘It is not often that jurisprudence can make a discovery comparable to the discoveries made by other sciences or arts…but here there is something that we may fairly call a discovery, though it was made by no one man and no one age.’4
The Roman Empire flourished with the societas publicanorum and contracted with its demise. The publicans became ‘unsurpassed in fraud, avarice, immodesty, and audacity’5 and embroiled in power struggles with the senatorial aristocracy from the first century bc. One graphic, and one might say crass, illustration of this is associated with Marcus Licinius Crassus, the third member of the First Triumvirate with Caesar and Pompey and the then wealthiest man in Rome. Some of his wealth was acquired through such conventional means as the selling of slaves. However, his most notorious method exploited the fact that at the time there was no fire service in Rome. Instead, as reported by Plutarch in his life of Crassus, Crassus would bring round his own fire service, his slaves, and negotiate with the owners of burning properties and those of endangered neighbouring properties over how much they would be willing to sell their properties for. If they did not agree to his fire sale offers then he would let the house burn down and then rebuild it with his slave labour.
Not unreasonably then limitations were imposed on the activities of the societas publicanorum, and, with the change from Republic to Empire, the government was less dependent on the publicans and more on public administration through a permanent bureaucracy. Privatization gave way to nationalization and with it the growth of industries, such as mining, that had previously enjoyed rapid technological innovations, declined.
The lasting contribution of the corporation was to the subsequent development of new institutions and forms of administration. Municipal corporations played an important part in the governance of the Roman Empire, first in the towns near Rome then in Italy then in the rest of the Roman world, creating a system of self-government under Rome’s supervision. This in turn gave rise to the adoption of corporations by former Roman colonies.
In English law the corporation owed its origins to the recognition of the rights and duties pertaining to the residents of cities and towns, such as London, by charters granted to them by William the Conqueror.6 Several centuries later it was transported to another colony. The government of the Massachusetts Bay Colony exercised its authority through the Charter of the Massachusetts Bay Company, which, by the Cambridge Agreement of 1629, was taken to America so that the company could erect a self-governing religious commonwealth, a ‘City of God in the wilderness’.7
The corporation has been a source of knowledge and invention as well as government. Our institution, the university derives from the fact that in the twelfth and thirteenth centuries teachers (in the case of England, France, and Germany) and students (in Italy and provincial France) incorporated institutions of learning separate from the cathedrals and monasteries of which they were previously a part. It is therefore particularly ironic that in 1996 Oxford should have rejected business studies because, as one of the oldest examples of the university, it is one of the oldest examples of a corporation.
Oxford University is a federation of thirty-eight colleges, each of which is a legal entity in its own right. They are brought together under the auspices of another legal entity—the University of Oxford. Each college can contract and be contracted, employ and be employed, sue and be sued, just as the University can. They have their own governing bodies, responsible for overseeing the provision of teaching students and the upkeep of the fabric of the medieval buildings. It is a complex legal structure that gives both Oxford and Cambridge universities their distinctive features and has placed them at the forefront of scholarship and learning for 900 years.
Important though the corporation was to public administration and the creation of knowledge in universities, its main contribution was still to come, many centuries later, to the wealth, competitiveness, and growth of nations. But before that, there was another quite unexpected place where the corporation was to make an appearance after its demise in Ancient Rome.
We do not normally associate the Church with the promotion of innovative business practice but during the late eleventh, twelfth, and thirteenth centuries, the Roman Catholic Church developed a body of corporation law within the system of canon law.8 It differed appreciably from Roman law in rejecting the Justinian requirement that only institutions recognized by the imperial authority could be granted the privileges of corporations, and instead it conferred the same rights on alms-houses, hospitals, the bishopric, and the Church itself.
The trend of medieval litigation favoured the members of the corporation in relation to its head. The bishop as head of the Church in his diocese sought support from members of his chapter, i.e. the clergy, when conferring privileges, managing property, and judging cases. This was part of a process of development in intellectual thinking in the twelfth century by which reason was no longer the privilege of aristocratic society but an attribute of individuals of equal moral standing. ‘The role of reason was being democratized. Reason ceased to be something that used people, and became something people used.’9
The canon law concept of the corporation differed significantly from Roman corporation law in four respects. First, it was not dependent on imperial authority for recognition of liberties and privileges. It could be created by any group of individuals with a common purpose and the required structure. Second, it was not only a public corporation that could exercise judicial authority over the corporation, instead any corporation could have ‘legislative and judicial jurisdiction over its members’ and ‘by becoming members of a corporation individuals could be deemed to have accepted its rules.’10 Third, authority was not only exercised by the corporation’s representatives, whose powers derived from birthright or imperial patronage, but also by the ensemble of members. Fourth, the Roman law maxim that ‘what pertains to a corporation does not pertain to its members’ was rejected and instead the property of the corporation was perceived to be ‘the common property’ of its members.
