Title: The Company: A Short History of a Revolutionary Idea
Author: John Micklethwait and Adrian Woolridge
Scope: 3.5 stars
Readability: 4 stars
My personal rating: 5 stars
See more on my book rating system.

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Topic of Book

The authors survey the history of the corporate organization.

Key Take-aways

• The most important organization in the world is the company.
• The modern company brought together three big ideas:
  • that it could be an “artificial person,” with the same ability to do business as a real person
  • that it could issue tradable shares to any number of investors; and
  • that at those investors could have limited liability (so they could lose only the money they had committed to the firm.
• The modern corporation was invented in 19^th-Century Britain and its has slowly spread throughout the world.
• Later Americans added on key concepts to the corporate model:
  • Professional salaried managers
  • National networks of suppliers
  • Operating units
• Later the Germans and Japanese created a corporate model based upon:
  • Financing largely through investment banks.
  • Focus on quality over efficiency
  • Close connections with technical universities.
  • Research and development labs
  • Collaboration with the state on national security matters.
• Starting in the 1970s, corporation began to be unbundled by:
  • Japanese Lean manufacturing techniques
  • Corporate raiders
  • Silicon Valley’s technology and horizontal organizational models

Important Quotes from Book

The most important organization in the world is the company: the basis of the prosperity of the West and the best hope for the future of the rest of the world. Indeed, for most of us, the company’s only real rival for our time and energy is the one that is taken for granted-the family.

The most powerful economic power of the day finally brought together the three big ideas behind the modern company: that it could be an “artificial person,” with the same ability to do business as a real person; that it could issue tradable shares to any number of investors; and that at those investors could have limited liability (so they could lose only the money they had committed to the firm). Just as important, the Victorians changed the point of companies. It was no longer necessary to seek special sanction from parliament to set one up or to limit its business to a specific worthy aim (like building a railway between two cities); now it was possible to set up general purpose corporations at the drop of a hat.

The Companies Acts, which were rapidly copied in other countries, unleashed entrepreneurs to raise money, safe in the knowledge that investors could lose only what they had put in. They also gave birth to an organization th at soon seemed to acquire a life of its own, swiftly mutating from one shape to another, with government usually unable to restrain it.

Three themes stand out in our story. First, the company’s past is often more dramatic than its present. Modern business books may have macho titles such as Barbarians at the Gate and Only the Paranoid Survive, but early businessmen took risks with their lives as well as their fortunes.

The second point is to some extent a correlation of the first. In general, companies have become more ethical: more honest, more humane, more socially responsible. The early history of companies was often one of imperialism and speculation, of appalling rip-offs and even massacres. People who now protest about the new evil of global commerce plainly have not read much about slavery or opium.

This leads to the third point. The company has been one of the West’s great competitive advantages. Of course, the West’s success owes much to technological prowess and liberal values. But Lowe and Gladstone ushered in an organization that has been uniquely effective in rendering human effort productive.

A cluster of competing companies makes for a remarkably innovative economy. Nowadays, you only have to look at Silicon Valley to grasp this point. But in the mid-nineteenth century, the effect of Western governments delegating key decisions about which ideas to back to independent firms was revolutionary.1O Rather than being trapped in government monopolies, capital began to search for the most efficient and flexible companies; and rather than being limited by family partnerships, it came together in bigger and bigger conglomerations. By contrast, civilizations that once outstripped the West yet failed to develop private-sector companies-notably China and the Islamic world-fell farther and farther behind. I t cannot be just coincidence that Asia’s most conspicuous economic success is also the country that most obviously embraced companies-Japan.

Before the modern company came of age in the mid-nineteenth century, it had an incredibly protracted and often highly irresponsible youth. The merchants and marauders, imperialists and speculators, who dominated business life for so many centuries might not have formed fully fledged companies as we know them, but they nevertheless created powerful organizations that changed commercial life.

In the early Middle Ages, jurists, elaborating on Roman and canon law, slowly began to recognize the existence of “corporate persons”: loose associations of people who wished to be treated as collective entities. These “corporate persons” included towns, universities, and religious communities, as well as guilds of merchants and tradesmen. Such associations honeycombed medieval society, providing security and fellowship in a forbidding world. They also provided a means of transmitting traditions-not to mention considerable wealth to future generations.

The sixteenth and seventeenth centuries saw the emergence of some of the most remarkable business organizations the world has seen: “chartered companies” that bore the names of almost every part of the known world (“East India,” “Muscovy,” “Hudson’s Bay,” “Africa,” “Levant,” “Virginia,” “Massachusetts”).

All of them were the lucky recipients of royal charters that gave them exclusive rights to trade with this or that bit of the world. They thus bestraddled the public and private sectors.

