The development of the company has a long and interesting history. Fundamentally, we can think about this history as attempts by people to formulate contracts and structures that mediate the doing of business in a way that’s more complex than direct single human to single human barter.
Understanding this history is important: it makes evidently clear that the corporation is a fundamentally political creation, and that it is the people’s collective responsibility to continue to improve on this mechanism for coordination and collaboration.
These are the notes I took while reading The Company: A Short History of a Revolutionary Idea by Micklethwait and Wooldridge. Some bullets are direct quotes, others are summarized points.
Merchants & Monopolists, 3000 B.C. - A.D. 1500
- Assyrians (~2000 BC): 14 investors put in 26 pieces of gold into a fund. fund run my merchant ~ Amur Ishtar, who added 4 pieces of gold. Structured to last 4 years, and the merchant would get 1/3rd of the profits. VC similarity is uncanny.
- Phoenicians & Athenians took it further, exacerbated by maritime commerce ~ the expense and time involved relative to land-based warranted some type of formal arrangement among stakeholders.
- Credited with the concept that an association of people could have a collective identity that was separate from its human componenets. They linked this concept strongly to the familia - basic unit of society. Even hired magisters that ran the business and did accounting. Had a form of limited liability. Still short term though.
- ‘Societates’ & ‘Guilds/Corpora’ (~ 210 BC)
- Societates: collection taxes was trusted to individual Roman knights, as levies grew with empire, became more than any one knight could guarantee. formed societates to manage.
- Guilds/Corpora: duh.
- Islam ~ Mohammed was a trader. Islam encouraged ‘repsonsible moneymaking’. While Christian businessmen often were at odds with their creed, Muslim merhcants like Sinbad could be celebrated. In Mecca, there was little else to do than be a trader (not agriculture rich & situated between West & East for trading). China ~ Historically has had large technology lead. Pioneered paper money. Why did they lose their lead? Huge debate. Author’s bias is b/c they failed to develop companies (of course other reasons too but feels strongly about that).
- Islam ~ relied on oral testimoney vs written contracts. Also estate law divided estates between countless family members ~ prevented Muslim firms frow growing to a size where they would raise capital form outside investors.
- China ~ Permanent private sector business undermined by culture & state interference. Business partnerships seldom lasted more than a few voyages. The bigger businesses relied on the state, hereditary bureaucrats ran state monopolies (i.e. porcelain). These institutions were not tempoarary enough (no competition). In 1424 - emperor ordered all mercantilist exploration to stop (looked inward/isolationist).
The Rialto Effect
Merchant Empires of Italy
- ~ 9th century. Started as financings for single voyages, increased in complexity over time (multiple trips, foreign partners, etc..)
- ~12th century: The ‘compagnia’ - started as family firms, jointly liable, trust critical. ‘Cum’ & ‘panis’ means breaking bread together. 14th century ~ double entry bookkeeping,
- Rise of ‘compagnie’ vary closely parallel rise of ‘banchi’ (banks). Most banks small, but ‘gross banchi’ huge (i.e. Medici Bank).
14th century bizness parallel to modern?
- ‘the noise of buiness was similar’ tell story of Datini ~ his rigorous recording of everything, letters that seem like e-mail today, etc… the environment different obviously… (black death, etc…)
- Datini believed in the compagnie model, basically “working together and make people more successful than individually”. Though still 2 year agreements, and mostly kin.
Corporations & Guilds
- Copied many of the arrangements the Italians pioneered (trading companies).
- Guilds (gilan in Saxon: “to pay”) - enjoyed a monopoly of trade within a city in return for substantial monetary donations to the sovereign. Had officers who did typical management responsibilities. A little more like a trade union than company. Often converged on luddism (i.e. boatmen’s guild ambushed the inventor of the first streamboat -> delayed the steamboat potentially 100 years).
- Chartered companies: associations of indep. merchants given monopolies of trade w/ specific foreign market. Had similar management processes (training, career growth) to guilds. Often operated as consortia ~ merchants working together to negotiate better prices for raw mats. Comparison to defense contractors in the modern day.
Imperialists & Speculators, 1500-1750
- 16th & 17th centuries - complex chartered companies around all over the world, long-lasting. they reflect the desire of governments & merchants to extract riches from the new worlds (imperialism). straddled plublic and private sectors, on some occasions governments owned shares.
- drew on 2 ideas from middle ages:
- shares that can be sold in an open market. was common historically, you could buy shares in mines & ships, etc… but “the naval capitalism of these centuries dramatically expanded the idea, bringing stock exchanges in its wake.”
- limited liability. occasionally surfaced before. colonization so risky that only way to raise large amount of $ was to protect them.
- Company stories:
- Muscovy Company (trying to find route to east indies, didn’t, but caught interest of Czar Ivan 4, who wanted to trade, company given monopoly on trade routes to Russian port)
- Richard Hakylut - Arguable ended up making the first ‘prospectus’ to convince Elizabeth I to finance an expedition. Additionally raised from 700 investors. Generated no profits.
- Dutch/English East India companies
- 25 years before formation - multiple majorly botched attempts, driven by merchants.
- state decides to form the two companies.
- eventually moved to 21-year length ventures. told investors they have limited liability. traded stock at stock exchange.
- most businesses int he world at this time were still small businesses that din’t have any of this stuff.
- the abuses of the big chartered companies that shaped the perception of joint-stock companies as dangerous and old-fashioned as late as 1800.
The Honorable Company
- East India company in some ways more than just a company ~ had an army, ruled a lot of the world, created a great civil service, built London’s docklands….
- Evolved over time ~ had some early hardships, but nothing existential, increasingly ‘stabilized’ - more joint stock offerings, routine-ized to 16 month long voyages financed multiple voyages at a time instead of just one. had to also manage seasonality, different countries and what they valued trading, etc…
- this all required sophisticated administration. created a 2 tier structure:
- General Court - all shareholders w/ voting rights
- Court of Directors - day to day management, 24 men elected by general court.
- 7 committees: accounting, buying, correspondence, shipping, finance, warehousing, private trade.