In effect, canon law swept aside Roman concepts in establishing corporations that possessed freedom of incorporation, private ordering, delegation of decision taking, and common ownership. These rules and concepts of canon law reflected ‘Germanic ideas of the corporation as a fellowship Genossenschaft, with a group personality and a group will, in contrast to the Roman idea of a corporation as an “institution”, whose identity is created by a higher political authority’.11 They were fused with Roman institutional ideas of the corporation as having a head empowered to perform acts that the corporation could not undertake itself, for example in relation to administration of property and resolution of disputes.
The corporation was used to reconcile the immortality of the offices of the Church with the mortality of its officers and to separate the ownership of its property from holders of its offices. This was done through a particularly distinctive form of the corporation, the corporation sole—a corporation comprising just one person.12 The corporation sole provided a means of ensuring that the Church retained possession of its property, parish churches, and monasteries by separating them from its parsons and monks. The parson and monks were owners of the churches and monasteries not in their own right but as corporations.13
Furthermore, since the corporation sole was not a real person, it could not possess a soul and could not itself be held responsible for delict of duty by its officers. The corporation thereby protected the Church from obligations to surrounding communities. The corporation sole therefore possessed two key features of a corporation: permanent capital, namely the property of the Church, and separation between ownership by the Church and control of its affairs by its officers.14
The corporation was not just a convenient organizational arrangement. By rejecting the Roman notion that only public corporations had legislative jurisdiction over their members or rights of ownership over their property, the corporation elevated ecclesiastical law to that of other legislative forms. Unlike universities, the Church’s authority and legislative power did not merely derive from the conferment of royal charter. Through the corporation, canon law asserted its position in regard to spiritual matters alongside the secular politics of kingdoms, feudal systems, and towns in governing the lives of the people.
The corporation was therefore used in creating new public institutions to manage public works, towns, guilds, seats of learning, and religious institutions, and by the thirteenth century these were flourishing in a variety of different forms. However, the corporation was not performing business or trade. For that, the other legal form with a far longer pedigree, the partnership, had already established itself as the preferred instrument for conducting business.
With the collapse of the Roman Empire, much of Western Europe went into decline but there was one part of the world that staged a remarkable renaissance by embracing institutions and laws of the ancient world. The Islamic Golden Age dates from the middle of the seventh to the thirteenth century. Its commercial activity flourished on the back of the mudaraba, a form of business partnership.
The mudaraba was used to solve a problem that confronted Islamic commerce of how to reconcile the strict prohibition on the payment of interest with rewarding providers of capital. It had its origins in the Code of Hammurabi, the sixth king of Babylon between 1792 and 1750bc. The Babylonian partnership (tappûtum) was defined in the Code according to the following principle: ‘If a man has given silver to a man for a partnership, they shall divide the profit or loss there may be in proportion before a god.’15 It was developed in the neo-Babylonian Empire between 626 and 539bc in the form of the harrānu contract that organized trade and business partnerships on an interest-free basis. The partnerships typically but not always divided the profit equally between the financing and working partners.16
In the mudaraba the profits were split between the partners to an enterprise according to a formula they negotiated in advance. The liability of a passive investor was limited to his own investment while liability for damages fell entirely on the merchant causing them. The partnership was legitimized by the fact of having been practised by the Prophet himself.17
The mudaraba was more flexible than its nearest equivalent in the Talmud, the isqa, which dictated equal profit shares between merchant and investor. Even after Maimonides’ codification of Jewish law, the Mishneh Torah, in the twelfth century, the isqa still required the merchant to accept liability for part of the principal and his profit share to exceed his share of liability.18 On the back of the mudaraba, Muslim trade expanded from China to Spain, and from the Black Sea to Zanzibar. With it, it carried commercial law, introduced arithmetic, and spread Arabic across three continents.19 It is regarded as the forerunner of the commenda, which originated in tenth- or eleventh-century Italy and became the foremost legal instrument in medieval Mediterranean trade.20
Flexible though it was, the mudaraba had its deficiencies. It was designed to avoid unjust enrichment for modest ventures of short duration initiated by a small group of partners. It was not suited to large, long-term projects that employed many people. Any partner could terminate a partnership by simply informing their co-partners of their wish to do so and their death automatically nullified a partnership. Most partnerships lasted for a few months and consisted of two people; few exceeded a year and involved more than five people. They lacked permanent capital, employees who were willing to accept the liability of partners, or the ability to bind themselves or their partners to contracts with other firms. In other words, they did not possess legal personality or the corporate form of the societas publicanorum.