These chartered companies also drew on two other ideas from the Middle Ages. The first was the idea of shares that could be sold on the open market… wake. The other idea, which had occasionally surfaced before, was limited liability. Colonization was so risky that the only way to raise large sums of money from investors was to protect them.

The monopoly that they eventually secured from the state in 1602-the Dutch East India Company, alternatively known as the VOC (for Vereenigde Oost-Indische Compagnie) or the Seventeen (after its seventeen-strong board)-became the model for all chartered firms. Whereas the English East India Company initially treated each voyage as a separate venture, with different shareholders, the VOC made all the voyages part of a twenty-one-year venture (something the English imitated a decade later). The VOC’s charter also explicitly told investors that they had limited liability. Dutch investors were the first to trade their shares at a regular stock exchange, founded in 1611, just around the corner from the VOC’s office.

The East India Company was more than just a modern company in embryo. “The grandest society of merchants in the Universe” possessed an army, ruled a vast tract of the world, created one of the world’s greatest civil services, built much of London’s docklands.

The rise of both the Royal Navy and maritime insurance had reduced the risks of foreign trade, in effect eroding the raison d’etre for the chartered monopolies.

The early American states used chartered corporations, endowed with special monopoly rights, to build some of the vital infrastructure of the new country-universities (like America’s oldest corporation, Harvard University, chartered in 1636), banks, churches, canals, municipalities, and roads.

America’s early tycoons, such as JohnJacob Astor (1763-1 848) and Stephen Girard (1750-1 831), were players on the exchange, buying great chunks of government debt. But they ran their own businesses as private partnerships-as did America’s slavers, such as the Browns, and early industrialists such as Eli Whitney (1765- Partnerships were fragile creations. Businesspeople stuck to them because they didn’t like bringing the state into their private affairs.

In the first half of the nineteenth century, the state began to step back. It did so first in America-though because of the federal system, it was a much more piecemeal and convoluted affair than in Britain. There were three prompts for change. The most important was the railroad, which we will discuss later. The second was legal. In a ruling about the status of Dartmouth College in 181 9, the Supreme Court found that at corporations of all sorts possessed private rights, so states could not rewrite their charters capriciously.

The last prompt was political. Concerned that at their states were losing potential business, legislatures, particularly in New England, slowly began to loosen their control over companies.

Victorian Britain gave birth to the modern company.

The crucial change was the railways, and their demands for large agglomerations of capital. In 1830, George Stephenson’s Rocket began steaming down the Liverpool-Manchester line, the world’s first regular passenger railway. By 1840, two thousand miles of track, the bare bones of a national network, had been built-all by chartered joint-stock companies.

In 1844, William Gladstone, the president of the Board of Trade (and the sponsor of the restrictive Railway Act of the same year), pushed through the Joint Stock Companies Act. The 1844 act allowed companies to dispense with the need to get a special charter, and be incorporated by the simple act of registration .2But it did not include the crucial ingredient of automatic limited liability.

Pleydell-Bouverie forced through a Limited Liability Act in 1855, which granted the privilege of limited liability to incorporated companies, as defined by the 1844 act, subject to various fiddly capital requirements.

Pleydell-Bouverie was then replaced by Robert Lowe, who masterminded the landmark Joint Stock Companies Act of 1856 (which removed the qualifications of the Limited Liability Act). If anyone deserves the title “father of the modern company,” it is Lowe.

This new regime was still a long way from modern shareholder capitalism. British law provided remarkably little protection for shareholders (who, for instance, did not need to be given audited accounts till 1900).JO It was not until the case of Salomon v. Salomon & Co. Ltd. in 1897, when the House of Lords ruled in favor of an unsavory leather merchant who had transferred his assets into a limited company, that the separate legal identity of the company, and the “corporate veil” of protection that it offered to its directors, was firmly established in the law.

The remarkable growth of Richard Sears’s business [Sears and Roebuck] from a hobby to a recognizably modern corporation, complete with shareholders, distinct operating units, a national network of suppliers, and professional salaried managers (not to mention management processes that would be “bench marked” by other industries), gives some idea of the revolution that took place in America in the late nineteenth century. It was not just a question of making use of the railroads. A firm structured like Sears, Roebuck in 1916, with thousands of employees, pensioners, and shareholders, did not exist in 1840-not even in the wild imaginings of some futuristic visionary.

By the First World War, the giant corporation had become the dominant business institution in America: the gold standard by which all other enterprises were judged. It had also helped propel America to the top of the economic league… By 1913, America produced 36 percent of the world’s industrial output compared with Germany’s 16 percent and Britain’s 14 percent.

Why did these extraordinary organizations take off when they did? Alfred Chandler has provided the classic answer: “Modern business enterprise” became viable “only when the visible hand of management proved to be more efficient than the invisible hand of market forces.” For that to happen, a new system of transport and communication was necessary.