- also supervised the overseas network of resident ‘factors’ who managed local trading posts/factories.
- quality of operation was critical, lots of dangers: warlords, diseases, climate, temptations… company selected sons of biggest shareholders to fill jobs (aligned incentives). payed generous salaries. called the company a ‘family’. encouraged church-going, discouraged drunken-ness/gambling/extravagance. used anomaly detection for QA, as well as peer review.
For King and Country
- Company nearly died in mid-seventeenth century: domestically, English civil war + Oliver Cromwell liked free trade. internationally, driven out of Spice islands by Dutch East India. Out of necessity focused on India, got a new permanent charter. Huge profits.
- By late 17th century ~ powerful state monopoly. People resented their gains & power, tried various measures over time to thwart.
- Became involved in Indian politics ~ eventually towards direct control. Robert Clive (raid leader for East India TC), fought numerous wars & raids to secure Enligsh positions in S/SE Asia. Now more ethically questioned too. Became an “empire within an empire”. The ‘trade’ part of their business was in decline from competition ~ maritime insurance & Royal Navy made it easier for others to compete… while the ‘imperialist side’ was rising. Critics wanted it nationalized, since it was acting lie a goernment. Through the 1800s, every 20 years slowly nationalized parts of it until in 1874 it no longer existed as a company.
John Law and The God Mammon
- Early joint stock co’s were subject to rampant speculation & economic imperialism. France & Britain tried to use two chartered co’s: (Mississippi COmpany in France, South Sea Company in England) to restrcuture vast debts they accumulated in 1689-1714 wars.
- France & Mississippi Co: Convert government annuities (paid fix interest) into lowwer yielding shares. Resulted in the biggest financial bubble in history. Scheme cooked up by Jown Law, over many years. He was a speculator that got in control of the national bank, and had the king’s ear. The overall strategy was convert debt to equity, and do shetch tactics to make the share price higher (i.e. raise dividends). Turns out Mississippi company wasn’t even doing that much in America to warrant this value, so super speculative. Fled to Brussels in 1720 when it all came crashing down.
The South Sea Bubble and the Carousel of Fools
- Britain & South Sea Co: Diff. from Mississippi because the South Sea Company did not also control the Bank of England.
- South Sea founded in 1711 with monopoly trade to South America. War with spain was making this hard, so directors decided to focus on public debt. Scheme by John Blunt, on 1720 took over the entire British national debt. SSC share price started rising quickly. Euphoric mood post war-win, boom in small businesses based on government patents that spawned an investor/speculator class, and the south sea directors used similar tactics to John Law. Eventually credit crisis, and company stock plumetted, Britan nationalized to save the financial system, but in the meantime many of those investors lost all their money.
A Body without a soul
- Shenanigans like the ones above caused major damage to the idea of companies. Were they so bad? Bubbles & speculation schemes. Blood on their hands from imperialis tendencies. Pioneered salvery.
- On the other hand, in America, chartered companies sometimes played a more enlightened role:
- Virgina company introduced representative democracy into the colonies.
- Masachussets company transformed itself into a commonwealth –> shareholders in a company –> citizens of a state.
- Adam Smith critiques -> 1. disliked that chartered companies were monopolies. 2. thought join-stock co’s had big problem: hired managers would never do work as good as the person who owns.
- East India co great leap: the ‘Company Man’. Employees known as civil servants before governments used that word.
- Had inefficienies. John Stuart mill (son of James Mill, who worked at East India) -> found office duties a rest.
- Ending point: despite counter arguments, something had to be done to reinvigorate the idea of a company after this period of intense critique.
A Prolonged & Painful Birth, 1750-1862
Most of 18th century was a dark time for the joint-stock/chartered company.
Slavers & Industrialists
- Several frenzies of joint-stock company creation, though: xanal building, Napoleonic War, Insurance businesses. On the whole though, the Bubble Act that came out of the South Sea China scandal made it cumbersome and sporatic for new formations to occur.
- Two fastest growing & dynamics parts of British economy (The slave trade & industrialists) preferred partnerships to joint stock.
- Stories on slave trade growth as partnerships, but not much interesting.
- For industrialists: The amount of capital for financing mfg ventures was not large. Limited liability was viewed as a weakness: it would lower the commitment of the partner-owners.
- Some neat stories (i.e. partnership of Watt & Boulton, & their emploree Murdock who drew up plans for a steam locomotive that Watt dismissed as not being useful to anyone) but not relevant to the main thrust so didn’t notate them.
An American Alternative
- Companies had a much more positive connotation in America (core to the founding story in the colonies).
- Early American states used chartered corps to build vital infra: universities (Harvard, America’s oldest corporation, chartered in 1636), banks, churches, canals, municipalities, and roads.
- After independence, things sped up i.e. Bank of North America (first wholly American charter), the Society for Establishing Useful Manufactures, 1795 North Carolina allowed canal companies to incorporate without permission from gov., 1799 massachusetts did the same for water supply companies. By 1800 - 335 business corporations, 2/3rs in new england. Transport most common followed by banking. Most had monopolies. Governments were fickle though, frequently altered charters.
- Wall street mostly focused on government debt, did not trade a corporate stock until 1798, when New York Insurance came to market.
- Amercia’s earliest tycoons were players on the exchange, buying great chunks of govt. debt… and ran their own businesses as private partnerships still, as did America’s slavers and early industrialists like Eli Witney.
Setting the Company Free
- But partnerships weren’t perfect. Unlimited liability made it hard to raise capital. Death of partner often killed firm. Business folk stuck to them because they didn’t like bringing state into their affairs.
- In America (first half of 19th century), state began to step back. For 3 reasons. 1) Railroads required a lot of capital. 2) Legal - supreme court decided corporations have private rights (1819 re: dartmouth college). 3) Politcal - competition between states for businesses, concerned they were losing them to other states.
The Middlemarch Effect
- Europe: were forgetting about the South Sea & John Law bubbles.1807 in frnace enabled a new type of business - partnership w/ transferable shares. Sweden allowed joint stock firms in 1848.
