Subject: Corporate Law

Book: The Company A Short History Of A Revolutionary Idea

Contents
Introduction ............................................................................................................................................................................ 2 Chapter 1................................................................................................................................................................................. 4 Chapter 2................................................................................................................................................................................. 6 Chapter 3................................................................................................................................................................................. 9 Chapter 4............................................................................................................................................................................... 12 Chapter 5............................................................................................................................................................................... 15 Chapter 6............................................................................................................................................................................... 20 Chapter 7............................................................................................................................................................................... 22 Chapter 8............................................................................................................................................................................... 26 Conclusion ............................................................................................................................................................................. 28

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Introduction
October 7, 1893: Utopia Limiteds play making fun of Joint stock company. President Rutherford B. Hayes warned: It is a government of corporation, by the corporation and for the corporations. The theme of the book is, The most important organization in the world is the company: the basis of prosperity of the West and the best hope for the future of the rest of the world. Companies have proved to be enormously powerful not just because the improve productivity but also because they possess most of the legal rights of a human being, without the attendant disadvantages of biology. (not condemned to die) This, on one hand, benefited the society but on the other, infuriated the government. Hence, lengthy series of badtempered laws were introduced to make the companies accountable for their acts. (Sarbanes-Oxley Act) Ways to define a company o o o The limited Liability Joint Stock Company Distinct Legal entity Endowed by government with certain collective rights and responsibilities.

In the sixteenth and seventeenth century, Europeans created chartered companies. e.g. East India Company (army of 260,000 troops). And Virginia Company (helped introducing the revolutionary concept of Democracy to American Colonies.) and John Laws Mississippi Company (wrecked the economy of France, European richest country in 18th century)

In 19th century something changed about companies. The three big ideas: o o o Artificial Person Tradable shares (transferable ownership) Limited Liability

Special permission of parliament was no more required to set up a company. All that one required was 7 members, Article of association and Memorandum of Association. Also, the use of word limited was necessary to be put at the end of the name of the company. Companies unleashed entrepreneurs to raise money, safe in the knowledge that investors cn lose only what is invested in the company. Gave birth to an organization that acquired its own life, changed shape and government was unable to restrain any such change. It was argued that causes of capitalism and companies were inseparable. According to A. V Dicery, the company would become the harbinger of a new age of collectivism (one trade after another) There were traditional cultural prejudices against three soulless institutions. Xenophobic campaign against railways because they were accused of exporting British jobs.

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Agency problem: owners and managers conflicting interests. Flattened and mess hierarchical organizations were formed. European and Asian governments failed to run the companies their way. Three themes stand out: o o o Companies past is often more dramatic than its past Companies have become more ethical The company has one of the Wests great competitive advantages.

Companies give rise to remarkably innovative economies. E.g silicon valley Companies are a source to channel the capital towards more efficient and flexible economies. The main reason why a company exists is because it minimizes the transaction costs of coordinating a particular economic activity.

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Chapter 1
Before the Modern company was emerged in the mid-nineteenth century, merchants, imperialists in the year 3000 BC etc formed the basis for powerful commercial organizations that changed commercial life. In the 3000 BC era, Mesopotamia made business arrangements beyond the barter system. Sumerian families traded and made contracts regarding property rights along the Euphrates and the Tigris rivers. The temple functioned as a bank and state overseer. Then in the 2000-1800 BC the Assyrians carried this further and made partnership agreements with merchants, traders etc and formed the origins of the modern day venture capital funds. Then the Phoenicians and then the Athenians spread this form of capitalism to the Mediterranean and a formal arrangement became more necessary in the sea due to risks and dangers existing. It stood out because it was based on rule of law rather than ordered by the king. Their business was small beer and employed only a handful of people. Then the societates of Rome emerged on the map of companies and Roman knights were incharge of collecting taxes but as Empires grew, this task was becoming difficult to handle therefore by the Second Punic War (218-202 BC) they began forming companies in which partners had a share. These companies were making swords, shields etc. the people at the lower level like craftsmen and merchants formed guilds that elected their own managers and were licensed. William Blackstone (18th century jurist) said that honour of inventing companies belongs entirely to the Romans who created elements of corporate law. Especially the idea that association of people having a collective identity that was separate from its human components. They linked companies to the familia (family). The partners or socii left managerial decisions to the magister. The firm also had some limited liability. After Rome fell, focus shifted to India, Islamic World and China. Prophet Muhammad was a trader and Islam had banned usury instead it promoted money making via trade. Muslims had moral plus geographic advantages which helped them in their trade. The Chinese meanwhile became ahead of West technology wise. Within a decade, Chinese factories were producing 125000 tons of iron per year. They invented paper money. The reason why the Chinese and Arabs could not develop companies further was because of their cultural and geographic shortcomings. Apart from this in Islam the muqarada which was trading partnership was oral rather than documented also led to companies failure there. Plus law of inheritance as mentioned in the Quran divided a partners estate amongst his countless family members (as opposed to European System in which partners nominated a single heir) also prevented Muslim firms from growing to a size where they needed to raise capital from outside. In China the failure was due to culture and state intervention. Partnerships lasted only on temporary basis. However, some of the big companies that did emerge in China relied on the state and bureaucrats ran state monopolies in areas like porcelain industries and these industries enjoyed economies of scale only till the 18 th century. But these state monopolies suffered from businesses of merchants and ultimately, Chinas policy to look inward proved fatal. The Rialto Effect: Two setups emerged from where the Romans had left. One was the merchant empires of Italy and the second was state chartered corporations and guilds of Northern Europe. Then in the 12th century, the compagnia emerged in Florence which began as family firms operated on joint liability. It grew sophisticated and began attracting investment from outside family members. It also introduced accounting

