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President hayes warns of corporations and rockefeller { August 29 2003 }

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They were battling with labour unions and challenging politicians. "This is a government of the people, by the people and for the people no longer," warned President Rutherford Hayes: "It is a government of corporations, by corporations and for corporations." The year before the curtain went up on Utopia Limited, the Ohio Supreme Court ruled that John D. Rockefeller’s Standard Oil had created a monopoly.,,630-795896,00.html

August 29, 2003

The British invented it, by accident, then other countries did it better: the making of the modern company

Extracts from The Company by John Micklethwait and Adrian Wooldridge

ON THE evening of October 7, 1893, a new operetta opened to a packed house in London’s West End. W. S. Gilbert and Arthur Sullivan were the titans of Victorian popular culture. Adding to the air of expectation, the two writers had quarrelled a few years earlier and it had looked as if their long collaboration was coming to an end. Now they were back.

One of the themes of Utopia Limited, or The Flowers of Progress, was not an obvious rib tickler: the limited-liability joint-stock company. That night’s operetta made fun of the idea that companies were sweeping all before them, enriching investors as they went. An English company promoter named Mr Goldbury arrives in the exotic South Sea island of Utopia and sets about turning the inhabitants into companies. Even babies issue company prospectuses.

At one point in the final act the King of Utopia demands: "And do I understand you that Great Britain/Upon this Joint Stock principle is governed?" And Mr Goldbury replies: "We haven’t come to that, exactly -- but/We’re tending rapidly in that direction/The date’s not distant." Soon afterwards the Utopians join in one of the most improbable choruses ever set to music: "All hail, astonishing Fact!/All hail, Invention new/The Joint Stock Company’s Act/The Act of Sixty Two!"

For all its barbs, Utopia Limited carried a distinct note of triumph. It was a celebration of yet another quirky Victorian invention that had changed the world. The various companies Acts of the mid-nineteenth century, including "the Act of 1862", had set free a new institution. Companies were spurring the first great age of globalisation. They were luring millions of people off the land, changing the way that people ate, worked and played. They were erecting the first towering offices in Manhattan and despoiling the Belgian Congo. They were battling with labour unions and challenging politicians. "This is a government of the people, by the people and for the people no longer," warned President Rutherford Hayes: "It is a government of corporations, by corporations and for corporations." The year before the curtain went up on Utopia Limited, the Ohio Supreme Court ruled that John D. Rockefeller’s Standard Oil had created a monopoly.

Nowadays, the influence of companies seems, for better or worse, even more awe-inspiring. Hegel predicted that the basic unit of modern society would be the State, Marx that it would be the commune, Lenin and Hitler that it would be the political party. Before that, a succession of saints and sages claimed the same for the parish church, the feudal manor and the monarchy. Yet the limited company now seems to have bettered them all. Companies have proved to be the West’s secret weapon.

Cultures that did not embrace capitalism’s most potent form -- Arabia, non-Japanese Asia and the old communist world -- have been left behind.

You might imagine that modern historians would be rushing to celebrate this success. In fact, the great enabling Companies Acts in the mid-nineteenth century get barely a sentence in most recent biographies of William Gladstone, one of their political champions; the intellectual godfather of the modern company, Robert Lowe, is more remembered for his work on education. The relevant volume of the New Oxford History of England that covers 1846-1886 does not find room to discuss the invention of the company in its 720 pages.

So how did the modern company emerge? The story is depressingly familiar. The British invent an enormously powerful technology, somewhat by accident, and then watch other countries exploit the technology more successfully.

What exactly did the Victorians invent? There are, broadly speaking, two sorts of "company". The first is merely an organisation engaged in business. You can trace their history back to ancient Mesopotamia. For instance, under one partnership agreement in 2000BC some 14 investors put 26 pieces of gold into a fund run by a merchant called Amur Ishtar, who himself added four. The fund was to last four years, and the merchant was to collect a third of the profits -- terms not dissimilar to a modern venture capital fund.

The second definition is more specific: the limited-liability joint-stock company is a distinct legal entity (so distinct in fact that its shareholders can sue it), endowed by government with certain collective rights and responsibilities. This was the institution that Victorians unleashed. We say "unleashed" because there were certainly limited liability companies before then. But in order to get limited liability, companies had to get a charter from the Crown. This was an incredibly cumbersome, expensive process -- one that people were prepared to pursue for big monopolistic infrastructure projects like building canals or running India, but not for normal business.

Normal commercial life, including the first Industrial Revolution, was conducted through partnerships, fragile creations normally run by families. The untimely death of a key partner or even an heir often killed the firm with it: Mr Dombey’s problems in Dombey & Son (1848) stem from the death of his son. Dombey entrusts the day-to-day running of his business to James Carker, and does not discover how badly he is doing until Carker runs off with Dombey’s wife.

Strangely, many businesspeople were loath to ditch these structures. Companies involved going to the State. As for the privilege of limited liability, many businesspeople saw this as evil: owners should be managers. Many Victorian progressives stuck to Adam Smith’s view that limited liability was an unwanted subsidy.