- Series of legal wins in Britain ~ 1825 repealed bubble act finally, 1819 currency convertible to gold, relaxed restricutive labor laws in 1824, opened east india markets to competition in 1834, and repealed protectionist corn laws in 1836. But the most crucial change was railways, and their demands for large pools of capital. By 1849 2/3rd of railway capital came from stock exchanges. Other technological upheaval: 2,000 miles of telegraph lines & the first propeller boat to cross Atlantic. The world was getting smaller.
The Great Victorian Debate
- 1844 Joint Stock Companies ACt meant companies could incorporate just by registering (no more state sponsored charter needed). But no limited liability yet. Was a big debate. Sense that it would help poor more than the rich. John Stuart Mill argued that it was very liberal, would help the poor set up businesses. Mill still worried (Like adam smith) if professional managers would ever match owner managers.
- More practical concerned ruled the day ~~ britain was afraid of losing businesses to countries that would grant them limited liability (specifically in paris and the USA). So finally sneaked through act in 1855 to greant limited liability, subject to some capital requirements. Shortly therafter replaced by the Joint Stock Companies Act of 1856 bill that got rid of the cap requirements, by Robert Lowe.
- Still a long way from modern shareholder capitalism. No protection for shareholders (i.e. audited accounts (1897), corporate veil for directors (1900), shareholders would often do partly-paid shares…).
- Between 1856 and 1862 acts ~ 25,000 companies formed. More than 30% formed between 1856 and 1883 failed in the first 5 years.
- The rest of europse was keen to get in on the action (France & Germany) specfically, followed shortly thereafter.
A New Sort of Organization
- First, the corporation was a POLITICAL creation, not the automatic result of technology innovation. Now that the business was ‘freed’ from the state, did it have any social/prublic responsibility, or was it free to just go make money?
- Second, they had important social impact in any case. They were an innovation of an autonomous unit of power within the state but independent of it. The industrial economy’s need for establishing scale would drive the big company to the forefront of capitalism (starting in America!).
The Rise of Big Business in America, 1862-1913
// This chapter highly overlapping with The Rise & Fall of American Growth first half.
Sears story. Richard Sears was a genius copywriter (important for a mail order catalog!) but wouldn’t have succeeded w/o his partner Rosenwald who was a master operator. He was one of the new breed of professional managers. Took company public to raise more money in 1906 and expand faster. Incredibly complex operation, Henry Ford one of the first to visit the marvel. Pension fund for employees where employer contributions tied to profits, and most of the fund invested in Sears itself. A firm like Sears, with thousands of employees, various divisions, pensioners, shareholders, did not exist in 1840, not even in the wild imaginings of some futuristic visionary. Prior big businesses and tycoon employed very few people.
Also historically business people expected coordination to happen via the market, no one would have thought a vast corporation could coordinate the demand for womens undergarments in Oregon with the production of cotton in New England. By first world war, the big corporation had become the dominant business institution in America. By 1913 - America produced 36% of the world’s industrial output. The behemoths created this period defined modern America.
First Came the Railroads
- Modern enterprise became possible when the ‘visible hand of management’ outperformed the ‘invisible hand fo the market’.This was largely enabled by a new network of transport & communication. (duh, late 19th and early 20th century in USA!)
- This means the rise of big business is inextricalby linked to both technological innovation & deployment, as well as the aforementioned political battles.
- Railroads enabled, but they were also the first modern big busineses. Needed a lot of capital (led to the early New York Stock Exchange & Wall Street Investor Culture & Wall Street Journal). Needed a lot of administration because logistically complex (professional managers).
- Railroad companies consolidated to connect lines and streamline operations & avert price wars. Became a massive institution, the Penn railroad employed more than 110,000. The entire countries debt was about the same as the Penn railroads capitalization. Connected America.
The Retailers Before the Manufacturers
- First to take advantage of rail network was retail & distributors. In 1840, most distribution was done through wheeling & dealing and various merchants. Within a generation, would be mostly controlled by a few giant companies. 50s & 60s -> wholesalers. 70s & 80s -> chain stores/department stores/mail order catalogs…
- Mfg. was slower to catch on. First big burst was due to the civil war, # of companies jumped by 80%. Thereafter, mostly driven by new technology. Early elecrtification pioneers just switched their steam to electricity, didn’t reorganize processes around it. Most productivity gains didn’t come until process reorganized around the new technology. Tech+organization change required.
- Carnegie: line production system (broke down process into component parts and stations, leveraged standarization & scale.). Employees organized around layers and layers of managers:
- followed by Henry Ford: ‘stopwatch’ ideas from principles of scientific managemnt, introduced converyer belts so workers could stand in one place, improved all sorts of other stuff… Model T mfg time from 12 hours to 2.5 hours.
All Under One Roof
- Ford didn’t just build more quickly, he integrated mass production & distribution within one organization. This means you could find economies of scale in everything ~ from purchasing to advertising and thus pump an endless supply of products around the country. These types of companies just didn’t exist before 1860. They dominated by turn of century, and usually combined technology innovation + market clout.
- Duke & American Tobacco.
- George Eastman & cheap camera + film & amateur photographer.
- Cornelius Vanderbilt & railway industry consolidation. Consolidation became a huge thing ~ referees to as Trusts: U.S Steel. American Cotton. National Biscuit. American Tobacco. General Electric. International Harvester. AT&T. Unified Fruit. People: Rockefeller & JP Morgan.
- Standard Oil story ~ Rockefeller new scale mattered. Bought fifty refineries in Cleveland, 80 in Pittsburgh. Formed joint stock company standard oil. Formed South Improvement Company, was a trust. Separates control and holding of assets from their beneficial ownership. Was a way of getting around antitrust laws. Merged everything into Standard Oil trust, and ‘rationalized and cut costs across all the companies to streamline as one operation’.
- Standard oil trust was technically illegal because trusts couldn’t be controlled by out of state trustees.
- Many trusts moved to New Jersey because it allowed holding companies (companies that own controlling shares in many subsidiaries).