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system of double entry bookkeeping. The compagnie also became associated with banchi (named after the bench where Italian moneylenders used to sit). They were important for providing capital to the compagnia. when Edward III of England defaulted in 1339 he brought down two most important banks namely the Bardi and the Peruzzi. And by 1423 the public debt of Florence had become 6 times the size of its annual tax revenues. The Medici Bank (set up in 1397 by Giovanni Medici) provided most of the capital for the Renaissance. The bank diversified into cloth making business and created a monopoly in that. The bank expanded and opened branches in ten cities. They minimized losses by organizing each bank as a separate partnership. They also devised profit sharing mechanisms so that all partners have a strong incentive to maximize returns. All this was due to strict supervision of Cosimo deMedici and after his death the bank went downhill and the bank had to close many branches. How similar were these firms similar to modern day companies? An example of this would be a 14th century business conducted by Marco Datini who began with arms trade then involved in businesses like textiles, jewelry, banks etc. He was careful to record and document everything he did in his businesses and there were 150000 letters, 500 ledgers and 300 partnership agreements. And he was a supporter of companies and believed that in partnerships people reaped greater returns than they would do so individually. Moving on to Northern Europe, it copied many of the arrangements initiated by the Italians. Some of the businesses were huge like the Germanys magna societas (a combination of three family firms based in Ravensburg). It stayed for 150 years and had 80 partners and a capital of 120000 florins. And the north also contributed to guilds and chartered companies. In the early middle ages, jurists began to recognize the existence of corporate persons which were loose associations of people who wished to be treated as collective entities and these included towns, universities and religious communities, guilds of merchants and tradesmen as well. These associations provided means of transmitting traditions and wealth to future generations. The oldest companies like Aberdeen Harbour Board dates back to this era. Another important form of association was the guild which was more like trade unions and they were more interested in protecting their members interests rather than pursuing economic innovation. Guilds we re also related to regulated companies associations of independent merchants who were given monopolies of trade with particular foreign markets. The most successful of regulated companies was the Staple of London which was founded in 1248 to control wool exports. So in short, even the royalty remained apprehensive about the power of these corporate bodies, it was still crucial to development of these firms and companies. The state offered security and a promise of a guaranteed market.

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Chapter 2
1670: The Hudsons bay company was founded which is the oldest multinational that exists. Chartered companies were mostly the joint effort by the government and the merchants. The two things that were prevalent in these companies were: The shares could be sold in the open market The limited liability

1555: the first charter was given to Muscovy Company. The company was given a monopoly and it got its finance by selling tradable shares. The company set the trend of getting monopolies. The risk of investing in voyages was so great thats why there was a necessity of charters, shares and limited liability. In 1602 Dutch East India company (VOC) was set up. English east india company treated each voyage separately with different shareholders VOC made all ventures a part of 21 yr venture. VOC was the first company to be listed on a stock exchange which was founded in 1611. There werent only big Corp that were existent, most of the business life continued in smaller businesses typically partnerships. By late 1800, many reformers saw joint stock companies as dangerous and 1599: a group of eighty people met to set up a company (EIC). They also elected 15 directors. 1600: one year later the group of 218 men with James Lancaster as their commander were given the charter which also gave them the monopoly for 15 years to trade with East indies. The erly ventures were very profitable and earned a return of 148% . The company then further raised money by joint stock offering and expanded. The most important cargo was silver which was traded in india for cotton textiles which were then further traded in the spice islands for pepper, cloves and nutmeg. On the back route via india the spices were traded with tea from india. Tea had a ready market in Europe. To administer this two tier structure was created. The general court: consisted of all the shareholders with voting rights. The court of directors: 24 men elected for day to day operations. Also supervised the overseas of network of resident factors who managed local trading posts or factories.

The company filled in the jobs by selecting the sons of bigger shareholders. It encouraged loyalty by paying off generous salaries and referring to the firm as family. The company nearly died in the seventeenth century primarily because of the English civil war and also it was driven out of Spice Island by VOC. The company was then reborn with a new charter and focused mostly on India only.

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It was under warren Hastings and Robert Clive that the company transformed itself into a form of government. The rise of Royal Navy and maritime insurance reduced the risks of foreign trade and hence the importance of chartered monopolies. In 1773 the company was given monopoly over tea trade in America which provoked the Boston tea party and with it the American Revolution. In 1833 it was deprived of its right to trade. In 1874, the company died when its charter expire. Missisipi Company and south sea company These two companies were created to restructure the vast debt that had been accumulated during the wars. The plan was to convert government annuities which paid fixed interests into lower yielding shares. The result was the biggest financial bubble In history John Law set up a bank Banque General charged with issuing banknotes. He wanted to rescue France from inflation by introducing paper money. With the French money supply under his control he then bid for trading concession belonging to compagnie and changed the company to Missipi company. The company then acquired many monopolies. Law issued a large number of shares and kept a hype about them announcing generous dividends and allowing shareholders to buy even more shares at preferred rates. He also offered the right to takeover the royal tax collection. The result was loads of investors coming in. Then he also started giving loans over security of shars from the bank. At the height of the bubble he sold call options allowing the investors to make a deposit of 1000livers to buy shares of 10000 livers He controlled both the central bank and the exchange he didnt have to answer wot his company was doing In early 1720 the bubble eventually busted and the investors started fleeing. Using his influncehe tried to stem the outflow of capital but the value of his shares continued to tumble and eventually he had to flee

South Sea Company The company had a monopoly over the trade with Spanish America. The war with Spain then started affecting this company. So the directors reverted to market for public debt. Then in 1720 it was announced that the company would take over the entire national debt. The share price of the company rose from 128 to 187 and then 950. New companies started doing the same. A flood of proposals for new companies engulfed Exchange valley prompting the South sea directors to ask their political allies to enact Bubble act 1720 which made it difficult to set up joint stock companies. This was done to reduce the number of enterprises that wud compete with south sea for capital. Then a financial crunch hit the country and the share prices went back to 170. The government then nationalized the company and saved the economy. However, the investors had to face huge losses.

Adam smith had two complaints with chartered companies.

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He disliked the way they possessed monopolies. He said that they were either burdensome or useless. They were inherently less efficient than the sole traders because of the agency problem

Counterargument to Adam smith Monopolies did make sense because of the huge risk involved in trading EIC demonstrated that when information was scarce and trust at a premium companies were more efficient because the companys network of trusted factors gathered info that could not be gathered by private businessmen.

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Chapter 3
Incorporated joint stock companies looked at with suspicion by English and French they are behind the times Slavers and Industrialists o In Britain, prejudice against joint-stock companies increased due to South Sea Bubble Scandals involving the Charitable Corporation and York Building Company o Most British businessmen preferred forms of companies other than the joint stock type o Partnerships tried to mimic joint stock companies by making their shares freely transferable o 1758-1803 >> 165 canal acts submitted to parliament >> joint stock companies created as a result o 1808 >> Napoleonic wars >> 42 companies created...many related to the business of helping the British get drunk o 2 most dynamic + controversial parts of British Empire (both were partnerships / joint ventures): Slave trade Slave traders soon rivaled the East India Company people in their wealth Isaac Hobhouse financed around 44 voyages between 1722 and 1747 Montaudoins financed around 80 voyages Growing industrial sector Capital required for manufacturing ventures was not large Limited liability considered a weakness >> it would lower the commitment of the partner-owners Matthew Boultons Soho Manufactory.produced metal boxes, buttons, chains, sword hilts.went into partnership with James Watt (pioneer of the steam engine).they demonstrated Watts machine in Birmingham (1776)coal industry and cotton industry welcomed it wholeheartedly.and Britain was producing 15 MILLION TONS OF COAL A YEAR.about 5 x the total production of continental Europe An American alternative o In contrast to Britain (where South Sea Companys abuses led to a decline in the popular ity of joint stock companies), the United States owed its very existence to the presence of joint stock companies o Early American states used chartered corporations with special monopoly rights o First corporation of US >> Harvard University >> chartered in 1636 o Post-independence >> 1781 >> Bank of North America = first wholly American corp. chartered by Continental Congress o 1795 >> North Carolina passed act allowing canal companies to incorporate without getting specific permission o 1800 >> 335 business corporations in US