Two things changed this. The first was the arrival of an industry -- the railway -- that required gigantic amounts of capital. Railway Acts began to clog up Parliament. There were 120 Railways Acts in 1845, 272 in 1846 and 170 in 1847. The second was a change of heart in progressive Britain. A growing number of liberals began to argue that it was unjust to deprive businesspeople of the advantages of limited liability.

These supporters included free traders like John Cobden; some industrialists (though most were still suspicious); the press (The Economist explained: "Why Companies are now necessary" in July 1856, gloomily admitting that the new form "would be carried to excess" but the State should keep out of it); various Christian Socialists (who thought limited liability would let the poor set up companies); William Gladstone; and particularly the young president of the Board of Trade, Robert Lowe. If anyone deserves the title "father of the modern company" it is Lowe. Lowe was a complicated figure: a serious intellectual who made his career in the rough-and-tumble of politics and a fervent liberal who turned against giving the lower classes the vote during a visit to Australia. He would later go on to promote education reform on the grounds that politicians "must educate our masters" and become Chancellor of the Exchequer.

In the mid-nineteenth century, Gladstone, Lowe and Edward Pleydell Bouverie bullied through a succession of Company Acts and Limited Liability Acts. By the time they had finished, 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 raise tradable shares to any number of investors and that those investors could have limited liability. Rather than having to seek special sanction from Parliament, all that was necessary was for seven people ("If possible, all peers and baronets," Goldbury mischievously advised the Utopians) to sign a memorandum of association, and for the company to use the word "limited" to warn creditors that they would have no recourse to the company’s owners.

These arcane provisions, which were rapidly copied in other countries, unleashed entrepreneurs to raise money, safe in the knowledge that investors could only lose what they had put in. A Briton could now invest in, say, a Chicago meat packer, and know he would only lose his stake.

There were teething problems. Around a third of the first "little republics" (as Lowe called his creation) went bust fairly promptly -- some spectacularly. The Morning Post ran a xenophobic campaign against the railway companies on the grounds that they were exporting British jobs abroad. At the same time, American populists denounced the very same companies on the ground that the British were trying to re-colonise the country by stealth. In Anthony Trollope’s The Way We Live Now (1875), a company, supposed to build a great railway linking Mexico and the United States, is hijacked by an unscrupulous continental financier, Augustus Melmotte, and his American partner, Hamilton K. Fisker.

All the same, the company was rapidly taken up around the world. Reformers in Japan seized on the idea to revolutionise not just business in Japan but the social order, redirecting the samurai to more peaceful forms of competition. In Germany, too, companies were put to nationalistic purposes. The AGs and IGs surged ahead in new technologies like chemicals. Across the Atlantic, companies built much of modern America; and they also changed the scope of business. To distribute goods around a whole continent you needed managers, marketing departments, distribution centres and ever larger numbers of shareholders.

Americans were scared of the power of people like Rockefeller and Morgan, but they also realised that Lowe and Gladstone had ushered in an organisation that was uniquely effective in rendering human effort productive. "The limited liability corporation is the greatest single discovery of modern times," proclaimed Nicholas Murray Butler, one of the great sages of the Progressive era. "Even steam and electricity would be reduced to comparative impotence without it."

And what about Britain? The country that led the way in industrialisation, in multinational commerce and in setting up this new institution certainly profited from companies. But it failed to produce the big industrial firms that were then the key to economic success; and it failed to produce managers in the same abundance as the United States or even Germany.

For instance, in 1902 America’s manufacturing workforce was only marginally bigger than Britain’s, but Britain had few firms to rival America’s leviathans. US Steel was worth $1.3 billion and employed a quarter of a million people. The largest British employer, Fine Cotton Spinners and Doublers, had only 30,000 workers, and the largest firm on the stock market, Imperial Tobacco, was worth only £17.5 million. Britain’s top 100 firms accounted for only about 15 per cent of output in 1900. And soon Britain was no longer really in second place. If you wanted to see technological might and managerial excellence, you were better looking along the Ruhr than the Mersey.

There are plenty of excuses for Britain’s failure to capitalise on its head start. As a pioneer of industrialisation, it was tempted to cling on to earlier forms of capitalism; as a compact island it was under less pressure to produce corporate giants (though the empire constituted a "domestic" market as big as America). But two familiar things stand out: a strong preference for family firms over professional managers; and a snooty distaste for industrial capitalism.

As late as the Second World War, a remarkable number of British firms were managed by members of the founding families. Family-run firms had no need for the detailed organisation charts and manuals that had become commonplace in large American companies. They relied instead on Uncle Freddie knowing what was best.