- Other Trusts also conveyed to holding companies , so that JP Morgan could invest (were some restrictions otherwise). This helped bring industrial companies to the public stock exchange, which was previously mostly rail.
- US Steel story ~ mostly partnerships. JP Morgan convinced Carnegie to sell it to him for 500 million. He then bought up 200 other smaller firms, and took it all public as US Steel for 1.4 billion.
- People on both sides of “were these new big companies/entities/organisms” good for us? Did they become our masters or do they serve us?
- Companies changed society, society changed companies. 1) growth of labor unions. 2) anti-trust laws - Sherman Antitrust of 1890 defines monopolies but didn’t set out how to prevent or stop them. 1906-1911 Teddy Roosevelt antitrust suit against standard oil, Supreme Court agreed -> became what would eventually be Exxon, Amoco, Mobil, and Chevron. In 1914 Clayton antitrust act restricted interlocking directorships when they restrained trade. 3) America also set up central bank in 1913 making the money trust less powerful.
The popularity of the company
- Backlash wasn’t actually that strong, especially compared to European. Only the very biggest were struck down (I.e tobacco), others figured out how to survive with a little diplomacy.
- Dislike power concentration, but Americans admired the sheer might of business. Disliked wealth, but admired they came from nothing. Americans lacked the strong sense of class consciousness of Europe. Most laborers believed they could become capitalists.
- 3 things helped curry favor: 1) big companies widened up to politics 2) ‘corporate social responsibility’: made efforts to improve capital/labor relations I.e welfare programs, profit sharing, company towns… robber barons embraced philanthropy. 3) the company was making America richer
- Size made it hard to compete with these firms - these firms stayed dominants from the 1880/ through the 1940s.
The Rise of Big Business in Britan, Germany, and Japan, 1850-1950
Britan: Despite enthusiasm for laissez-faire, was reluctant to convert to companies.
Germany & Japan: Embraced warmly, but twisted for other ends (workers’ welfare, nationalism), more ‘society’ oriented vs ‘profit’. Beginnings of shareholder vs stakeholder capitalism.
Land of Hope & History
- Britain led in industrialization, and of larger firms – but not companies. Why?
- Tempted to cling to earlier forms of capitalism (was working for them).
- Compact island - under less pressure to produce corporate giants
- Strong preference for family firms & personal management.
- Prejudice against industrial capitalism.
- “For American industrialists, companies were an end in themselves, to be tended and grown. For British industrialists, they were a means to a higher end: civilized existence”
- Elite British public schools steered most talented students into subjects like classics & scourned anything that resembled commerce. “Successful business was devastatingly uninteresting”. Industry was to blame for polluting the countryside, debasing the culture, and shattering their peace and quiet. This robbed British companies of scientific expertise & managerial brainpower.
- British universities 1922: 19% studied science. 1938: 16%. Studying science risked social ostracism ~ on top of that, industry-oriented science was also looked down on.
- Produced only a very small # of business/accounting departments, and even those were meant to be theoretical and detached from industry. One interesting comment… “they have found that successful businessmen have nothing to tell their students.”
- 1937 Cambridge graduates: Only 23% of men from business families followed their fathers into business themselves.
- Still, no amount of anticorporate activity could keep Britain from the impact of the corporation. Led to tade unions, revolutionized working habits, & provided jobs for women entering the workforce.
The good & the few
- There were a few really good British companies. They were more internationally oriented.
- One reason: the stock market. Gilber & Sullivan’s Mr Goldbury made it easier for smaller investors to get into the market by issuing lower share denominantions. In 1885 - 60 domestic manufacturers, by 1907 – 600.
- Imperial Tobacco (loose federation of british family firms) was 4x American Tobacco by 1937. Was better at converting smokers to branded cigarettes (from other forms of Tobacco), and better at promoting internal competition in the company.
- British Petroleum outperformed Exxon over the long term, and J&P Coats did better than American Woolen.
- Britain’s companies were hardened by free trade, in a way American firms were not.
- Unilever vs P&G ~ one of the few arenas Britain was competitive with US companies. Not until after World War 1 that britain developed bigger firms in the second industrial revolution (steel, chemicals, machinery).
The Rise of German Industry
- Distinct: Tolerance of what US/Britain would regard as ‘anitcompetitive practices’. In the same year that Sherman Antitrust act passed (1897), Germany passed a law that contractual agreements to regulate prices/output and market share were legal, because they benefited the country as a whole.
- Nationalistic outlook - underpinned by Friedrich List (the Prussian answer to Adam Smith). In National System of POlitical Economy he said “the basic economic unit is not the individual but the nation: the job of businesspeople and politicians is to band together for the national good”. Politicians were of course excited about this.
- Predecessor: “communities of interest” German word abbreviated to IG. IGs were coalitions of firms that pooled profits, coordinated policies on everything from patents to technical standards.. and frequently tied together via cross-shareholding.
- IG Farben example: began as alliance of young chemical firms that eventually converted to a single company. By late 1930s, controlled 98% of dyestuff market, 70% of photographic film, and 50% of pharmaceuticals. Though still somewhat acted like a small group of connected companies vs a single company.
- Second big difference from US/Britain: influence of big banks. German capital markets were too local & inefficient for industrialization. German bankers formed joint-stock & limited partner banks that channeled money from savers of all sorts into railways and then young industrial companies like Siemens. (maybe somewhat similar to JP Morgan in the USA). 1913: 17 of the biggest 25 joint-stock companies were banks. Bankers on the boards of all big German companies.
- Third big difference: Germany’s two level system of corporate control. Management boards (day to day decisions) & supervisory boards (big shareholders & interest groups i.e. politicians, partners, unions).
- All these differences ~ the boards, the bankers, & legalized nationalism/collusion – reinforced the 4th big difference: the emphasis on their social role in society. German ‘stakeholder capitalism’ was influenced by guilds - which lasted much longer in Germany than other European countries (explains fascination w/ training). In late 19th century ~ government imposes a “social insurance” system on companies - forcing them to pay pensions; and codetermination - giving a formal voice to workers. The Third Reich abolished unions, but Germans clung to belief in consulting society’s interest groups.