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o New Yorks markets were volatile due to flighty British capitalgradually replaced Philadelphia as the main exchange Setting the company free o Businesspeople stuck to partnerships because they didnt want the state meddling in their affairs o First half of 19th Century >> state began to step back >> easier in US due to presence of Federal System. Three prompts for change: Railroad Legal >> Supreme Court found that corporations possessed private rights so states could not rewrite their charters on impulse Political >> states were losing businesses, so relaxed their legislation regarding corporations e.g. in 1837 Connecticut allowed many types of companies to get incorporated without special legislative enactment The Middlemarch Effect o France1807.new type of company formed >> partnership with transferable shares >> granted limited liability to sleeping partners o 1825 >> Bubble Act repealed o 1830 >> George Stephensons Rocket (worlds first regular passenger railway) became functional (Britain) o 1840 >> 2,000 miles of track completed (Britain) >> all by chartered joint stock companies (railway industry was very demanding of large capital) o 1844 Railway Act >> state reserved the right to buy back any railway charter that had been operating for 21 years o ^ Railway Mania o 1850 >> Britain also had 2,000 miles of telegraph lines The Great Victorian Debate o 1844 >> Joint Stock Companies Act (by William Gladstone, President of the Board of Trade) Owing to this act, companies just had to get registered to get incorporated, instead of needing to obtain a special charter But they did not include automatic limited liability Adam Smith >> owner-managed firm = purer economic unit. Only way for joint stock companies to stay in the competition was by having the subsidy of limited liability. But wouldnt limited liability attract even the lower level people into the owner domain? Wouldnt limited liability just impose the risk of doing business on suppliers, customers, and lenders? On the other hand, some reformers argued that denying a commercial tool like limited liability to businesspeople would be an illiberal act.

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John Stuart Mill + Richard Cobden argued that limited liability would help the poor set up businesses Only control option for a large business besides joint stock companies was government control British Government also concerned about losing its business to foreign countries o 1855 >> Limited Liability Act (by Edward Pleydell-Bouverie, VP of the Board of Trade in 1855) = granted privilege of limited liability to incorporated companies Pleydell-Bouverie replaced by Robert Lowe, who came up with the Joint Stock Companies Act of 1856 (which removed the qualifications demanded by the Limited Liability Act) o So just 7 people needed to sign a Memorandum of Association for the company to register its office and to market its status as a ltd. Company o ^ New regime was still a long way from modern shareholder capitalism o Separate legal entity of the corporation, and the protective veil it offered its directors, was firmly established in British Law after the case of Salomon vs Salomon & Co. Ltd. in 1897. o Many companies formedmany went bankrupt o France passed a law allowing establishment of joint stock companies with full limited liability o Germany also relaxed its laws o Numbers of companies began increasing rapidly by 1871 A new sort of Organization o 2 points emerge from this activity: 1 >> The Company was a political creation (no matter how much businesspeople may think to the contrary) It was the result of a political battle, not just the result of technological innovation 2 >> The Company plainly had a political and social impact in the societies that spawned them Peter Drucker (the Management guru) >> the Company was not merely a reform.it was an innovation. o The need for economies of scale would then drive the company to the forefront of capitalism, but mostly in the United States.

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Chapter 4
Richard sears and his company
He started his work when a local jeweller rejected the watches consignment and he took up the job of selling them. He partnered with Julius rosenwald who took care of the administration of the company. To fulfil the orders Rosenwald set up a mechanical scheduling system, sort of assembly line for customer orders He also added another innovation and that was the pension fund for employees in which the firms contributions were tied up with the profit and much of the fund was invested in sears stock. A company like sears with thousands employees and shareholders didnt exist in the 19th century. Most of the economic activity was conducted with single unit businesses runned by independent owners. By 1913, America produced 36% of the worlds industrial output followed by Germany and then Britain. It was the creation of jobs in America that attracted people. The abuses lead to the development of labour unions and their indifference to the environment that lead to pollution.

Rail roads
According to Alfred Chandler, Modern business enterprise became viable when the visible hand of management proved to be more efficient than the invisible hand of the market and for that rail roads and proper system was necessary. The railroads required a lot of administration and borrowing from the example of britiain, American railroad firms also started building up hierarchies employing 50-60 managers. Rail road executives build up accounting and information systems to control movement of trains. The huge capital requirements for railroads lead to the birth of modern New York stock exchange. In 1850s when the railways were booming, hundreds of thousands shares exchanged hands. Wall Street existed exclusively to finance rail roads. When a speculator was unable to sell bonds of the Northern railroad, his bank went bankrupt leading to a series of bankruptcies and closure of exchange for ten days. In the late 19th century 700 railroad companies went bankrupt Railroad accounted for 60% of the publicly issued stock in 1898. Most of the money raised was from debt because owners wanted to keep control of the company. In 1890, all the railways consolidated and connected all the rail roads. The consolidation meant that the railroad companies were now greater than the utilities companies. The big giants built up most of the infrastructure: telegraph, telephone lines and revolutionization of the post office. The first American companies that took advantage of the railroads were the distributors and the retailers. The new retailers learnt the trick of reducing the costs and improving choices Manufacturing companies were slowing to catch on. They got their first big spurt because of the civil war. The main spur was new technology-electricity and the internal combustion engine. However, the companies started using electricity instead of steam but didnt reengineer the production process. Andrew Carnegie was the first person to reengineer the process. He introduced line production system in which he arranged machines and workers into a sequence that allowed jobs to be broken into components. He also tried to standardize things and exploited advantages of scale. The line production system was perfected by Henry Ford. The ideas were borrowed from the stop watch ideas. They introduced the conveyor belts which reduced the time from 12hrs to 2hrs. Ford brought mass production and mass distribution all under one roof. He believed in an integrated firm.

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Integrated firm had advantages over other firms. Duke entered into business of cigarettes. He bought a machine which increased his production from 3000 to 125000. Since the demand was not much he created a huge marketing organization to increase demand. Later he merged with four companies and formed the great American tobacco company. Following his example, there was a wave of consolidations and the industrial base went into hands of fifty organization-referred to as TRUSTS.