There was an alternative long-term arrangement, the waqf, an unincorporated trust, which emerged about a century after Muhammad, in the eighth century ad. It bore some resemblance to the societas publicanorum in so far as it delivered public services, such as drinking water, pavements, and inns for travellers, some of which survive to this day. However, it was a trust not a corporate body. It existed to protect the founder’s assets and ensure that his will was upheld in perpetuity. The terms of the trust were irrevocable and conferred no discretion on its caretakers, the mutawalli, to alter its purpose or redeploy its assets.
There were therefore two organizational forms—a highly flexible partnership for promoting short-term low capital ventures involving a small number of individuals, and a rigid trust for the deployment of founders’ assets in perpetuity. What was not available, and did not emerge for more than a millennium in the Middle East, was an organizational structure that was perpetual, well capitalized, and contractually entrusted to bind and deploy assets and employees as it deemed appropriate. In other words, there was no corporate form in which the management of the organization could function separately from its ownership.
The failure of such an organization to emerge had slow but insidious consequences for the Middle East. It could not keep pace with the larger, better-capitalized entities that were emerging elsewhere in the world. Between 1000 and 1600, the Middle East’s share of world gross domestic product fell from 10 per cent to 4 per cent,21 and with it its influence on commerce, culture, and language began to wane.
The significance of organizational form in this regard is illustrated by one particular example. Just like their European counterparts, madrasas, the Islamic colleges, were founded as trusts. However, while the colleges of Oxford and Cambridge were self-governing legal entities that determined their own destiny, the madrasas were run according to the terms of their founding waqfs. As a result, their curricula and modes of teaching became ossified during a period in which European universities were embracing new forms of scholarship and learning.
So the corporation was a tremendous vehicle for creating institutions but not undertaking business and trade, and the partnership for conducting business and trade but not establishing institutions. The corporation was not used in raising finance and the partnership was not suited to large-scale administration. What then happened was the merger of the two: the emergence of funding for corporations and of administrative structures in partnerships. In essence, this was the entry of one form of organization, the partnership, into another, the corporation, and it resulted in one of the most important forms of not just symbiosis but symbiogenesis—a new species of organization. We will start with the partnerships.
While the corporation was consolidating its position in the Church, the partnership was moving west from the Middle East to the shores of Italy. The commenda partnership became in the Middle Ages one of the most frequent arrangements for organizing commerce by land and sea. It was the means by which capitalist nobles and bourgeois could participate in trade without carrying it on themselves. The commenda (from the Latin commandare ‘to deposit, trust, or lend’) involved investors bearing all the risks of the capital and being entitled to a share of the profits (usually three-fourths), and managing borrowers bearing all risks of labour and keeping the rest of the profits. Third parties only had claims against the managing borrowers and not the lenders who had limited liability.
The oldest preserved commenda contract dates from 1072.22 It appears frequently in the Cairo Geniza, a collection of 300,000 Jewish manuscript fragments found in the Ben Ezra synagogue in Cairo. The collection includes correspondence and contracts from the early part of the eleventh century relating to the trade of Cairo Jews and it records that they used the Muslim mudaraba in preference to the Jewish isqa, confirming that indeed the commenda was exported from the Middle East to Europe.
The active partners in the commenda began to divide their ships into shares and sold shares or carati (reflecting their division into twenty-four parts) to several owners. In the fourteenth century, the city-state of Genoa used the multi-share commenda as a way of funding state projects and, as a precursor to John Law’s ill-fated attempts in France 300 years later, in 1407 created a carati bank to manage the state debt and exploit the state colonies.
Alongside the commenda was the compagnia (from cum panis, companion or ‘sharer of the same bread’) which was a partnership of relatives that involved investment of a limited sum for a limited time of between one and five years but for which liability was unlimited (what later became known as the ‘general partnership’). It derived from the societas in which partners pooled their capital and labour, and shared risks and rewards in an unlimited form.
Giant Italian (in particular Florentine) super-companies emerged on the back of this in the thirteenth and fourteenth centuries, of which Acciaiuoli, Bardi, and Peruzzi were the most notable. These firms were involved in the flourishing trade in commodities, particularly in wool. To gain access, they required franchises and concessions from monarchs, which they secured as a form of repayment on their loans. England, as a main exporter of wool, was particularly important in this regard, and the Italian companies were heavily involved in lending to the English monarchy.
