Sunday, October 24, 2010

The History of the Company

The early chapters of The Company: A Short History of a Revolutionary Idea by John Micklethwait and Adrian Wooldridge trace the history of business organization. While there were partnerships and other forms of business organization into the distant past, the early "corporations" were typically chartered by European monarchical governments giving monopolistic rights to groups to encourage the investment needed to exploit emerging commercial opportunities with high risk such as the exploitation of overseas markets in Asia and America, or the construction of canals.

Early bubbles led to general distrust and fear of corporations and draconian legislation to reduce the powers of corporations.

I was struck by the comment that corporations were accorded juridical personality to protect against government capriciously ending privileges that had been granted in corporation charters. Legislatures felt that what they had given they could take away at will; investors felt that they needed more surety of charter commitments to justify investments in the face of risk. The idea that corporations had rights to free speech, as we are now suffering, seems very recent indeed!

The idea of limited liability for corporate investors was quite controversial when first introduced, and was not embodied in law until the 19th century. It had been felt by many before that time that the management of business organizations by their owners was necessary for efficient operation and that the stake of the partners in their organization was needed to assure prudent management. The need for regulation to assure good management and prudent risk management by business organizations is obviously still with us.

It seems that the birth of the modern corporation really dates to the middle of the 19th century, although many of the characteristics of the modern corporation draw on earlier institutional inventions.

I posted one earlier comment on this book.

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