The story of standard oil

Rockfeller realizing the importance of economies of scale bought fifty companies and set up standard oil which was a joint stock company. He also set up South Improvement Company, a cartel of refiners and railroads. This was one of the first trust companies. Trust; which separate the holding and control of assets from their beneficial ownership were an old legal concept dating back to crusades. It was also a way of avoiding the law prohibiting the companies owning shares in each other. Shareholders in competing companies gave their voting shares to a central trust company. Then the company was sued because it was violating its charter by handing over control to out of state trustees. Standard oil got the chance and moved to New Jersey. New Jersey law was favorable: it allowed the holding companies-umbrella companies that own a controlling proportion of the voting shares of subsidiary companies. Following the example, many companies started moving to New Jersey. The Newyork legislature was forced to enact a special charter for GE to prevent it from running away to New Jersey. Most of the companies converted to holding companies. Since the Us had no central bank some of the bankers made use of new holding companies to get around the rules preventing them from investing in shares. This tied the industrial firms to the stock exchange. First the industrial companies were regarded as riskier by investors hence only few manufacturing shares exchanged hands. And then the exchange of manufacturing companies rose. Carnegie made his own firm with his equity and entered into partnerships and each partner who wanted to leave could leave only after he sold shares back to the company at book value. He then sold the company to Jp morgan and Gary . they then merged it with two other corporations and it became a giant US steel which controlled 2/3 of Americas steel production and employed quarter a million of employees.

The Backlash
The company lead to the growth of labor unions the most famous was the breakout of small war between labour union and firm was in the firm o Andrew Carnegie. At first the labor union helped him in imposing equal labor costs on competitors but when the competitors were beaten he reduced the wages of labor which lead to a huge strike. This stirkes were followed by more strikes and aggression by the labour union. In most of the cases the court ruled out in favor of companies. The notion of freedom of contract was greater than workers rights. And then the labor unions increased by fivefold. In 1890 Sherman antitrust act broke new ground by defining monopolies but failed to set out many ways of punishing and preventing

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In 1906 the antitrust suit against Standard law broke it into exxon Ammoco mobil and chevron.

The popularity of the company

Three things kept ambivalence about the corporation from tipping into hostility. The companies became more active in politics. The senate became known as the millionaires club more representative of different economic interests than the individual states. The growth of corporate social responsibility.it helped social services where none existed. It built museums and art galleries in a country that was prone to philistinism and it bound classes together in a society where the income gap was widening. The third and the most important was that these companies were making America rich. The new companies improved the living standards of the people

The productivity of these companies was tied to gigantism which also raised barriers to entry the only way to compete with these big companies was to set up a huge company of your own.

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Chapter 5
US may have bounded ahead rest of the world but other countries were also trying to come to terms with companies. Three most interesting were Britain Germany Japan

All illustrated different approaches to the new economic form. Britain despite its whole hearted enthusiasm for laisse-fair was a reluctant convert to companies. Germany and Japan embraced the idea much more warmly but tried to twist it to different ends such as workers welfare and the quest for national greatness. More focused on serving the society. Aglo saxon competitors chased profits. BRITAIN Predominant question: why didnt it exploit companies better as it led the way in industrialization and in development of relatively large firms. Also a pioneer in setting companies free from state control yet failed to produce the big industrial firm in 19th century, that were then the key to economic success. America Manufacturing force only marginally bigger than Britain US steel worth 1.4 billion, employed a quarter of a million people Britain Had few firms to rival Americas leviathans Largest british employer Fine cotton spineer and doublers had only 3000 workers Largest firm on the market Imperial tobacco was worth only $17.5 million Top 100 firms accounted for 15% of output in 1900

Reason for British failure to capitalize on its head start as a pioneer of industrialization it was tempted to cling to earlier form of capitalism. As a compact island it was under less pressure to produce corporate giants Two things that stand out Companies preference for family firms and personal management Prejudice against industrial capitalism

British entrepreneurs cling to the personal approach to the management v/s American embracing professionalism. As late as the 2nd WW

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Big decision kept within the company, help of professional managers taken only in extreme cases. Family run companies had no need for organizational charts and manuals which were commonplace in large American companies Relied on personal relations and family traditions

British firms eventually turned out to be longer lasting and more profitable than their American peers. Problem was there were not enough of them Family firms were far too small to thrive in a world dominated by economies of scale and scope Britain boasted more than 2000 cotton firms. Keynes complained there is no hall in Manchester larger enough to hold all the directors but only a handful has anything as sophisticated as the marketing department. Steel industry dominated b y firms that could barely keep their head above the waters in their domestic market let alone swim in foreign sea. Too many amateurs rose to high positions, far too many talented professionals were kept in the ranks. American industrialist companies were an end in themselves. They were to be tended and grown. British industrialist means to a higher end: a civilized existence. They were there to be harvested. For e.g. before WW1, dividend to earning ration was 80 to 90%, far higher than in US 2nd problem Elite public schools steered their most talented students into useless subjects like the classics and scorn on anything related to commerce State schools and universities all did their best to emulate the antiutilitarian bias of Eton and Oxbridge Kept up a semi aristocratic outlook by going into the professional and fighting services rather than trade Business deemed as a despicable way of life, pursued only by the stupid and unimaginative Everyone blamed industry for polluting the country side, debasing the culture and shattering their peace and quiet. The antiutilitarian bias robbed British of both scientific expertise and managerial brain power Proportion of British students studying science actually declined between the wars Science as positively revered compared with business education No more than a handful of business and accounting department were produced and those avoided any contact with the business world Teaching staff out of sympathy with American development and successful businessmen have nothing to tell to their students All this led to British companies were starved of both able recruits and up to date expertise Fewer sons followed their father into business

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No more than a dozen universities had management training schemes for university graduates GARDEN CITY - Some of the best British companies embraced this idea A new decentralized social order in which people would be rural enough o keep in touch with he athe land but urban enough to support such civic institutions as hospitals, concert halls and art galleries Still no amount of incorporate activity could keep Britain locked in the middle ages. Company profoundly changed British life. They prompted the development of trade unions, provided career opportunities for a whole class of people who had been denied it before women. THE GOOD AND THE FEW British firms, for all their idiosyncrasies were still more internationally oriented than American businesses. And there was also elite of advanced British companies that realized that there was far more to be gained from mastering change than resisting it A continual prompt for this was the stock market, one area where the British preserved their lead over the Americans. The few big firms that Britain managed to produce by 1912 proved to be more successful than their American peers. Some historians have speculated that the few big firms that Britain did produce by the 1st WW were hardened by free trade, in a way American firms were not. Going public was also a stimulus to better performance The merger boom that followed the 1st WW led to a rapid increase in a number if quoted companies Britains biggest manufacture employer was Unilever with 62000 workers. RISE OF GERMAN INDUSTRY German great companies enable it to replace Britain as europes leading industrial power. The finest example of the new economy in Europe were all in Germany: the electrical equipment, Huge chemical works, massive machinery works and steel mill. Germany companies were similar to America in their focus on the new economy. BUT they embodied a different sort of capitalism one that emphasized cooperation rather than competition and that gave leading role to that state. The most obvious was Germanys tolerance of what Anglo Saxons would regard as anti competitive practices. German law did not prohibit combination in restraint of trade like British law. Nor did it posses any anti monopoly legislation like Americas Sherman antitrust act. The year the law was made constitutional, German ruled that contractual agreement regulating prices, output and market share could be enforced in court of law, because such agreement benefitted the country as a whole. They were in essence a form of cooperative self help. Friedrich List argued that the b sic economic unit is not the individual but the nation: the job of business people and politician is to band together for national good.

