In the late 1870s, President Rutherford B. Hayes said the U.S. had a "government of corporations, by corporations, and for corporations." He'd probably say the same thing today, underscoring the amazing trajectory of the modern corporation. If you want to dive deep into this concept, check out The Company: A Short History of a Revolutionary Idea.
A step back in history
The authors, Economist journalists John Micklethwait and Adrian Wooldridge, begin their story around 3000 B.C. Despite the simplicity of corporations during that era, they still allowed for trade in civilizations like Mesopotamia and Sumeria.
By the 1500s, the introduction of chartered companies had started to rev things up. These vehicles typically had the support of governments to colonize the New World, and even to convert "heathens." The East India Company, for example, had a board of directors, layers of management, and a private army of 260,000 troops. For some shareholders, the firm became a source of tremendous wealth.
There were also Enron-style blowups along the way. John Law was the Jeff Skilling of the 1700s; born to a wealthy family, he spent money wildly and once killed an opponent in a duel. Through political cunning, he gained control of the French stock market and central bank, leveraging this connection to pump up shares of his Mississippi Company. When the stock price eventually collapsed in 1720, Law fled France with a false passport.
More than 100 years later, British merchant Robert Lowe hit upon a better way to structure companies. He believed that it was critical for investors to have "limited liability," protecting them from their company's outstanding debts should it go under.
England and the U.S. adopted this radical approach, and the new corporate protections made it much easier for companies to raise enormous amounts of money to build railroads, skyscrapers, and telegraph networks. The results were amazing. By the 1920s, a multitude of powerhouses like General Electric
Perhaps these firms were too successful. Critics feared that these companies exerted too much power over society, if not democracy itself, and that shareholders weren't getting a fair shake.
Modernization of the market
The business world faltered in the late '20s and early '30s, as the stock market crashed and the U.S. plunged into the Great Depression. The federal government took action, passing extensive regulations and establishing the Securities and Exchange Commission. Fervent capitalists saw this as a disaster. Shouldn't the market be free?
Ironically, regulation was the next phase in the corporation's success. Combining limited liability with full disclosure encouraged even more investment, and investors became even more willing to put their hard-earned money into risky start-up ventures. While many would fail or languish, some would go on to become giants, including Microsoft
Today, however, concerns over corporations' reach and power remain. Micklethwait and Wooldridge particularly analyze the Sarbanes-Oxley regulations, which imposed tough reporting requirements on companies following the meltdowns of Enron and WorldCom. Is Sarbanes-Oxley too tough and expensive? Does stringent disclosure make our capital markets less competitive? The debate will likely continue for some time.
Not just for a history buff
Somehow, Micklethwait and Wooldridge squeeze all of this history into 191 pages. While brevity is good, I still think they could have fleshed out some areas, like their discussion of emerging markets or their comparisons of capitalist and communist societies.
I'm a business history junkie, having taught several classes on corporate law and formed a myriad of corporations. While this book was right up my alley, it's also a good book for any Fool. To invest intelligently, it's important to have some historical perspective on the capitalist system, and to understand how critical the corporation really is.
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