The railroads were not just great enablers for modern business; they were also the first modern businesses.

From the end of the Civil War to the 1890s, Wall Street existed almost exclusively to finance the railroads, something investors often regretted.

The first American companies to take advantage of the railway infrastructure were in distribution and retailing. I 3 In 1840, most goods were distributed around the country through a system of wheeling and dealing. Within a generation, distribution was dominated by giant companies. The 1850s and 1860s saw the appearance of huge wholesalers who bought directly from producers and sold to retailers. Then the 1870s and 1880s saw the birth of modern mass retailers-of chain stores, department stores, and mail-order companies.

Integrated companies, which did not really exist in the 1860s, dominated America’s most vital industries by the turn of the century.

Between 1890 and 1904, huge waves of consolidation left most of the country’s industrial base in the hands of around fifty organizations-usually (if sometimes unfairly) referred to as trusts. The merger era produced some of the most powerful companies of their time, including U.S. Steel, American Cotton, National Biscuit, American Tobacco, General Electric, International Harvester, AT&T, and United Fruit. Two people are synonymous with the trust era: John D. Rockefeller (1839-1937) and J. P. Morgan (1837-1913).

Britain, despite its wholehearted enthusiasm for laissez-faire, was a reluctant convert to companies. Germany and Japan embraced the idea much more warmly, but tried to twist it to rather different ends, such as workers’ welfare and the quest for national greatness.

British entrepreneurs clung to the personal approach to management long after their American cousins had embraced professionalism. As late as the Second World War, a remarkable number of British firms were managed by members of the founding families.

This points to the second British problem with companies: a fatal snobbish distaste for business. The elite public schools steered their most talented students into conspicuously useless subjects like the classics and poured scorn on anything that smacked of commerce.

The upshot of all this was that British companies were starved of both able recruits and up-to-date expertise.

Germany was not unified until 1871. Yet, over the next forty years, its great companies enabled it to replace Britain as Europe’s leading industrial power. In the late nineteenth century, the finest examples of the “new economy” in Europe were all in Germany: the vast electrical-equipment producing complex at Siemenstadt, the huge chemical works of Leverkusen, Ludwigshafen, and Frankfurt, the massive machinery works and steel mills in the Ruhr and along the Rhine.

Germany’s companies were similar to America’s in their focus on the new economy: almost two-thirds of the top two hundred dealt with metals, chemicals, and machinery. But they embodied a rather different sort of capitalism-one that emphasized cooperation rather than competition and that gave a leading role to the state. By 1900, four clear structural differences were apparent between the German corporate model and its Anglo-Saxon equivalent.

The second difference from Anglo-Saxon capitalism was the influence of the big banks. Germany’s capital markets were too localized and inefficient to power its industrialization. Germany’s bankers stepped into the breach by forming joint-stock and limited-partnership banks that duly channeled money from savers of all sorts, first into the railways (which were financed by bank debt, not bonds) and then, after the railways were nationalized in 1879, into young industrial companies like Siemens. The biggest were the “universal banks” that managed to be commercial banks, investment banks, and investment trusts all rolled into one.

In 1913, seventeen of the biggest twenty-five joint-stock companies were banks. Universal banks financed almost half of the country’s net investment. Bankers also sat on the supervisory boards of all Germany’s great industrial companies, providing advice and contacts as well as capital.

All these structural differences-the boards, the bankers, and the legalized collusion-reinforced the fourth distinguishing thing about German companies: the emphasis on their social role.

Our suspicion is that Germany’s success owed less to stakeholder capitalism than to two rather more practical things. The first was the cult of education-particularly scientific and vocational education. This was there from the very first.

Peter Drucker claims that the foundation for Germany’s manufacturing productivity was laid in the 1840s by August Borsig (1804-1854), an early industrialist who pioneered corporate apprenticeships, mixing on-the-job experience and formal classwork. Universities-particularly technical universities happily acted as both research agencies and recruiting grounds for local industries.

German firms also pioneered the development of internal laboratories, and invested heavily in research and development even in such basic industries as coal, iron, and steel.

The second related area was the respect accorded to managers, who enjoyed the same high status as public-sector bureaucrats.

Japan’s version of organized capitalism had many similarities to Germany’s. Japan also leaped ahead in the 1870s-and Japan also embraced a conception of the company that combined up-to-date professionalism with a pronounced and sometimes atavistic nationalism.