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The economic downturn of 1873-1893 helped force German companies together, the number of cartel rose from 4 (1875) to 385 (1905). Interessengemeinschaften or communities of interest were coalition of firms that pooled profit and coordinated policies on everything from patent to technical standards. The second difference from Anglo- Saxon capitalism was the influence of the big banks. Germany capital markets were too localized and inefficient to power its industrialization. Germany bankers stepped into the breach by forming joint stock and limited partnership banks that duly channeled money from savers of all sorts to, first into the railways and after nationalization of railways into young companies. The biggest were the universal banks that managed to be commercial banks, investment banks and investment trusts all rolled into one. They financed almost half of the countrys investment. Bankers also sat on the supervisory boards of all Germany great industrial companies providing advice and contacts as well as capital. The bankers influence was reflected in the third big difference vis--vis the Anglo Saxon world: Germanys two-level system of corporate control. The 1870 law that introduced free incorporation also obliged joint-stock companies to have two level of control: management board, responsible for day to day decisions supervisory boards, made up of big shareholders and assorted interest groups

Fourth, distinguishing thing about German companies was the emphasis on their social role. At first, social responsibility was voluntary. The result was that German companies were keener on cooperating with trade unions than their AngloSaxons rival. Despite clashes with the trade union, there was a common belief that in ideal world all interests ought to be involved in decision making. Factory foreman were regularly consulted by managers. In 1920, laws were passed setting up work councils giving workers an even louder voice. Despite abolition of trade unions later, German clung to their belief in consulting societys various interest group albeit in a perverted form. What explains German economic success? The first was the cult of education particularly scientific and vocational education. Universities particularly technical universities acted as both research agencies and recruiting grounds for local industries. German began to found business schools at about the same time as US. Boring sounding industrial groups provided consulting advice and disseminated technical knowledge. Germans firms also pioneered the development of internal laboratories and invested heavily in research and development in basic industries such as coal, iron and steel. Second was, the respect awarded to managers who enjoyed the same high status as public sector bureaucrats. Salaried managers dominated supervisory boards as compared to Britain where only a few managers were admitted to the board of directors. The company also made a point of giving technicians managerial responsibility rather than just relying on generalists as American tended to. THE ZAIBASTU OF JAPAN Japans version of organized capitalism had many similarities to Germany. 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

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In 1868 the ruling oligarchs decided to open the country to the west s part of their rich country strong army policy Foreigners were invited from different countries to provide instructions in western methods. Samurai were forced to shed their feudal ways and wear western clothing. Business opportunities were created by selling state owned factories. Joint stock companies laws were introduced. Guilds were abolished. Many samurai reinvested themselves as businessmen. The young companies had the advantage of being able to learn from their predecessors mistake. By WW1 Japan accounted for a quarter of the worlds cotton yarn export. Japanese firms were particularly good at electrification. By 1920, half the power in Japanese factories came from electric motors, compared with less than a third in America and barely a quarter in Britain. The government played a leading role in Japans great leap forward. It poured money into the infrastructure, establishing universities, directing business and credit toward companies and establishing public companies as recipients of western technology and models of western business. Govt. investment usually exceeded private sector investment until the first WW1. At the heart of each zaibastu sat a family owned holding company that controlled a cluster of other firms through crossshareholdings and interlocking directorates. Each cluster typically included at least one bank and insurance company as a conduit for public savings. Managers were typically recruited into the holding company from university. The companies that made up each zaibastu operated in abewildeirng number of industries but thoer lack of foucs did nto prevent them from beong highly competitive. The structure allowed for greater flexibility, specialization in particular markets and summoning of economies of scale when needed. 30% of Japan output came from factories with fewer than five workers. The structure was particularly successful in mixing family ownership with meritocratic management. The founding families were nervous about the joint stock company concept, initially trying to keep control through special classes of shares and later making arrangements so that group of descendents could hold shares together. Yet these families were notably better than, say, the British, at handing over day to day management to professionals. Leading Japanese industrial families also proved remarkably adapt at transforming feudal loyalty into corporate loyalty samurai who were willing to die for their masters became loyal company men who were willing to do anything for company success. Eventually, almost all zaibastu handed over management control to well-trained professionals

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Chapter 6
One important innovation of the 1920s which resulted in the sameness in the list of the top American businesses was the multidivisional firm. The multidivisional firm became the template for managerialism. Family businesses in the hands of robber barons were not succeeding because of the fact that there was a lack of managerial skills among close family members. So companies turned to professional managers. To house these managers, skyscrapers were built. The first was built in 1908 by the Singer Company. These managers soon began making big strategic decisions and they realized that mergers, share issues and deaths of robber barons would free their hands. GM was caught in the recession of the 1920s because William Durant, founder of GM, could not administer properly. Du Pont bought 37% of the ailing companys shares and picked Alfred Sloan to redesign the company. o Du Pont decided that the companys activities were too disparate to be run by a single central authority and turned each of its units into separate divisions where each division was defined by the market that it served so for e.g. the cars division was segmented according to price into multiple divisions. o However, the decentralization was controlled. The divisions were marshaled together to secure supplies at cheapest rates, budgets were allocated according to performances and a 10 man committee headed by Du Pont and Sloan headed the corporate strategy. o Du Pont also put into place proper research and development departments within each division and made them responsible for coming up with new products. There was also a central laboratory known as purity hall for fundamental research. Ford, however, killed itself by too much decentralization by not having any management structures in place. Other companies such as Coca Cola also moved towards scientific management styles focusing on research and numbers. P&G also came up with the idea of brand management i.e. employing a team to manage each brand. Throughout the depression, the multidivisional firms spent heavily on advertising and retained their positions never feeling threatened by young upstarts. The only fear was of another multidivisional firm entering their segment systematically. A multidivisional firm could be beaten only by a multidivisional firm. Management started emerging as an educational field in the early 20th century. Till then only the University of Pennsylvanias Wharton School, founded 1881, offered anything other than courses in secretarial book keeping. Harvard Business School opened doors in 1908 and was offering courses in marketing by 1914. There was continuous contradiction between various schools of thought on management. In all, management began being realized as a field which would drive industries, draw credit and draw workers and customers. There was bad press about the company men that emerged as a result of this upsurge of management. Yet, companies did accept them for 2 things: professional standards and corporate loyalty. The company men relied on credentials not lineage and were focused on the one best way of doing things. Even during this time, these companies were shouldering social responsibilities without government intervention. P&G came up with the 8 hour day and guaranteed employment 48 weeks of the year (during the 1920s Great Depression). Ford paid higher than the market, Heinz paid for his employees education and Red Deupee cut his own salary and bonus. Three works of the 1930s and 40s defined the company: o Ronald Coases article called the nature of the firm published in 1937 which argued that companies were successful because they successfully cut down transaction costs by achieving economies of scale through bundling together plenty of transactions that would otherwise have been done independently. o Adolf Berle and Gardiner Means book The Modern Corporation and Private Property published in 1932 that outlines the distribution of wealth in corporate America. They established that the companies held enormous amounts of wealth i.e. AT&T held more assets than the 20 poorest states. But this