- For all these differences – what was the impact? They got something important right: companies endured defeat in 2 world wards, recessions, Nazism, and partition. Theory is it was less about stakeholder capitalism and more about 1) cult of education ~ scientific & vocational. invested heavily in R&D & training. 2) respect accorded to managers - who enjoyed same status as public-sector bureaucrats. Made a point to give technicians managerial responsibility (diff than USA).
The Zaibatsu of Japan
- Similarities to Germany: up-to-date professionalism w/ atavistic nationalism.
- 1868 collapse of shogunate ~ emperor decided to open the country to the west as part of their “rich country, strong army policy”. They invited 2400 foreigners from 23 diff countries to provide instruction in western methods ~ 2% of government expenditure. forced samurai to shed feudal ways & wear western clothes, many became businessmen. preached that moneymaking was compatible w/ Shinto/Buddhist religious beliefs – in fact was patriotic.
- Fast switch from importing goods to domestically manufactured. Particulary good at electrification: by 1920 50% of power in factories came from electric motors (vs 1/3rd in US, 1/4th in britain).
- Government played huge role: $$ into infrastructure, esatblishing universities, directing business/credit to companies, receipients of western technology & business models ~~ public investment > private sector investment until WW1. MAny of the early upstarts (& now big names in Japan co’s) were early on affiliated w/ government projects of one sort or another.
- Mitsubishi model of Zaibatsu (Japanese conglomerates – translation: ‘financial cliques’), dominated until WW2 (then reborn as Keiretsu). Family-owned holding company that controlled a cluster of firms through cross-shareholdings & interlocking directorates. Typically included at least 1 bank & 1 insurance company (conduit for public savings). Managers recruited into holding company from university. Spent their whole lives within this one family of companies. Operated in many industries, & were highly competitive. Offered great flexibility (could do specialized markets, or muster greate economies of scale). There were still SMBs, but the tone was set by Zaibatsu.
- Particularly successful @ mixing family ownership w/ meritocratic management. Families hiring professional managers (banto) was a historic tradition (back to 18th century). Was a suitable role for samurai was well ~ dedicate yourself to a family for life, do anything for company success. By early 1930s, all Zaibatsu were run by management professionals.
The Triumps of Managerial Captialism, 1913-1975
- By WW1, the big company was a defining American institution - remember Rise & Fall of American Growth: most rapid period of growth in history. Author’s claim: largely due to embrace of the institution of the ‘big company’.
- A list of America’s biggest companies in 1973 would seem familiar to someone in 1913.
- The multi-divisonal firm, important innovation: professionalized the big company and set dominant structure. Became the template for managerialism.
- The archetypical figure of this era was the professional manager.
- This is the story of the separation between ownership of a company and control of a company.
- Robber barons (Gillette, Wrigley, Heinz, Rockefeller…) couldn’t oversee every detail in the business and couldn’t find the skills to manage within their families… so turned to new class of professional managers. Skyscraper devlopment coincided, a ‘home’ for them.
- Over time, strategic decisions shifted to professional managers becasue 1) skills & knowledge accrued to operator 2) Robber Baron’s died and 3) share issuance diluting owneers.
- Alfred Sloan @ GM: An engineer in the parts/accessories unit, was asked to re-org GM. “Management was my specialization” he wrote in his autobiography. Decided org. was doing too many things to be a single division, split into autonomous units defined by the market they served, for cars - the price pyramid.
- Multidivisional @ GM was a kind of controlled decentralization. Centralized corporate strategy, divisions worked together to secure cheaper prices, large general management administration for ensuring divisions operated consistently.
- The beauty of sloanism: companies could expand easily. New research -> new product -> new division. Sloan: “size is not a barrier, just a problem of management.”
- Described Henry Ford as a more Jobs-ian character, subjective & personality driven, in contrast to Sloan, a more objective manager. Irony - “what Ford did for physical machines, Sloan did for human beings”.
- Multi-divisional structure spread quickly: GE, US Rubber, Standard Oil, US Steel. P&G followed suit, but with “Brand Management” - multidivisional for CPG firms. Helped weather depression of 1930s (big, diversified, hard to challenge).
- Business education followed suit: from bookkeeping & secretary skills to a more robust curriculum. Wharton 1881, HBS 1908. Expanded to marketing, finanace, business policy, etc….
- Management consulting: McKinsey (1926), American Management Association (1923). Herbert Hoover tried to apply scientific management to government. (Reminds me of Robert Moses, same time period)
- Different schools of management thinking: Taylor’s dominant “rationalist school” (i.e. found switching lights on and off improved productivity), a rival “humanist school” (i.e. treat workers well).
- The Company Man ~ 1) professional standards and 2) corporate loyalty. Defined by credentials rather than lineage (upper class) or collective muscle (workers). Adopted otto “the one best way”, and looked down on entrepreneurs as good-for-nothings.
- Standard Oil: Every employee must wear the Standard Oil collar, ca only be removed with the head of the wearer.
- IBM & Watson (1924): Uniform, refrained from drink, company song praising founder, competed for membership in 100% club. Watson: loyalty “saves the daily wear and tear of making daily decisions of what is best to do”.
- Paternalism extended to all employees: P&G offered disability/retirment pensions (1915), 8 hour work day (1918), guaranteed work 48 weeks a year (1920s). Minimized layoffs during recession. Henry Ford paid well above market rate. Henry Heinz paid for education in citizenship for his employees.
Three Debates that Defined the Company
- As the company’s impact & role in society depeened, so did the debate.
- Ronal Coase “The Nature of the Firm” paper (1937), explained why the economy moved beyond individuals sellings goods & services to each other. Mainly, transaction costs: the cost sole traders incur getting the best deal and coordinating manufcaturing & marketing was higher relative to a single org. coordinating within itself.