Their activities were funded by participation of wealthy individuals in the fixed term compagnia—40 per cent of the Peruzzi first company (1300 to 1310) capital was contributed by ten outsiders—and investments by small savers for which Peruzzi opened a bank branch in Naples in 1302—a structure not dissimilar to the parallel family ownership and shareholder investment in listed companies around the world today, described in the next chapter. Ensuring prompt repayment was key, and this was achieved by strong pressure being exerted on government agencies, with, if necessary, recourse to the monarch.
The firms developed a network of branches across Europe. But there were two deficiencies of the super-company structure. First, there was no permanent capital to fund the businesses. Thus, when on threat of the imposition of a wealth tax in Florence in 1324, investors wished to conceal their investments, subscriptions to the fourth Peruzzi Company halved from li.118,000 to li.60,000. Secondly, the integrated nature of the partnership made it exposed to losses in any one branch and dependent on firm central leadership from the senior partner. In particular, the joint and several liabilities of partners made them vulnerable to actions by other partners that bound the entire partnership. Therefore, threat of default by Edward III led Bonifazio, Peruzzi’s chairman, to go to England in 1338 where he judged the company’s survival lay. However, this came at the expense of providing central direction to the business and by 1343 the company was bankrupt.
Some of these deficiencies were averted in the Medici bank in the next century. It organized its activities in branches, each of which were legally independent partnerships. Thus failures of the London and the Bruges branches in 1472 and 1481 respectively did not bring down the whole business. Likewise, a Bruges municipal court threw out a claim for damages in 1455 against the Bruges branch of the Medici Bank brought by a purchaser of defective packing of nine bales of wool from the London branch on the grounds that the Bruges and London branches were separate partnerships and that claims should be made against the London not the Bruges branch.
The branches operated according to their articles of association, which stipulated the purpose of the branch, the capital that was subscribed, how the profits were to be divided, and the restrictions on the authority of the managers. For example, the articles of the Bruges branch restricted the granting of credit to bona fide merchants and manufacturers and ruled out extending loans to princes. However, the company remained dependent on strong central leadership, which was not forthcoming after the death of Cosimo in 1464. In particular, several of the branches, such as Avignon, London, and Naples, were heavily exposed to lending to sovereign borrowers. Despite the fact that the super-companies, the Acciauoli, Bardi, and Peruzzi, had been wrecked by lending to English kings and other sovereigns, the Medici ‘were unable to steer clear of it and foundered on the same reef’.23
So by the middle of the fifteenth century, the partnership had adopted quite sophisticated ‘hub and spoke’ methods of managing businesses on an international dimension. They were beginning to adopt the administrative structure of corporations. Meanwhile, the corporation was emerging in its most decisive guise alongside its public and religious functions in a different part of Europe.
The two deficiences of the unlimited and the limited liability partnerships, the societas and the commenda, namely the limited period of the partnership undermining the provision of long-term capital and the absence of well-established central governance arrangements, were precisely the advantages possessed by the English guilds. In a guild, established before the Norman Conquest based on the Roman collegium, property was granted for the guild ‘to possess now and hence-forth’, implying that the body was to continue indefinitely.24 After the Norman Conquest, guilds took on a trading function, which in turn developed into craft guilds and companies of merchants in the fourteenth century. One in particular, the Staplers, became involved in overseas trade. At the end of the fourteenth century it received the first charter for foreign trade to the countries bordering the North Sea and the Baltic.
In addition, these bodies evolved a governance structure during the fourteenth century involving a governor, assistants, and deputies. The governor was given powers of executing justice amongst English merchants, and in 1404 the Staplers were granted rights to make statutes and ordinances for the discharge of the duties of the deputies and to punish English subjects who disobeyed these rules. As corporate bodies, the guilds were therefore able to enact by-laws. Similar privileges were subsequently bestowed on the Merchant Adventurers and the Eastland Company.
So long as trade remained close at hand there was not much of a requirement to raise capital. While there might be rules requiring freemen to employ capital according to the terms of the fellowship, there was no central pooling of capital. However, the exploitation of further trading opportunities required more substantial investments to be made. To achieve this, a fusing of the partnership principles of the societas with the perpetual life and governance structure of the guild-merchants was required.