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massive wealth belonged to a huge number of stockholders who were merely passive investors. The ones with the real power were the unfettered managers. And the managers faced a conflict of interest and their own profits could be increased by taking more risks with money that was not their own. The Securities Act of 1933 placed fiduciary responsibility on the BoD to report proper accounts for listed companies. The SEC was created to overlook the companies actions and protect interests of minority shareholders. o Peter Drucker wrote The Future of Industrial Man which caught Sloans attention in 1942 where he argued that companies had a social dimension besides having economic purpose. Sloan invited him to analyze GM. The resulting book The Concept of Corporation was published in 1946 where he identified a class of knowledge workers and argued that workers should be valued for their brains not hands. After 1945, in US, the state co-opted with big business to increase production in an effort to prevent strikes such as those that had marred the 1930s. The world war had led to formation of a military industrial complex. Many large businesses were dependent on the Pentagon but the government remained an ally and could not be an owner. In Western Europe, however, companies were nationalized in order to create a new form of socialist class where the corporation acted as the high custodian of public interest. But they followed the Sloanist belief in managerialism. Governments believed they would achieve economies of scale with nationalization. It led to setting up of huge companies which were protected by the government. American firms, however, continued to gain dominance especially after the Second World War. This was because the Japanese and German firms faced a setback after the war and also because the US firms were highly innovative. o Also, in America, taxes were higher on dividends than on capital gains. Furthermore, most shareholders were managers themselves so they preferred reaping the capital gains taxes instead of the dividends. So, large amounts of capital were reinvested and 2/3rd of the capital raised by nonfinancial companies between 1945 and 1970 came from internal sources. o Managers however, used decentralization as a job creation tool creating departments after departments. This led to Peter Drucker introducing the concept of Management by Objectives. During the 1950s and 1960s, backed by the government, the companies acted with social responsibility and ensured they shared their spoils with the various stakeholders. But the conformist nature of the company man now referred to as an organization man was bothersome for a few authors and critics. They claimed that the organization man was more focused on what others thought of him than in what he thought of himself. British companies started reorganizing themselves around the American model and were hiring McKinsey consultants to guide them in doing so. German and Japanese firms stuck with their models and did not copy the American model. However, they did import parts of the multidivisional structure. The only alternative to multidivisional firms was the diversified conglomerate which believed in buying everything in sight through hostile takeovers as well as peaceful acquisitions of divisions other firms did not want. But, these failed to deliver returns to shareholders due to reckless buying and hence, the model declined.

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Chapter 7
By the 1970s the idea of American Capitalism had triumphed and joit stock companies were rising in power. The general expectation was that these joint stock companies would dominate and rise to power. This was true, for a while at least. In early 1970s big companies were expected to play a significant role in rebuilding economies after the War. This however proved burdensome given the awful state these economies were in o Very powerful labor unions. 1974 miners union in Britain toppled Conservatives o Nixon introduced wage and price controls, affirmative action, and major regulatory bodies. Then came privatization. British, European and Russian governments began privatizing like crazy. o The largest privatization effort was on the part of Russian that corporatized state owned enterprises by converting them to joint stock companies and issued shares to everyone in Russia, even children. o However the control was largely in the hands of the old management and instead millions of people lost their jobs China however moved cautiously into privatization. In the 1990s it allowed entrepreneurs to create companies, however in 1997 at the 15th Party Conference the pace of reform increased substantially. o Many state companies were privatized. In the US deregulation also came into vogue, with Carter deregulating the airline business, railroads, trucking and the biggest regulated company AT&T. On both sides of the Atlantic bureaucrats started to assign more social responsibility to companies while making it easier to form companies. However the rise of deregulation also meant that accountants and financiers could get more creative with their funding. For example single purpose vehicles and limited partnerships in tax free areas etc.

The unbundling of the company Contrary to past belief huge companies like Sears, Pan Am, Barings bank etc began collapsing. This was because their large structures have become obstacles, made them inflexible. The new philosophy of smaller firms, with more flexibility was in. Entrepreneurialism was the name of the game. This is evident from the fact that in 1974 100 of the biggest companies accounted for 35.8% of the US GDP. This number fell to 17.3% by 1998 The big firms that did survive were the ones who went ahead and slimmed down, drastically and with brutality. GE, IBM both had to lay off workers, cut out departments etc The Sloanist idea of a company no longer worked. It was too slow, too methodical, to hiearchal, and too reliant on economies of scale. Companies had to be vigilant, their competition could come from anywhere. For e.g. LINUX was developed in a dorm room in Finland and posed a significant threat to the then richest man in the world, Bill Gates. Brainpower was brought into the limelight more than ever before. In the last quarter of 20th century the structure of the company was unbundled and forced to focus on the core competencies as given by Ronald Coase years ago.