- Berle & Means in “The Modern Corporation & Private Proverty” (1932): found evidence of great concentration - top 200 companies accounted for 1/2 of assets, AT&T controlled more assets than the 20 poorest states. Difference, these new oligopolies were controlled by 10 million ordinary shareholders. 1916 supreme court: “a business corporation is organized and carried on primarily for the profit of the stockholders”. Bele & Means argued passivity of millions of stockholders had frozen absolute power in corporate management (interest of agent separate from principle).
- Rather than worrying about monopolies squeezing out small businesses, authorities looked to protect small investors from power of corporate managers. 1933: NYSE required proper accounts for listed companies, 1933/1934 Securities Act - fiduciary responsibility for reporting accurate information with directors. Roosevelt created SEC.
- Peter Drucker’s “The Future of Indutrial Man” (1942) - argued companies had a social dimension as well as economic purpose. Sloan invited Drucker to study GM - result “The Concept of the Corporation” (1946). Drucker argued big was beautiful, and GM’s decentralized structure was the key to its success. Persuaded countless firms to follow suit. However, the book made a plea to GM to treat workers as resource rather than just cost. The carmaker’s attempt ~ suggest workers write an essay “My Job and Why I Like It”.
- USA: Indicator of success of managerial capitalism: replaced things government would have done themselves. During WW2: government purchased 50% of the products of industry & agriculture. Ordered management to boost productivity and prevent strikes. Relationship continued post-war: drafted business people for positions like secretary of state, creation of “military-industrial complex”, companies more often sent lobbyists to congress. Government remained a customer, policeman, and ally - not owner.
- Western europe - governments nationalized companies postwar (heavy industry, communications, infrastructure especially). 1 in 5 workers employed by nationalized companies. Founders claimed creating a new form of socialist company. Architect of Britain’s postwar nationalization strategy: “the public corporation must be more than a capitalist business… Its board and its officers must regard themselves as the high custodians of public interest.”
- Similar to Sloan (corporations), Morrison claimed (government) could manage things better than the anarchy of the market - w/ controls and forward planning. Eurpoean & Asian govs. poured resources into national champions - example: Italy’s national oil company ENI became a conglomerate involved in things from crude oil to hotels. Generally - revolving door between big companies & big gov.
- Even w/ these gov. firms, there was little turnover in world’s top 200 companies until 1970s. Between 1947 & 1968 - % of corporate assets owned by U.S. 200 largest industrial companies went from 47% to 61%. Banks added branches & consolidated, hotels/restaurants/rent-a-cars spread their networks across the land - helping build highway system. Booming IT industry produced a few new firms that made it to super leagues, but older firms hung around.
- Oversight from wallstreet: since dividends were taxed higher than capital gains, postwar managers didn’t return their cash to investors, instead they re-invested it in the company, making the firms bigger faster.
- Firms became more bureaucratic & introspective. Peter Drucker’s “management by objectives” published 1954.
Organization Man & American Benevolence
- 50s & 60s: companies had close relations with government, and also spread their spoils among various stakeholders. 1961 “The New Industrial State” (Galbraith) argued the US was run by a quasi-benevolent oligopoly. A few companies dominated each industry (i.e. the big 3 cars cos or the big 5 steel cos) & planned economy in name of stability and provided blue collar workers lifetime employment & solid pensions, & had good relations with unions (40% of workers were unionized in 1960).
- Most obvious winners: the managers. 50s and 60s were peak Company Man => “Organization Man”. Relished tradition of office life: secretaries (office-wives), water cooler chat, Christmas party. Spent more time in office then home, often left wife for secretary.
- Company Man innante conformity began to worry authors. The Lonely Crowd (1950) noted they were “other directed” instead of “inner directed” … The Organization Man (1956) worried the emphasis of fitting in was stifling entrepreneurialism… Status Seekers (1959) showed how big companies develop intricate status measures (i.e. size of office) and how Company Men chase them like lab-rats.
- Yet, manager mood was triumphant. American bosses ran the government. Abroad, American companies conquered Europoean markets. The hugely popular book “The American Challenge” argued the European Common Market was an American organization
- By 1970, 50% of british biggest 100 indutrial firms turned to McKinsey to reorganize themselves.
The Corporate Paradox, 1975-2002
- 1973 Sears unveiled worlds tallest building (another near 1970-peak event i.e. moon landing). American corporate dominance. But by 2002, the idea of a big company (multidivisional, hierarchical & offer lifetime employment) had been unbundled. Culminates in Enron scandal of 2002.
Hail the company
- Movements towards deregulation began in late 70s in the Britain, with Thatcher. Government privatized British Telecom, British Gas, British Airways, British Steel, and more… by 1992 2/3rd of state-owned industries privatized. Downsizing of workforce and upsizing of executive salaries.
- Other European governments followed British lead (Volkswagen, Lufthansa, Renault, Elf Acquitaine, ENI, Deutshe Telekom), but most radical was in former communist world. Yeltsin in Russia: Eighteen thousand companies privatized, rechartered as joint-stock with state owning all shares, then issued vouchers to all citizens to buy shares, 40 million Russians became shareholders. China: Tiptoed in. 1990s: Small entrepreurs could create companies. “Red chips” - favored state firms that could register on HK stock market. 1997: Fifteenth party congress decreed that most of the country’s state companies would be freed and operated as people-owned companies.
- USA: Carter started with deregulating Airline industry, then railroad and trucking, then AT&T in 1981.
The Unbundling of the Company
- Rate at which American companies left Fortune 500 increased 4x between 1970 and 1990. Bigness became a code for inflexibility, antithesis of new credo: entrepreneurialism.
- The big firms that survived did so by internal revolution i.e. IBM ~ 1990s laid off 122k workers (25%), and Welch’s reign @ GE.
- Shift towards information: 1999 America’s most valuable export was IP licensing + royalties ($37 billion), compared to aircraft ($29 billion).
- Companies were pressured to focus on their ‘core competencies’. And they discovered these often were in intangibles (i.e. culture of discovery @ Glaxo, tradition of engineering @ Mercedes). Hollowing out also commin in Silicon Valley (i.e. Cisco one of America’s biggest manufactures but only made 1/4th of product it sold). Ford’s River Rogue plant: 100,000 workers to make 1200 cars a day, by 2001 3,000 workers to make 800 a day - switched to only assembly and test instead of vertically integrated.