The first form this took was the regulated company that extended the guild principle into foreign activities. In the regulated company, each member traded with his own stock and on his own account subject to the rules of the company. Charters were acquired to confer a monopoly for the members of the company. Essentially, the regulated company was a restrictive practice that prevented competition occurring between members and allowing monopoly benefits to be exploited. The Merchant Adventurers were examples of this form.25
The distinguishing feature of the joint stock company was that members traded on a common rather than individual account and joint stock. The first example of this was the Russia Company, which started its activities in 1553 under the governorship of Sebastian Cabot. The company raised £6,000 from £25 shares. The primitive type of company was formed for a single expedition at the end of which it was wound up. The Russia Company was ahead of its contemporaries in having a few stocks in the sixty-seven years to 1620. The stock corporation also played an important role in the syndicates that were employed by England in the war against Spain in the second half of the sixteenth century. While both Portugal and Spain organized and financed exploration through the state, England chose the self-governing guilds. The state-run organizations had the advantage of access to financial resources but suffered from their cumbersome central bureaucracy.
A similar process was followed in the Netherlands with ports forming trading companies to organize activities in the Indian Ocean. To avoid competition these were consolidated in 1602 into one, the Dutch East India Company. A distinctive feature of the Company was that unlike the commenda, it did not have to return capital to investors immediately on completion of each voyage. Initially it could retain members’ capital for ten years, and in 1623 it passed an amendment that made the capital perpetual. In return members were allowed to trade their shares on the open market.
In contrast, the English East India Company operated on conventional trading company lines liquidating capital at the end of each voyage. The nature of trading activities in the East Indies created financing requirements for ships, provisions and equipment, labour, and goods. The innovation of the East India Company was in fusing the corporation with joint stock. Whereas the Dutch East India Company merged several limited partnerships in a single organization that essentially coordinated and cartelized the individual partnerships, limited partnerships were not available in England until the twentieth century.
To encourage participation by passive investors, a different institutional form was required, and the solution that was found was to graft joint stock onto corporations with their well-established managerial structure comprising the General Court, the Court of Directors, officers of various types, and a Governor. However, the requirement to keep its assets liquid when each stock was wound up put the English Company at a disadvantage. From 1614 the joint stock was subscribed for a period of a year, in 1654 it adopted a perpetual existence, and then in 1658 fixed capital, equivalent to its Dutch counterpart, and its shares became transferable.
The right of a shareholder to vote at the election of officers was formerly analogous to that possessed by the citizens of municipal corporations. One shareholder one vote was the first rule at the East India Company. This soon became unacceptable to the large shareholders and various changes were made, for example that only holders of £500 stock should have the right to vote, the small holders being allowed to pool their stock to the required minimum.
While the organization of the East India Company and its novel forms of capital and governance were important innovations, there was an additional feature that contributed to both its significance and longevity and reflected the original purpose of its Roman forbearers—to act as a public agency. The Company not only evolved in terms of its structure and conduct, it developed a conscious appreciation of its relationship to the communities in which it operated. ‘This idea that the object of a business corporation is the public one of managing and ordering the trade in which it is engaged, as well as the private one of profit for its members, may also be noticed in the charters granted to new corporations, especially in the recitals, and in the provisions usually found that the newly chartered company shall have the exclusive control of the trade intrusted to it.’26
Citing various dispatches by the East India Company from London to Madras, Surat, and St Helena, Philip Stern notes that this pursuit of public purpose derived from its degree of independence from its nation state. ‘English common and statute law was a useful model but not a binding one abroad, expanding as it did no “further than to England, Wales, & Berwick upon Tweed”…The corporation thus had a dual personality: subject to the English Crown in one sense but possessed of a supreme rule abroad in another: “wee act by his authority; so their dependence is on us, and they act by ours.” As London contended, “the Company must always have the Preference in India as his Majesty justly hath here,” though in some ways they implied it was even greater, as St Helena’s laws and constitutions, which they had drafted, were also to be regarded “as good Law as Magna Charta is to England”.’27
The vision that lay behind the East India Company’s public purpose was clear: ‘These projects for encouraging colonial immigration reflected a vision of plantation as a multidimensional process, in which settlements acted as nodes within a global Company system crosscut by a variety of English, European, and Asian commercial and migratory diasporic networks and labour markets…While certain tensions between “commerce” and “territory” would consistently remain, and London would never abandon its desire to rein in costs, an East India Company firmly committed to a system of colonial plantation unavoidably required a different way of doing business.’28
