The Raj Bhavan in Kolkata, West Bengal, was once the seat of the East India Company. (Image: Raj Bhavan, West Bengal)

Tales Of Trade: The Modern Corporation’s Roots In The East India Company

This is a series based on The Stories of Indian Business Series: 10 Extraordinary Tales of Trade, published by Penguin Random House and edited by Gurcharan Das.

The East India Company: The World’s Most Powerful Corporation

By Tirthankar Roy

The modern corporation is, indeed, a child of the East India Company and there is much to learn from the mother’s failures and successes. In its extraordinary history lie answers to the great questions faced by business people throughout history—how to mitigate risk, raise capital, build trust with customers and suppliers, motivate employees, keep shareholders happy and achieve a harmonious relationship with society.

The Company was one of the pioneers of the shareholder or joint-stock model of corporate enterprise. As an early joint-stock company it derived huge competitive advantage—it could mobilize vast amounts of capital and operate on a much bigger scale than before. By separating investors from the professional managers who ran the business, it achieved a division of labour that made it more efficient. Unlike the ‘owner’ or ‘partner’ model of business, it was able to distribute risk widely—it shielded shareholders from losses as they were only responsible up to the value of their paidup capital. Since it was a ‘legal person’, it could act independently beyond the interests of its investors.

Indeed, the corporate form of doing business is one of the reasons for the rise of the West in the transition from the pre-modern to the modern periods in history (and possibly the backwardness of other societies such as the Islamic Middle East, as argued by some scholars).

The English got the concept of a corporation from Roman law—in particular, the ideas of a legal personality, limited liability and variable shareholdings.

The Italians in the fifteenth century experimented with the corporate form during the flowering of their great multinational business houses, such as the Medicis of Florence (although it was in the city of Genoa that public loans were first used to finance companies). In sixteenth century England, chartered companies brought together a group of merchants, seamen, adventurers and politicians in order to buy and sell goods on a common platform. The idea of pooling resources, however, went back to the medieval guild—a commercial body of merchants who made rules for trade and formed part of town administration. The chartered companies took great risks to finance sea voyages over vast distances which sometimes took years; their capital costs were high and the ships carried high-value luxuries, as well as gold and silver to pay for them. Everything could be lost in a storm. Hence, spreading the shareholding and the backing of the state helped to mitigate risk.

As one of the earliest corporations, the Company evolved a hierarchical model of management that is still followed by today’s multinational companies. Its commercial success also lay in its information management system, not unlike today. Whereas it matched supply and demand through an army of ‘writers’ and clerks, today’s marketing professionals achieve the same thing through highly sophisticated software. But even the best of information depends, in the end, on a ‘feel for the market’.

The Company’s directors debated the same sort of issues—for example, how do you balance headquarters control with autonomy of the local subsidiary—that multinational companies wrestle with today. These are some of its enduring legacies for business enterprises today.

The major difference between the Company and the modern corporation is that it was a monopoly created by the state, privileged by a charter granted by the Crown (later by Parliament) because it was thought to have a public purpose as well as private interest. Such chartered companies have largely disappeared—the BBC is one of the few that remain—as the modern age has rebelled against the notion of monopoly. Today in our democratic times anyone literally can start a company and raise capital by listing it on the stock exchange. And its share price is dependent far more on vigorous competitive forces, unlike chartered companies, whose monopoly powers were able to maintain high share prices.

Gradually, in the eighteenth century, public sentiment in Britain turned against the idea of a monopoly chartered by the government that furthered private interest. This was partly due to the misdeeds of the Company, but in fact, the coming of the Industrial Revolution with its vigorously competitive and innovative companies made the idea obsolete.

In today’s jargon, the Company had acquired the unacceptable odour of ‘crony capitalism’.

Soon it became an anachronism and when it died in 1874, the era of the chartered corporation died with it. Public monopolies did not die, however. They were popular around the world during ‘socialist periods’ of the twentieth century. The post-Independence government of India between 1956 and 1981, in a period popularly called ‘License Raj’, was as biased in favour of public monopoly and against private enterprise as the mercantile state in Europe. These state monopolies were beset with some of the problems that Adam Smith had forecast: poor customer service, high costs, weak profits, poor work ethic among employees, poor capital output ratios and low accountability.

- Edited excerpt from Gurcharan Das’ introduction to the book.

Watch Tirthankar Roy, in conversation with Gurcharan Das, on the history of the East India Company.