Round up the usual suspects
- Three main groups led the unbundling: Japanese, Wallstreet, and Silicon Valley.
- Japense companies systematically beat American companies domestically: first in motorbikes (Honda, Yamaha, Kawasaki, Suzuki), then in cars, and finally in consumer electronics (Sony, Matsushita).
- At the heart of the Japanese model was Toyota’s system of lean production. After WW2, Toyota bosses toured American factories and were obsessed with the wasted effort they saw. Turned to ideas of Edward Deming and Peter Drucker, who focused on improving quality. Ideas: Every worker in charge of quality & just-in-time manufacturing. Counter to American’s Sloanism: quality control was a department. American companies eventually copied.
- Other part of Japanese model: “long-termism”. Believed in lifetime employment for all, management by consensus. Financed expansion from their keiretsu banks, profits deemed less important than market share.
- All together “long-term stakeholder capitalism” in contrast to American “shareholder capitalism”, posed a challenge up until the 90s, when Japan stagnated. Some reasons: management by consensus was slow, lifetime employment made it hard to promote young talent, the best left to work for western firms. Lack of short term pressure also meant tended to overproduce and overinvest, which hurt in hard times.
Barbarians and Pension Funds
- By 1980 in the US, big investment institutions owned 1/3rd of shares on wall street, 60% by 2000. Pension funds went from 0.8% in 1950 to 30% by 2000. Enormous power for organizations like CalPERS. Mutual funds 2% in 1950 to 12% in 1994. These and things like 401ks because savers started checking on investment manager performance => made the investment manager job glamorous.
- Investment world also becoming more complex betweeb deregulated markets, international markets, and computers entering the picture. Mathematicians dreaming up swaps/options/derivatives… hedge funds arrived. Of all, corporate raiders struck the most fear into business managers.
- The popular model was the ‘leveraged buyout’. At heart, an attempt so make managers think like owners. Pioneered incentivizing managers with stakes in their businesses. Investors wanted companies to be good at one thing, they could diversify on their own. Remorseless about punishing bureaucratic flab.
- Silicon Valley helped unbundle the company: business ideas + technology.
- 70s, started to acquire its identity: anti-war protesters/hippies
- comeptition from Japanese in chips pushed SV to diversify into software and outsource its manufacturing
- this model proved more resilient thatn Boston’s Route 128 - which had just as much venture capital and universities (especially through the 80s)
- Why? Big east coast firms such as DEC and Data General were self-contrained empires focused on one product: mini-computers, Silicon Valley was a network of small firms that endlessly spawned new ones.
- SV changed companies in two ways: 1) less intermediaries for market transactions (i.e. personal computing, eBay) and 2) alternate form of corporate life ‘creative destruction’, tolerated failure, hyper-growth, ties were optional.
- this spirit spread throughout corporate world by the end of the 20th century (to some extent)
Unbundled, Flat, and Borderless
- End of 20th century: loss of confidence and mounting uncertainty, best symbolized by rise of ‘management theory’ industry.
- As companies outsourced everything in sight, some even outsourced thinking: McKinsey had 4k consultants, and IT/accounting firms established consulting models.
- Simultaneously, companies retreated HQs out of cities and into suburbs. “Cult of bottom line” => do away with unnecessary expenditures, often at expense of civic responsibility.
- Company Man values were under assault: loyalty, malleability, willingness to put in face time. New hero: tieless entrepreneur. Example: IBM culture shift under Jack Welch.
- Most significantly a psychological change (i.e. not everyone was leaving corporate life), but ratherthe old certainties of employment and position were gone - “employability” not lifetime employment. Growth in anxiety.
- These shifts prompted: what is the company’s relationship to the state?
- Governments had set the company free: deregulating, loosening trade barriers, and privatizing state-owned companies. Also, politicians and interest groups looking to turn the company to social ends.
- EU: started to regulate a lot: consumer protection, safety, product definition.
- US: Laws governing health, safety, environment, employee and consumer rights, affirmative action. Also, increased $ spent by companies on lobbying to twist these rules to their advantage.
- More frequent piercings of the corporate veil: In Britain - 1986 Insolvency Act made directors liable for debts incurred after they should have been reasonably expected to wind down.
- Real onslaught in America… below
Enron and Beyond
- 1990s infatuation with companies: G W Bush first MBA president w/ chief executive cabinet, explosion in magazines covering business, CEOs on the cover…
- By 2002 things changed - Sarbanes-Oxley. Many executives faced criminal charges. 70% of Americans did not trust brokers/corporations.
- Catalyst was bursting of American stock-market bubble. Beteween March 200 & July 2002 - destroyed $7 trillion in wealth. Widespread hurt b/c of spread of mutual funds & contribution retirement plans.
- Specific catalyst was the Enron case. Followed by WorldCom (bookkeeping deception), Xerox, AOL, and many more…
- Reaction: two camps.. “bad apples” vs “rotten roots”. Rotten roots argued that since 90s had seen dramatic weakening of proper checks and balances on companies. => Sarbanes Oxley. But wanted more: majority of directors independent, auditing firms rotated, etc…
- However, politics was more on the side of bosses – as more and more Americans owned stocks. Stockholders are interested in oversight (auditing/acounting/regulation pensions/etc…) but don’t want to impeded company performance.
- Not a backlash against business or capitalism, but against bad business practices. However, America ended the century in self doubt; old debate about whether companies were supposed to merely make money, or to be active instruments of the common good had reappeared.
Agents of Influence: Multinationals, 1850-2002
Multinationals have loyalties that transcend national boundaries; which pose threats to both rich and poor nation-states, to national elites, conservative populists, or even socialists. Mutli-nationals thrive in foreign markets because they outcompete domestic firms, which is seldom popular.
The First Forays Abroad
- Just like companies, an idea that started in Europe, flowered in 19th century Britain, and taken over by Americans.