The Company had a profound interest in the governance of the areas that it administered:
At the root of the Company political thought was an almost obsessive concern with the correlation between population and strength, particularly economic strength, a notion with firm roots in Restoration economic thought…The basic principle behind the Company’s project of peopling its colonies was to ensure a freedom of trade and security and property to inhabitants and foreigners. Unencumbered commerce would encourage people to choose to settle in Company plantations, attract wealth, and increase navigation, all of which contribute to the strength of polity; in turn, settlers should be encouraged to cultivate land, placing great importance on the Company’s role in providing a legal apparatus to ensure due process in matters such probate, land transfers, property disputes, and confiscation.29
Its leadership had come to regard themselves as bearing a responsibility not just for trade but for government in the East Indies.30
The Corporation was supposed to be a broadly representative institution, one of those freedoms in liberty and property that would inspire immigration, settlement, and investment in the city.31
‘Rules and discipline’ preserved the trade as well as prosecuted it. A ‘united stock’ provided the capital and the corporate institution necessary to provide those rules. Finally, recalling the importance of consultative government, that institution had to be governed at every level by ‘a Select & authorized council’.32
Taxation was critical to the success of the Corporation: ‘Without revenue there could be no government, and without government there was only anarchy.’33 ‘This is what made paying taxes such a serious moral responsibility.’34 Alongside governance, considerable emphasis was also placed on religion and giving people a sound moral upbringing and defence. ‘The Company seemed to seek violence neither for its own sake nor for territorial aggrandizement. The conflicts in Siam and Bengal aimed not at war but peace.’35
A main concern of the Company was the presence of what were termed ‘interlopers’—any English subject travelling to or residing in Asia without the Company’s permission—threatening the dominance of its operations. The Company argued that it was not seeking their exclusion as a monopolist but as an organization that was creating new trading operations rather than dominating existing ones. It suggested that it needed to be able to promote productive relations with local populations and that these could be undermined by the hostility of merchants acting independently.
The justices of the Court of King’s Bench concurred with the Company in this regard. They rejected the notion of it being monopoly, not because the Company was its own republic with an authority that was distinct from the Crown but, on the contrary, because its power derived from that of the Crown and the Company possessed a permanent and inviolable right to trade and traffic in the East. The Company therefore did have rights to set and prosecute its laws by virtue of the authority granted to it by the Crown and, in so doing, it was representing rather than abusing the public interest. In other words the governance as well as trade that it was performing was on behalf of not in place of the Crown.
However, this benign view of the East India Company changed markedly in 1688 with the ‘Glorious Revolution’. The fact that the Company’s position was ‘rooted in royal grants at home and prerogative abroad’36 meant that it was exposed to the newfound authority that Parliament began to exert: ‘The problem for the Company was not its ties to any one monarch in particular but its constitutional and institutional ties to monarchy in general. Parliament eager in its own way to establish its authority with respect to the monarchy, became a natural venue in the years following 1688 for the Company’s enemies to air their long-standing complaints.’37
It was stated that the Company ‘had borrowed money with no intent to repay. It had pirated Mughal ships, disregarding even its own passes. It erected an “arbitrary Admiralty court” that illegally seized the property of English subjects. The execution of capital punishment at St. Helena was in fact “Murther”. It had executed an “unwarrantable war” in which: “1. Many outrages and Violences were committed upon the Innocent Natives on Shoare; 2. Many of them killed; 3. Their dwelling houses, warehouses & goods burnt & destroyed. Their ships at Sea seized & made prize.”’38
In response there were proposals to double the capital stock of the company and limit the voting rights of large shareholders. However, there was concern that such changes could weaken the company’s operations and ‘ruin both trade and government in Asia irreparably’.39 As a result the company was granted a new charter that was similar to its existing one dating back to Charles II but with one notable exception and that was the company ‘“submit and conform” to any regulations of its affairs the monarchs and the Privy Council “think fit to make, insert, limit, direct, appoint, or express” before the end of September 1694; failure to do would render the charter void’.40 In other words, for the first time the company became subject to serious regulatory oversight by the Privy Council and potentially Parliament.
The company might have been conscious of the responsibilities that derived from the trust placed in it operating in distant lands shielded from the gaze of public scrutiny at home. However, it may not always have demonstrated the integrity necessary to justify that trust, so when it was eventually subject to interrogation at home, it undermined the reputation and operations of the Company abroad.
The East India Company was not the only one to endure such a fate. Between 1620 and 1680, a number of companies, such as the French Company and the Spanish Company, ceased operations, and some companies, such as the Russia Company, were transformed from joint-stock to regulated companies.
