November 2, 2003

A firm grip on all our lives

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Meanwhile, up in the ghetto, Shylock sharpened his knife in anticipation of Antonio’s pound of flesh. Had insurance been invented at the time, the merchant and Shylock could have slept easily. Indeed, had the company as we know it today been up and running, particularly in its limited liability guise, the merchant and the financier could have shared a grappa.

The company, much maligned in many quarters, is of the most revolutionary inventions we have ever seen. It is bizarre how little coverage is given to the company’s role in history.When historians cite the great convulsions in history,the usual suspects emerge: the Reformation, Marxism, communism, imperialism and fascism.

Rarely does a commentator point to the Companies Act of 1862, which enshrined in law the modern company.This revolutionary creation continues to dominate most of our lives; it has devoured the Soviet Union, is encroaching on communist China and has been celebrated and attacked in equal measure all over universities and the editorial pages in theWest.

Arguably, the only two institutions that have survived the great upheavals of the past 100 years are the family and the company, and both dominate our lives.Why do I commute? What is the point of the daily grind? Who owns me? Where do my loyalties lie, with my kids or my boss? Where do I work really? What does my company do? What is it all for? These are questions most of us frequently ask ourselves.

Most of us may work in companies without knowing why that company exists. If it went, would anyone miss it? What precisely is one’s own role in the company’s overall game plan?

Even if we can’t answer these questions, we spend an inordinate amount of our energies serving companies, and we expect in return that they will give us security. However, to assess just how revolutionary companies are,we have to go back in time.

Light opera wouldn’t be my strong suit, but I do know that Gilbert and Sullivan’s Utopia Limited (which opened in Dublin in 1870) shows that both men understood the importance of the company:

All hail, the fact, All hail, Invention new, The Joint Stock Companies Act, The Act of Sixty-Two.
The masters of Victorian operetta had grasped the fact that the source of Britain’s economic vibrancy stemmed from the Companies Act of 1862.

This revolutionary law, enacted by Gladstone, brought together four big ideas that have outlasted Marx, Engels and all the others put together.

First, a company can be an `artificial’ person with the same ability to do business as a real human. Second, the company can issue tradable shares to any number of investors.Third, it is possible to limit the liability of those investors to the extent that they can’t lose more than the amount invested. Fourth, a company can be set up without having to take on any social obligation.

Before 1862, a company had to have a specific purpose, such as building a railway between Dublin and Dun Laoghaire. After 1861, a company could be set up with the specific aim of making money – nothing more, nothing less – and creditors of the company were warned that the `limited’ nature of the liability meant that company directors were protected if the company went belly-up.

This legislation soon exported itself all over the globe allowing companies to be set up at will with little or no hassle. The most important aspect of the act is that it changed the balance of risk in society. A company could have the same legal rights as an individual, but the downside financial risk was capped.

Thus, companies became the perfect vehicle for economic expansion. The act also allowed companies to mutate and this is crucial. Companies could now change into anything they wanted. A company could trade, invent, extract, mine, farm, manufacture and speculate. Therefore, at a stroke, Gladstone created in society a revolutionary entity, equal to government,that would be both the strongest supporter and the greatest enemy of politicians over the next century.

Over the course of the last 140 years, while companies have marched relentlessly on, corporate practices have been subject to fads and fashions. Ironically, companies have not always been seen as being hand-in-glove with capitalism. Early objectors to the company included Adam Smith, who saw companies as the harbingers of collective states, where the management of trades and the like would be taken out of private hands and given to faceless corporations.

Later on, in the US gilded age from 1870 to 1910, company bosses were seen as robber-barons that used the enormous power of well-financed companies and shareholders’ money to enrich themselves.

During a later phase after the Second World War, another enemy emerged within the ranks of companies – that of the faceless manager. During the heyday of company man, from the early 1950s to the late 1970s, investors saw their funds being wasted by managers in large amorphous corporations. The manager was seen as the bureaucratic enemy number one who needed to be stopped lest the shareholder be bled dry of all returns.

Since the mid-1980s, we have been in the `shareholder value’ phase of company development, where the return to shareholders, based on the share price of the company, appears to be regarded as the be-all and endall.This has led to corporate practices regarded by many as irresponsible, such as mega-mergers to reduce cost – the likes of which we saw this week in the US banking sector.

In addition, basing the health of a company purely on its share value has been criticised by many as being far too narrow a definition of success, as it places little store on the health of the workforce, and far too much emphasis on the bank balances of already rich investors.

Whatever the fashion, the march of the company appears relentless. Many applaud this, and postulate that where there are companies, there is individual freedom. Nothing, they claim, more reveals the vitality of a country than how easy it is to set up and close down companies.

This corporate fluidity argument is quite persuasive. However, the antiglobalisation movement sees things differently.

Looking forward, there are three distinct schools of thought about what will happen to the company in the future.The first is the anti-globalisation view that believes in the `silent takeover’ thesis.This forecasts that a small number of huge companies will take over the levers of power from governments, leaving the democratic masses without any economic power.

A second view argues the opposite. It says that companies will become less substantial and individuals will use modern technology, so that companies are not needed to maintain a bureaucracy. Thus, many companies will mutate into middlemen.

The crux of this idea is that maintaining a set structure is inefficient and costly, and will prove tobe the major sticking point in the future. So the company of the 21st century will simply contract out almost everything.

A third view is that companies will become epicentres for an organisation whose members are tapped into information networks. This is the Silicone Valley model, which, frankly, has come a bit of a cropper since the dotcom bust, but remains relevant to smart mobile workers.

Whatever the future, the company is the most revolutionary social invention of the past 150 years and has proved to be durable, resilient and a reflection of humanity. It dominates our world and, in many ways, it is only the (increasingly dysfunctional) family that has more influence over our day-to-day lives.

Far from being a faceless, remote, unfriendly monolith, more and more the company is a reflection of ourselves.    


  1. Gerry Fahey

    Corporate practices subject to fads and fashions
    David,

    You were recently a guest speaker at the CIPD Conference.
    During the conference prominence was given to Emotional
    Intelligence as a panacea for corporate ills.
    As a psychologist I should point out that all the objective
    research available to date shows that EI has the same
    relevance to bottom line performance as ‘ROO BARS’ to the
    traffic problems of Dublin. I can provide you with the
    evidence if you are interested.

    This hasn’t stopped the IMI from promoting the EI fad to
    its members. I wonder why?

  2. CHANTAL LADIAS

    EI is a viable tool to measure and assess another dimension of personality in team leader. It looks at self awareness and also the ability to manage one’s own feelings. Many researchers like to undermine EI and emotions but the debate is still going on. It reminds me of qualitative vs. quantitative debate war. As an academic, one more time I go for peace by claiming EI and IQ complement eachother.

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