In 1868, the shogunate that had ruled the country for more than 250 years collapsed, and power reverted to the sixteen year-old emperor Meiji-or rather to the officials and oligarchs who surrounded him. Some of the samurai who supported the restoration hoped that the emperor would cleanse the country of barbarians. Instead, the ruling oligarchs decided to open the country to the West as part of their “rich country, strong army” policy. They invited more than 2,400 foreigners from twenty-three different countries to provide instruction in Western methods. Employment of foreign experts accounted for about 2 percent of government expenditure.

Mitsubishi was the model for the zaibatsu-the Japanese conglomerates (literally, “financial cliques”) that dominated business in the country until the Second World War (and were subsequently reborn as keiretsu). These conglomerates were a strange mixture of feudal dynasties, old-fashioned trading companies, government agencies, and modern corporations. At the heart of each zaibatsu sat a family-owned holding company that controlled a cluster of other firms through

All the same, the most remarkable thing about the sixty years after the First World War was continuity-particularly the continued success of big American business. A list of America’s biggest companies in 1970 would have seemed fairly familiar to J. P. Morgan, who died in 1913. Yet, this very predictability, this sameness, was itself the result of one important innovation, introduced in the 1920s: the multidivisional firm.

The multidivisional firm was an important innovation by itself, because it professionalized the big company and set its dominant structure. But it was also important because it became the template for “managerialism.” If the archetypical figure of the Gilded Age was the robber baron, his successor was the professional manager.

In the first two decades of the twentieth century, a silent takeover began: the gradual separation of ownership from control.

The beauty of Sloanism was that the structure of a company could be expanded easily: if research came up with a new product, a new division could be set up.

As early as 1920, Company Man’s character had been formed by two things: professional standards and corporate loyalty. Company Man was defined by his credentials rather than by his lineage (like the upper classes) or his collective muscle (like the workers). He was part of a professional caste that adopted Frederick Taylor’s motto that there was “the one best way” for organizing work and sneered at rough-hewn entrepreneurs for not knowing it.

The 1950s and 1960s was the heyday of Company Man-or Organization Man, as he was then known.

The rate at which large American companies left the Fortune 500 increased four times between 1970 and 1990.

Far from being a source of comfort, bigness became a code for inflexibility, the antithesis of the new credo, entrepreneurialism. In 1974, America’s one hundred biggest industrial companies accounted for 35.8 percent of the country’s gross domestic product; by 1998, that figure had fallen to 17.3 percent. Their share of the nation’s workforce and its corporate assets also roughly halved.

The story of the company in the last quarter of the twentieth century is of a structure being unbundled. Companies were gradually forced to focus on their “core competencies.” Ronald Coase’s requirement of the company-it had to do things more efficiently than the open market-was being much more sorely tested.

Three groups of people played a leading role in unbundling the corporation: the Japanese, Wall Street, and Silicon Valley. The creativity, carnage, and (sometimes) corruption that this trio unleashed in turn set the scene for a fourth player to reassert itself in the wake of the Enron scandal: the government.

At the heart of the Japanese model was Toyota’s system of lean production… Toyota treated all the different parts of the production system-development, purchasing, manufacturing-as a seamless process, rather than a series of separate departments. It brought together several important ideas, such as total quality management (putting every worker in charge of the quality of products), continuous improvement (getting those workers to suggest improvements), and just-in-time manufacturing (making sure that parts get to factories only when they are needed). Workers were put into self-governing teams, and there was far more contact with suppliers.

Silicon Valley changed companies in two ways. The first was through the products it made. At the heart of nearly all of them was the principle of miniaturization. In the last three decades of the twentieth century, the cost of computing processing power tumbled by 99.99 percent-or 35 percent a year. Computers thrust ever more power down the corporate hierarchy-to local area networks, to the desktop, and increasingly to outside the office altogether. Meanwhile, the Internet reduced transaction costs.

The other way in which Silicon Valley changed the company was by pioneering an alternative form of corporate life. Some of its companies, such as Hewlett-Packard and Intel, lasted for decades, but the Valley epitomized the idea of “creative destruction.” An unusual amount of the Valley’s growth came from gazelle companies-firms whose sales had grown by at least 20 percent in each of the previous four years. It also tolerated failure and even treachery to an unusual degree. Many would argue that its real birth date was not 1938 but the moment in 1957 when the so-called “traitorous eight” walked out of Shockley Laboratories to found Fairchild Semiconductor, which in turn spawned Intel and another thirty-six firms. Virtually every big firm in Silicon Valley was a spin-off from another one.

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.

Related Books

• “Going the Distance: Eurasian Trade and the Rise of the Business Corporation, 1400-1700” by Ron Harris
• “Big Is Beautiful: Debunking the Myth of Small Business” by Atkinson and Lind
• “Good Capitalism, Bad Capitalism” by Baumol, Litan and Schramm

If you would like to learn more about the role organizations play in creating economic growth, read my book From Poverty to Progress.