Round up the usual suspects When you look at it this transition to ever changing alliances and networks of specialists and constant vigilance is reminiscent of the pre-joint stock company era. 3 groups people helped unbundled the corporation; Japanese, Wall Street and Silicon Valley. Japanese:

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The Japanese model of capitalism triumphed over the American and European model. With their focus on lean systems i.e. the Toyota method helped spur Japanese firms to the fore front. o Models like TQM, lean processing, JIT were the buzz words. These ideas were shocking to the American Sloanist model. o The second most important point of Japanese capitalism was related to long term-ism. The Japanese believed in lifetime employment, management by consensus , and stakeholder philosophy. o The Japanese firms were funded not by short term investors ( like the American firms) but by Kieretsu banks, their industries were protected by the governments and profits were deemed less important than market share << all are characteristics of stakeholder philosophy to some extent. o But this model was not always in vogue and soon lost its charm in the 1990s as a series of issues emerged. Consensus Management=Paralysis Lifetime employment=impossible goal; barrier to promoting young talent Kieretsu firms>> overproduced and overinvested compared to smaller firms. Asian currency crisis, Chaebol scandal, charges of corruption, scandals etc all added to reducing favor for Japanese model o However it is important to note that the Japanese model provided an alternative to the American Model. Wall Street o In the managerial capitalism days, shareholder activism was a limited if not non-existent idea. o However this soon changed with the rise of big investment institutions like pension funds, mutual funds, and various saving schemes launched by the government. This is because these institutions forced savers to start checking into investment managers and the returns they were generating. o However apart from the investment fund managers the other players that were gaining power were the corporate raiders that would start buying out companies then dismantling them and selling them off. o There were a number of such raiders, for e.g. James Hanson and Gordon White of Hanson Trust, Carl Icahn, Sir Jame Goldsmith. o But the defining takeover of this decade was that of RJR Nabisco. The company was formed through the merger of RJR (tobacco company) and Nabisco ( a biscuit manufacturer). This was a time when tobacco companies were being targeted by the government and thus many companies were diversifying to keep a steady stream of revenue available. o RJR Nabiscon was bought by Kohlberg Kravis Roberts (KKR) through a leveraged buyout. The company basically put in a tiny amount of equity and used debt to finance the rest of the transaction, later it paid the debt off and since debt has a lower cost of capital you get higher returns on equity leaving shareholders with fat paychecks. o LBOS were an attempt to solve the agency problem by making managers think like owners. The success rate of LBOs depended highly on the price tag of the company being bought and largely benefited the original shareholders who could sell crappy companies at a premium to the market value. o LBOs in turn relied on junk bonds that basically opened up the market to ventures that were too risky to issue regular bonds o But the problem was not solved. By giving managers more and more stock options did not work cause they got into risky, get-rich-quick schemes instead. For eg, Enron. o Despite this LBOs did have an effect on the way companies are run. The whole idea of incentivizing managers with stakes in the business is still here today.

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Companies were /are forced to ask what is the one thing that they are good at? Diversification is something investors can do themselves, companies dont need to Silicon Valley: o The emergence of companies here changed the entire perception of what a powerful company should be like. o Of the two tech clusters in the US ie the East Coast firms and the Silicon Valley it was the latter that proved to be successful because of 2 reasons: The companies focused on one thing, their product. And the principle of miniaturization. Make things faster, easier to access etc. The alternative form of the corporation; Gazelle companies. Tolerated failure and treachery Ties were optional Meritocracy was crucial Yout was promoted only on ability. Unusually open to immigrants o By the end of the century company outlook had completely changed, the buzzwords were now looser firms, temporary workers, entrepreneurial culture.

Unbundled, flat and borderless Changes to companies o Outsource everything, sometimes even thinking o New hero is the tie-less entrepreneur not the company Man. o Women entered the competition o Major change was psychological. People no longer talked of lifetime employment instead they focused on employability

Regulatory Capitalism On the one hand governments were moving towards deregulation , privatization , removing trade barriers and setting the company free, on the other hand various politicians and pressure groups were vying to find ways to make the company more accountable and socially responsible Various regulations came into place limiting work hours, safety standards, consumer protection etc. Tony Blairs Labour government added regulations worth 15 billion in costs to the businesses Both British and American governments introduced laws that forced companies to look at other stakeholders along with shareholders. About half the US states had such laws put into place in the 1980s. The 1985 Companies Act in Britain also took a similar stance by forcing directors to consider employees as well. Regulators now broke the corporate veil in attempts to hold company bosses into account. A number of scandals had contributed to this, Enron, WorldCom etc. Not to mention the very fat paychecks given to such CEOs. 2002-Sarbanes Oxley. Toughest legislation on auditors ever

Enron and beyond What had led to this schizophrenic attitude towards the companies? What had gone wrong? There were 2 explanations given:

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The government said that the scandals were a product of individual greed and not a flawed system. Basically the bad apples school of thought. They responded by arresting CEOs and parading them handcuffed in front of cameras The rotten eggs school of thought basically subscribed to the agency problem . Managers interested were not aligned with shareholders interests. The fact that tougher legislation such as the SarbanesOxley Act were passed was a score for this team . However note 2 things here, this legislation was not as revolutionary as that passed by Roosevelt and secondly the rotten eggs school still thought more could be done, like greater monitoring of CEOs, rotation of auditors etc etc. Did the company change fundamentally? Not really The bad apples school was right in one respect, the market started to correct itself. Companies took efforts to improve, introduces expensing stock options, auditors became tougher etc. etc Politics was on the side of the bosses. Most Americans now owned stocks and stock owners are interested more in improving oversight of companies rather than curtailing company performance. Moreover this was not a revolution against the American company model. It was more of a reaffirmation of the basic principles of the model. The backlash was not against the business but against bad business practices. However it is true that the American corporation ended this period in self doubt as the old debate of reemerged. Are companies here to make money or to serve the common good? The only difference was that while companies as a whole were powerful but individually were now more fragile than ever.

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Chapter 8
Multinationals have always been viewed with suspicion by national authority (as a threat to their authority), by conservative populists (as agents of cosmopolitanism) and by socialists (as the highest stage of capitalism). o In poor countries the power of multinationals is exceptionally high. Hence they rouse suspicion. o They get powerful because they can sell better than local competition The first companies to coordinate activities across borders were banks e.g. Italian bankers collecting taxes from England on behalf of the papacy. o Banks e.g. German Euggers and Hochstetters also lent money to cash hungry rulers. o Chartered companies like EIC owed even more to the state than the banks which thrived due to the state. But it all can be traced to the railways in Britain. Because it was always an export industry. Belgian rail network was made by British. Connections from Paris to French channel ports were made by the London and Southampton Railway Company. Thomas Bassey was at work on railways in 5 continents at the same time. Only in USA, the British were passive investors in railways. Everywhere else they were active. o Joint stock companies involved in trade copied the railway companies models. In last quarter of 19th century MNCs changed shape in 2 ways: o World was shrinking faster than ever before hence they shifted from railways to pharmaceuticals, cigarette, chocolates, etc. o Had to change to deal with politics and tariffs which were raised by countries to protect native industries. So companies which were exporters had to become MNCs. Britain was most ahead in this trend with around 200 MNCs in the late 19th century. Britain invested everywhere not just in its own backyard unlike the Americans and Germans. o Half of the 30 largest British MNCs were involved in consumer goods. Britain had another form of MNCs as well i.e. the free-standing companies which were headquartered in London but were made to trade with other countries e.g. Anglo-Argentine, Anglo-Australian and Anglo-Russian. They were specialized but involved in ALL trade of their particular region and soon developed factories of their own. o Unprofessional management and lack of dynamism were issues. o Germany also had this form of company and called them Mercantile Houses. But a typical German MNC was a local company which expanded abroad in search of markets. Germans were more successful in producing high-tech MNCs. o Most other European countries also sprawled MNCs. Asian companies also expanded overseas. Japan took the lead in expanding abroad from Asia. By 1881 14 Japanese trading companies had branches in New York. European 19th century MNCs were bound up with imperialism. Kings sold off parts of countries for money to concessionaire and the owners were extremely abusive to the workers and often used torture to make them work. Started in Congo Free State due to King Leopold of Belgium. It was so profitable that the French copied it as well. King Leopold annexed the Congo Free State after a huge public outcry on the torture being inflicted. o Not all MNCs despoiled imperialism. Some even built it up by establishing infrastructure, institutions, railways and schools where they traded as they felt obliged to do so. o Yet most FDI did flow to developed countries not the developing or underdeveloped colonies. But this was more strategic than commercial as the colonies did not provide demand for products and it was not profitable to invest there.