Herein we see the intrinsic dilemma that the fusion of the corporation and the partnership created. What was in effect a public body—the corporation—was drawn towards private interests when it absorbed the commercial affairs of the partnership. As a small organization of limited duration, the social impact of the partnership was modest. However, as part of a corporate body, the ramifications of commercial interests for public matters became profound. So while the partnership benefited from its conscious awareness of the impact of its activities on those with whom it was engaged in trade, it did not need to consider its position in its wider societies and nations. That was manifestly not the case for the corporation, and once it sought to acquire the commercial features of the partnership it was presented with an inevitable conflict between the two—a conflict that has continued to afflict it to this very day.
Nevertheless, after the 1680s the stock corporation expanded rapidly, and up to 1695 about 150 companies were formed. This growth was assisted by a gradual relaxation of the authority of the Crown to assert ‘an exclusive right to create “corporateness”’,41 and merchants used a variety of methods to create separate legal personalities, even in the absence of a royal assent to do so. It was ‘a tribute to the shrewdness of eighteenth-century lawyers that in most instances the advantages of formal incorporation were approximated’.42
Adam Smith maintained that: ‘The only trades which it seems possible for a joint-stock company to carry on successfully without an exclusive privilege, are those of which all the operations are capable of being reduced to what is called a routine, or to such a uniformity of method as admits of little variation.’43 Four industries were covered by his description: banking, fire and marine insurance, water supply, and canal navigation. In a well-known passage he writes: ‘The directors of such companies, however, being the managers rather of other people’s money than of their own, it cannot be well expected, that they should watch over it with the same anxious vigilance with which the partners in a private co-partnery frequently watch over their own. Like the stewards of a rich man, they are apt to consider attention to small matters as not for their master’s honour, and very easily give themselves a dispensation from having it.’44
However, the initial phase of development of the joint-stock corporation was primarily associated with high-risk ventures:
During the early history of the system, its applicability was almost the reverse of that suggested by Adam Smith. The capital of companies was used in the main, at the time at which each undertaking was started, for ventures which were either altogether new trades, or revived industries, or those proposed to be conducted by new methods, or again in cases where there was an exceptional degree of risk. The advantage of joint-stock ownership in such enterprises was obvious; for, while no individual would be prepared to undertake the whole liability, a number of persons, acting together, were willing to provide the funds required.45
The emergence of banking in England in the seventeenth century paralleled that in Italy some four centuries earlier. Goldsmiths flourished after the dissolution of the monasteries in the 1530s increased supplies of gold. The seizure by Charles I of private gold deposited in the Tower of London encouraged the gentry to seek safe custody for their wealth, and goldsmiths and scriveners provided a safe deposit for money, bullion, plate, and jewellery. The money could be lent out and used to discount bills of exchange. The receipt that was given to the depositor was in turn passed from hand to hand and, over time since not all deposits were claimed immediately, the banker could issue more notes than there were deposits. The depositor would give instructions to pay one of his creditors thereby creating the forerunners of both the bank note and the cheque (the term being derived from the practice of keeping a counterfoil to serve as a record of the payment made against the general account). Unusually, the cheque was classified in England as a bill of exchange and was therefore negotiable. This allowed it to function as a general means of payment. On the Continent in Europe, the cheque was classified as an order of payment and was thus not negotiable.
The development of financial institutions in Amsterdam also paralleled the Italian institutions. The business of private cash-keeping had originally been in Antwerp. Cashiers or kassiers paid creditors and collected from debtors on behalf of merchants. The written orders from the merchants acted as cheques, and the receipts for deposits were negotiable and therefore became monetary instruments.46 The Lombards brought pawnbroking to Amsterdam. But the real innovation was the introduction of stability to the chaotic payments system, which involved competing currencies and mints in the provinces and circulation of foreign coins. In 1610, contemporary moneychangers had to handle almost 1,000 gold and silver coins. Key to the creation of stability was the establishment of the Bank of Amsterdam, which acted as a central clearing mechanism. It issued no notes of its own and engaged in no lending. But all bills of exchange of more than 600 guilders had to be paid through the Bank with the result that all major merchants held accounts with the Bank. Such was the confidence in the Bank that in the Baltic and in Russia, only Amsterdam bills of exchange were accepted.
In contrast, the Bourse was a centre for highly speculative activities. The stock exchange originated in Bruges in the fifteenth century. The term bourse relates to the square and family inn (the complex of houses owned by the van der Beurse family known as ‘Ter Beurse’) where merchants gathered for the purpose of trading bills of exchange.47 But it was in Bruges’ rival, Antwerp, that the bourse really developed. A member of the de Beurse family was an owner of several houses where merchants in Antwerp met, and in 1485 they were allowed to form a common body or society. Antwerp became the preferred point of exchange of English wool, Portuguese spices, and German copper and silver. With standardization of commodities using seals or trademarks, commodity markets emerged away from the goods themselves.