- Banks were the first businesses to large scale coordinate activities across borders. Next were the charter companies (i.e. East India). And finally, the railways in Britain (mostly because it was a huge export industry). Extracting raw materials followed a similar model (De Beers, Rio Tinto, & Shell).
- End of 19th century: 1) multinationals expand from industrials to pharmaceuticals, cigarettes, chocolate, soap, margarine, sewing machines, ready-made clothes (enabled by shrinking world: telegraph, railways…) and 2) had to start to deal with politics, namely tarriffs.
An Empire of their Own
- By 1950, America had firmly replaced Britain as the world’s premier progenitor of multinationals because American companies already had to figure out how to serve a large national market: skills transferred to global (mass marketing, mass mfg.).
- After ww2, 1947 GATT (swept away most tarriffs) + Marshall plan in Europe => stimulated consumer demand, & America’s healthier companies seized oppty.
- American secret weapon: passenger jet. Enabled Americans to look at their companies as global entities vs collection of national co’s.
- 1960s heyday: led by IBM, Ford, Kellogg, Heinz, P&G: 1.7 billion direct american investment in Europe to 25 billion by 1970.
- By 1980s, American’s on defensive to German & Japanese multinationals.
The Multicultural Multinational
- History of multinationals through national lens becomes difficult in final quarter of 20th century. Three big shifts: 1) huge increase in number of multinationals (2001: 65,000 1975: 12,000) 2) smaller companies just as much as bigger ones b/c lowering of trade barries and deregulation 3) tried to treat world as a single market (single HQ, same product for all markets, single adv campaign, etc..)
- Increased investment in electronic communication systems, intellectual arbitrage (i.e. Italian designer and Japenese specialists in miniaturization). Desire to combine global scale & local knowledge (i.e. Nestle put HQ of pasta buiness in Italy).
- Some firms mostly looked to intnl markets for cheap labor (i.e. Nike economy), setup backlash against multinationals.
The Great Unloved
- End of 20th: antiglobalization sentiments rise. Though, less powerful than critics decried “companies are 51 of top 100 economies”. Compares sales with GDP, but GDP is value-added not sales. Using value add metric only 37 of 100, and only 2 in top 50 (Wal-Mart/Exonn). Wealth not same as power: companies had to generally bow to local governments (unlike old multinationals like East India).
- History points to two contradictory conclusions 1) multinationals have become better over time compared to state-chartered monopolies who sought conequest and exploitation and 2) multionationals have never been loved - either at home or abroad - something scary about the idea that your job is dependent on decisions of managers who live faraway.
- Multinationals will represent the best of companies ability to improve productivity and living standards and continue to embody what is most alienating.
Conclusion: The Future of the Company
- Company has been a core part of social change: not just churning out society-changing products like Model T or Microsoft Word, but the way people behave, dictating the pace of daily life.
- Secret to its success: ability to evolve. 19th century: instrument of government to a “little republic” running its own affairs and making shareholders money. 20 century: Wilson’s ‘new organization’ outlived robber barons and allied itself with their hired servants (Company Man) - turned organizations into smooth-running bureaucratic machines. Most recently, morphed to a lean, flattened entrepreneurial creation.
- It will continue to change, but how? Depends on two long-running themes 1) economic logic - balance between transaction costs, hierarchy costs, 2) political logic - companies sprang from loin of the state - dependent on ‘a franchise’ from society - public reins them in, to make sure they’re to the benefit of the public.
Three Possible Worlds
- From economic standpoint, three possibilities:
- 1) handful of giant companies silently take over the world: unprecendented spurt of mergers… survirors are the lords of the world. trouble: history has shown that those at the top don’t stay there long… and the more futuristic the industry, the less evidence of concentration.
- 2) companies are becoming less substantial: no assets, factories, warehouses… no office… distributed freelancers designing.. digital order systems.. passed to subscontractors… FedEx… etc… A company is just an idea and a few people. Modern technology shifting balance towards markets & individuals as opposed to big companies. Counter: Big companies have core competencies, often cultural that can’t be easily purchased.
- 3) discrete company is no longer the building block of the modern economy - it will be replaced by the ‘network’. Akin to Japan’s keiretsu and SK’s chaebol, or Silicon Valley’s boundaryless firms. networks in SV are still built as companies. joint-stock brings legal personality and internal accountability - networks have neither. makes it difficult for them to make joint decisions or divide profits. networks succeed when a firm drives it.
- None are inevitable, though 2 & 3 seem more likely- trend of the moment is for a corporation to become ‘less corporate’, breakdown into smaller entrepreneurial units in loose relationships with each other.
A Franchise Under Threat
- Trouble with the economic examples above: ignore politics. Core theme of book: jostling for power between company & government. Balance has recently swung towards the company (force governemnts/nations to compete for them, corporate advertising/control of the media, outcompete the largest anti-trust efforts). Thought govt still more powerful: companies more heavily regulated than ever, companies often tied to their geographical roots).
- From company’s perspective, two clouds of horizon as far as keeping its franchise from society: 1) roguery, particularly during boom cycles - should be curbed by Sarbanes-Oxley, but wished it went further (rotating audit firms) 2) stakeholder ideal that companies are responsible to a wide range of social groups/concerns vs the shareholder ideal - primary responsibility to shareholders.
- The shareholder ideal has been gaining ground in historically ‘stakeholder ideal’ bastions like Gernamy and Japan. But is the shareholder ideal so bad? Claim: public scrutiny, the desire to be a trusted brand, and a popular employer forces shareholder ideal to approximate stakeholder ideal. Points out connection between rise of capitalism & the protestant ethic. Points to modern examples of corporate responsibility.
- Twist to the modern debate: company in general has never seemed more vibrant, but company as individual has never been more fragile. East India lasted 258 years, will be remarkable if Microsoft lasts 1/4th of that.
- Will we find a successful way of exploiting an organization that has been colectively indispensable, yet individually unpredictable? In any case, the joint-stock company deserves a round of applause for what is has achieved.