The Company – A Short History of a Revolutionary Idea

This book by John Micklethwait and Adrian Wooldridge is a concise and interesting history of joint-stock company. At the outset, this book appeared to be a very ambitious attempt to me – in just 200 pages, it claimed to cover the 5 millennia period from 3000 B.C. to 2000 A.D. But the adulations of many book reviewers proved to be right. It is a very comprehensive and measured handling of the subject. The authors have covered almost all shapes and forms of the idea in all parts of the world - the business arrangements Before Christ civilizations, the European imperialists and speculators of medieval period, the travails of modern corporation in 18th century and beyond, formation of big businesses across the world and the current challenges faced by the idea. Like any history book, this book provides a very good context. It is fascinating to observe that the economic, political and social tenets of the joint-stock company structure have remained constant yet conflicting all this while. I highly recommend this book to anyone who wants to build a perspective on how the company has affected (and has been affected by) the prevailing political and social themes.

Following are a few interesting excerpts:

Company is a Political Creation

Two points emerge from all this activity [around the idea and implementation of joint-stock company in 18th and 19th centuries]. First, the company was a political creation. The company was the product of a political battle, not just the automatic result of technological innovation. And the debate forged in mid-19th-century Britain has shadowed the institution ever since: Is the company essentially a private association, subject to the laws of the state but with no greater obligation than making money, or a public one which is supposed to act in the public interest?

Case of Negative Share Prices

[In 19th century,] many companies used partly paid shares – shareholders, for instance, paid in only 10 shillings for each GBP 1 share; that meant that if the firm got into difficulties, the other 10 shillings would be called for. As late as the 1930s, some cotton mills listed on London Stock Exchange had negative share prices, reflecting this unpaid liability.

All Under One Roof

Ford’s success [in early and mid 20th century] was not just about building cars more swiftly, but also about bringing both mass production and mass distribution under the roof of a single organization. An ‘integrated’ industrial firm could find economies of scale in everything from purchasing to advertising – and thus pump an endless supply of cigarettes, matches, breakfast cereals, film, cameras, canned milk, and soup around the country. The key was to own as much of the process as possible. Ford even owned the land on which grazed the sheep that produced the wool that went into his seat covers.

Silicon Valley’s Transformation in 80s

The 1970s boom [in the memory chip business] was brought to a halt by the Japanese. On ‘the black day,’ March 28, 1980, Richard Anderson, a HP manager, revealed that tests had shown the Japanese memory chips outperformed the Valley’s. To its shame, the Valley turned to the American government for protection, but it also successfully changed shape, outsourcing its manufacturing and diversifying from chips into computer software.

Enron: Back to the Square One for Shareholders

All the corporate overseers who were employed to monitor Enron on behalf of its shareholders – the outside directors, auditors, regulators, and analysts – were found wanting. Despite four centuries of corporate advancement, the hapless shareholders turned out to be no better protected or informed than the London merchants who dispatched Edward Fenton to the East Indies in 1582, only to see him head off to St. Helena, hoping to declare himself king.

Multinationals and Imperialism

The link between the 19th century multinationals and imperialism has often been exaggerated, particularly by devotees of the Marxist idea that imperialism was the highest stage of capitalism. Most foreign direct investment in the period flowed to other developed countries rather than to the colonies. The impoverished tribesmen of Africa hardly provided much demand for western products. [Also] For the most part, the logic of 19th-century imperialism was strategic rather than commercial. The competitive landgrabs by European countries in Africa brought few commercial gains.

Intellectual Arbitrage

Good multinationals went to great lengths not just to adapt products to local taste (even dividing up the American market), but also to scour the world for ideas. They began to experiment with ‘intellectual arbitrage’ - putting Italian designers together with Japanese specialists in miniaturization, for example.

[At the same time] Some firms looked on the developing world as a source of cheap labor rather than ideas. This ‘Nike economy’, relying on cheap Third World workers, helped stir up a backlash against multinationals.

Fallacy in Comparing Companies’ Sales with GDP

The idea, popular in antiglobalization circles, that companies accounted for 51 of the world’s 100 biggest economies relied on comparing sales of companies with the GDP of countries. But GDP is a measure of value-added, not sales. Using a measure for value-added for companies, only 37 companies appeared in the 100 biggest economies in the world in 2000. WalMart was barely a quarter of the size of a fairly small European country, such as Belgium and Austria, though it was bigger than Pakistan or Peru.

Company’s Primary Good is Not Philanthropy

The central good of the joint-stock company is that it is the key to productivity growth in the private sector: the best and easiest structure for individuals to pool capital, to refine skills, and to pass them on. We are all richer as a result.

[This is the reason that] drawing up long lists of when companies have acted responsibly (and when they haven’t) risks missing the big point. Henry Ford’s $5 wage was a force for good, but his cheap cars helped change the lives of poor in ways that socialists could only dream about. Boeing has spent millions of dollars financing good works in Seattle, but the real boost to the region has been the jobs that it has provided. J&J’s behavior with Tylenol was exemplary – but its main contribution to American well-being has been all the pills and profits that its has made.

[But] the [social] obligations [of the company] are likely to get larger as politicians discover that it is far cheaper (both in financial and electoral terms) to get companies to do their work.

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