A thousand years of business sees companies and corporations involved in steadily changing purposes and associated functions: public works and services, towns, guilds, seats of learning, the church, alms-houses, hospitals, merchant trading, colonial and public administration, canals, railroads, safe keeping, lending, insurance, and financial instrument trading.
These changing purposes and functions required continuous innovation and evolution in the corporate form: incorporation (societas publicanorum), democratization and establishment of rights of members as against public authorities (canon law), separation of ownership of property from control of holders of offices (corporation sole), profit sharing in business partnerships (mudaraba, isqa, and societas), growth and branching (commenda and compagnia), governance (guilds), capital raising, pooling of capital, retained profits, perpetual existence, fixed capital, transferable shares, shareholder voting (joint-stock company), public license to operate, consultative governance, tax raising (chartered company), Parliamentary oversight (regulated company), bills of exchange, bank notes, cheques (banking and central banking), and securities trading (commodity and stock exchanges).
Municipalities, guilds, universities, and the Church were all corporations with legal personalities separate from those of their individual members. Royal charters typically conferred legal personality, together with certain rights of self-governance. The emergence of stock corporations out of the guilds in England and ports in Holland provided a means of financing exploration and trade outside of the bureaucracy of the state.
But the most dramatic development was the evolution of the self-liquidating commenda into the perpetual stock corporation. What a brilliant innovation it was to offer rights of trade in return for removal of the right to withdraw capital. Any one member’s share remained perfectly liquid, or indeed became even more liquid since it did not have to await the return of the fleet before its merchandise could be liquidated, at the same time as share capital in aggregate became perfectly illiquid. It was this separation of the capital of the firm from its members that furthered the emergence of the firm as an entity distinct from its members. At the same time banking flourished in England and Holland and the central clearing function performed by the Bank of Amsterdam offered liquidity on a scale that no single bank could previously provide.
We therefore arrive at the beginning of the seventeenth century, where Chapter 1 began, with two parallel forms of doing business—the partnership that had evolved into family firms with elaborate management structures, and the corporation with shareholders for raising capital. And that is a key to understanding the corporation. It had at its roots a public or scholarly or religious purpose for which the creation of a corporate body was of advantage. When it finally emerged as a business activity, the corporation grafted the capital-raising element of the partnership onto this administrative role. But the symbiosis gave rise to a form of capital raising that was quite different from the partnership. While the partnership through the compagnia became predominantly a family business, the guilds did not have families at their roots. While the partnership was closely held, the guilds raised capital from the public at large. Bourses and stock exchanges therefore emerged on the back of this. The distinction between the Anglo-Dutch corporation as a widely held organization and that of the family-owned business of the rest of Europe had as its origins the divergent influence of the corporate and partnership forms.
Important and striking as the origins of the corporation and its parallels with biological evolution are, their main insight is into the original purpose of the corporation. It was created to perform a public function—to provide public services, to administer towns, to satisfy spiritual as well as material needs, and to provide seats of knowledge and learning. The key requirements for this were an ability to bind many people together for long periods of time in contrast to partnerships that funded entrepreneurship ventures of limited duration. Merging these provided the means to manage and fund the major corporate enterprises of the coming centuries.
The original business forms therefore had a clear sense of purpose and direction. The societas publicanorum had a public function; the compagnia was run by families; the guilds had administrative offices; the corporation had independent management that sustained that purpose. The origin of the word business captures this. In English and Italian company and compagnia come from cum panis ‘sharing bread together’; in Swedish, näringslivet derives from ‘nourishment for life’; in Chinese, 生意 means ‘giving meaning to life and vitality’; and in Korean, 企業 means ‘causing karma’. The universal origin of the concept of business is therefore of promoting life through a collective endeavour. In marked contrast to the Friedman conception of the firm, not only were social and public considerations incorporated in corporate purpose from the outset, they were interwoven in a fusion of commercial and community in a single corporate form.
It is only as we move into the twentieth century, where Chapter 1 left off, that we find the corporation progressively losing its public sense of purpose as its investment tail increasingly wags the administrative dog and the corporation becomes a rudderless vessel, not well suited for voyages into unchartered seas to eternity. But standing on a village green in Birmingham in 1900, a group of people are contemplating a very public-spirited proposal close to home from one of the most enlightened corporate leaders of the time.