There were good family firms. At Cadbury, for instance, the owners managed and the managers owned. But usually the results were less impressive. Alfred Chandler, the doyen of business historians, points to Pilkington, the glass-making giant, which reserved all its top positions for members of the family. But by the end of the 1920s, profits were falling. Austin Pilkington, the chairman, was cracking under the strain, unable to craft a long-term strategy. The family took remedial action, bringing outsiders on to the board. The firm was saved only because it had the good luck to recruit a talented distant relation who happened to be called Pilkington.

The British firms that did eventually emerge -- like ICI, Unilever and Imperial Tobacco -- turned out to be longer lasting and more profitable than their big American peers. The problem was there were not enough giants. Britain boasted more than 2,000 cotton firms -- John Maynard Keynes complained that "there is probably no hall in Manchester large enough to hold all the directors" -- but only a handful had anything as sophisticated as a marketing department.

The elite public schools poured scorn on anything that smacked of commerce. ("He gets degrees in making jam/at Liverpool and Birmingham" went one popular Edwardian rhyme.) To British intellectuals, particularly between the wars, a career in business was a despicable way of life, pursued only by the stupid and unimaginative. One of C.P. Snow’s characters remarks that "successful business was devastatingly uninteresting". "How I hate that man" was C.S. Lewis’s tart comment on Lord Nuffield, Oxford’s biggest employer and one of the most generous benefactors to Lewis’s beloved university. J.B. Priestley dismissed "the shoddy, greedy, profit-grabbing, joint-stock company industrial system". In opening a new set of laboratories at Bristol University in 1927, Lord Rutherford made it clear that he would regard it as an "unmitigated disaster" if they were devoted to "research bearing on industry".

Some of these prejudices were brought to an end by the Second World War -- but not many. Look at the way that British business lost ground in the 1950s, 1960s and 1970s, and the same story reappears time and again. Indeed, it was precisely this sort of "anti-business attitude" that Margaret Thatcher set out to change in the 1980s.

Thatcher sold the company with much the same enthusiasm as Mr Goldbury. She introduced companies everywhere, most notably through privatisation -- another British idea that spread around the world. And she also went to great lengths to champion entrepreneurialism, drawing on the ideas of writers like Corelli Barnett and lionising businesspeople from Lord Hanson to the new breed of "yuppie" traders and Japanese car manufacturers. The result was social upheaval similar to that which frightened Trollope. Latter-day versions of Gilbert & Sullivan even found ways to update Utopia Ltd -- through satirical plays like Serious Money. So something changed. But how much? If Robert Lowe were to return to Blairite Britain and to survey his little republics, what would he see. He would no doubt take pride that hold-outs as obstinate as communist China and the partners of Goldman Sachs have decided to embrace companies. He would also be delighted that a socialist prime minister could celebrate private-sector businessmen like Richard Branson.

But he would also surely be worried that the British disease -- that fatal combination of excessive government intervention and anti-business snobbery -- was beginning to reassert itself in the wake of the Thatcher upheaval. The Blair Government seems prepared to let any sort of organisation run the country’s rail network, other than a limited company (which is odd seeing that most of the infrastructure was built by private companies). Lowe would also be mystified why the mere idea of letting capitalism’s most potent organisation into, say, the health service is viewed as anathema -- even though French and German companies play a large role in their much better services.

As for our snobbery towards business, we live in a country where the word entrepreneur is still symbolised by Arthur Daley and Del Boy Trotter, rather than Bill Gates or even Richard Branson. According to MORI, we trust our business leaders even less than our local councillors or trade unionists. In America, a show called The Office would have been a sex-filled soap opera featuring lithe young lawyers; here it was a brilliantly funny but still maudlin satire on the dreary world of work. We no longer study Latin; but the most popular subject is media studies. The best-known "corporation" in Britain is the BBC, a public-sector organisation that owes its existence to a poll tax on television owners -- and that uses its privileged position to reinforce the idea that there is something a bit dubious about the private pursuit of profit.

So when you gaze at those initials PLC, feel at least a frisson of pride. The Victorians invented an institution that changed the world. But also feel a tinge of regret. They could not quite invent an institution to change Britain.

The Company: A Short History of a Revolutionary Idea by John Micklethwait & Adrian Wooldridge is published by Weidenfeld & Nicolson at £14.99. To order your copy at £11.99 + £1.95 p&p call Times Books Direct on 0870-160 8080 or visit

TOMORROW: Hanson and the corporate raiders

Quirky idea that changed the world

16th and 17th centuries: emergence of East India, Muscovy and other "chartered companies". Royal charters ensured exclusive trading rights.

1711: The South Sea Company founded with a monopoly of trade with Spanish America. The South Sea "Bubble" bursts in 1720.

1844: William Gladstone pushes through Joint Stock Companies Act, allowing companies to dispense with the need to obtain a special charter and be incorporated by the simple act of registration.

1862: Companies Act enshrines idea of limited liability joint-stock company as a distinct legal entity, endowed with collective rights and responsibilities.

1885: Lever Brothers launches Sunlight, the world’s first branded and packaged laundry soap.

1901: The Imperial Tobacco Company (of Great Britain and Ireland) Limited is formed.

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