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America posed the greatest challenge to the British. They had mastered the art of exploiting an economy where labor was scarce and had mastered mass production and mass marketing. By 1950, US had more MNCs than Britain. o First American companies to make their mark were Industrial companies e.g. Singer and Ford. o They often entered markets just to deal with spontaneous demand and found themselves sucked in. Their expansions overseas were from absence of mind. And often it was the protectionists keeping out imports who inadvertently helped America. Because the policies led to USA forming affiliates in target countries to leap over protectionist barriers which led to their suppliers also shifting to those countries and that led to expansion. o It was post World War 2 and the GATT of 1947 that the US decisively took the lead. The Marshall Plan increased standards of living and that led to more consumer demand which led to tariffs being lowered and the GATT being agreed upon and the American expansion began. o The passenger jet was also a great aid to the US which allowed its managers to go across the world at any time and also allowed them to view their companies as global entities. o By the 1970s it was almost impossible for British companies to compete with American firms because the British commitment to family firms was no match for American management and reliance on science. The ITT was the prime example of MNCs gone bad. From making bombers for Hitler to successfully filing lawsuits against the destruction of its plants making the bombers by the Allied Forces to bribing and being involved in illegal activities in multiple countries for a worth of $8.7 million, the company did everything before being revealed as rogue by the SEC. However, the Americans saw their decline in 1970s as well because of the devaluation of the dollar, the oil price hikes and inflation & recession. Globalization also led to spring up of new MNCs and ensures that MNCs could spring up out of anywhere. Globalization led to 3 important changes which affected MNCs: o Increase in number of MNCs. In 2000, total global figure for FDI was $1 trillion. o Small companies could now fight against large companies. Free trade, deregulations, JIT production techniques etc. allowed small companies to compete in efficiency with large MNCs and they also did not face the political backlash like the larger MNCs. o MNCs worked harder to treat the world as a single market even though they were mostly a confederation of national companies. People feared MNC power though it was often overstated because people were comparing sales of companies to GDP which is a measure of value added. And wealth is not the same as power because governments can tax, imprison and raise armies. Also, MNCs carried out their abusive practices because civil society and government supported them. When the stance of society changed, the sins of MNCs went from commission to omission i.e. now you blame companies for not doing MORE to help society. The wages MNCs pay are not necessarily low by local standards. They also open up choices and push up local living standards. MNCs have always been feared both locally and abroad. Because it is worrying that your job depends on someone living in a far off place. They will continue to increase productivity and raise living standards but they will also continue to be feared for this alienating problem that they face.

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Conclusion
Companies have a way to condense social change. They change the way people behave by dictating the way of life. Companies also have the ability to evolve very quickly from being a governmental instrument to being a little republic of its own to being a lean, flat entrepreneurial creation. The future of the company and the changes it brings will depend on two things: o Economic logic i.e. balance between transaction costs and hierarchy costs which decide whether companies make sense. o Political i.e. the operation of companies depends on the amount of regulation that is imposed on them. Three possible futures for the company are debated: o A few companies will take over the world. As is argued that some companies are financially superior to most states but that argument has the flaw of comparing revenue to GDP. This thought has almost no backing statistics because industries which were oligopolies just a few years back are now fought over by a much larger number of companies. Hence, the claim that a few companies will gain utmost power seems baseless. o Companies will become very insubstantial. This view is supported by economist Ronald Coase who says that the sense of a company is here only if its saving from transaction costs is greater than the cost of hierarchy and bureaucracy. This is supported by the number of small firms and virtual firms which is coming up especially in technology oriented industries. However, the claim is a little farfetched as it undermines other core competencies of the company especially cultural ones. o The company is no longer the building block of economy, networks are. Loose-fitting alliances are the ideal homes for Peter Druckers knowledge workers. But the old networks like the keiretsu were built around protecting member companies from the market while the new Silicon Valley networks are built around companies with a heightened response to market. So there is a contradiction. A network today only succeeds if there is a company driving it because of the advantages of a legal personality and internal accountability provided by a company. o The last two outcomes are more plausible than the first but all three are possible. The trend for companies now is to become ever less corporate and for young entrepreneurs to enter into loose relationships rather than forming long lasting corporations. But all above economic forecasts ignore politics and the increase in power of corporations which no longer need government charters and have embedded themselves in the body politic. Some companies have even been able to outfight governments e.g. IBM and Microsoft. However, companies still do not have the power governments do and are more closely policed than ever before. The company now faces two major ideas i.e. Corporate Social Responsibility and Corporate Scandals. Scandals have forever haunted the companies especially during stock market booms. However, the company is still the major driving force behind the wealth of nations and the rising living standards. The Sarbanes Oxley Act and other acts can work to cut down on scandals which will only serve to increase efficiency of the company. But they cannot deny the importance of the company. The shareholder v/s stakeholder debate remains with companies trying to go towards the shareholder point of view. And it can be argued that the company, in its shareholder-ism, is not as heartless as it is deemed to be primarily because the company is now monitored by the media and is answerable more than ever before to its shareholders. Companies are involved in more and more social acts such as building schools and hospitals etc. Companies do have selfish reasons for this increase in social work. 2 reasons are:

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Trust which gives companies a benefit of doubt when dealing with customers, workers and regulators is compounded by social work. o War for talent is won by nice companies The central good of the joint stock company is that it is the key to productivity growth in the private sector. Problems for companies in future may not stem from what companies do to society but what society does to companies in the form of laws and regulations etc. From history, the company has been most successful when the line between the company and the government has been thick. The foremost contribution to society from the company has been through economic progress. It has to obey laws but it is designed to create money. The future of individual companies is very uncertain and their lifespans have been largely diminished but what the company has so far achieved cannot be overlooked in terms of economic progress.

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