Monday, July 09, 2007

The East India Company Was Never a Model of the Modern Joint-Stock Company

Larry Elliot writes on "PLc: prerogative to an unaccountable few,” Guardian Unlimited 9 July:

Smith, indeed, predicted what might happen in the Wealth of Nations, when he supported the idea of private companies (or copartneries) against joint stock companies, the equivalent of today's limited liability firm.”

The joint-stock chartered trading companies (e.g., the East India Company) that Smith wrote about in Wealth Of Nations were definitely not “the equivalent of today's limited liability firm”, any more that the Titanic was the ‘equivalent of a submarine’.

“In the former, Smith said, each partner was "bound for the debts contracted by the company to the whole extent of his fortune", a potential liability that tended to concentrate the mind. In joint stock companies, Smith said, shareholders tended to know little about the running of the company, raked off a half-yearly dividend and, if things went wrong, stood only to lose the value of their shares.”

The Chartered Trading Companies were set up by Royal Charter or Act of Parliament, with heavy political backing and received an absolute monopoly of territorial trade (‘East of the Cape of God Hope’; “the Baltic”; “Hudson’s bay”, etc.,).

Given the distances they operated under (a six to ten month’s round trip to India), communications were tenuous and under loose supervision to say the least. The case of the East India Company is so bad, so corrupt, so cruel and so awful, that Smith’s criticism of it was well justified.

Be absolutely clear: it was the monopoly status, sanctioned by law that gave the ‘parcel of rogues’ who represented The Company in India and elsewhere in the region a virtual free hand to act as despots, and to plunder on a scale that made even lowly clerks into millionaires, who ‘traded on their own account’, and committed crimes to match.

The limited liability company, legislated for in mid-19th century, and since on many occasions, does not resemble the Chartered monopoly companies in the slightest. To talk as if losing an investment is a mere nothing to the shareholders is somewhat less than convincing. To ignore the legislation and regulation that covers limited liability companies and charges them with a host of responsibilities, with heavy fines for ignoring them, including trading ‘recklessly’, as if the model of the East India Company’s directors applies today is unconvincing.

Big pension funds buy shares in companies and usually spend a great deal of time and money ensuring that the governance of a company performs responsibly before they invest and continue to invest. If all their funds were liable to their full value that would bankrupt the pension funds, which would be reckless in the extreme, including for Mr Elliot's pension. Hence, pension funds take care of where they invest, or withdraw from. In what would Penion Funds invest their members funds if PLCs and Ltd's were banned - corner gorcery shops, lawyers, accountants partnerships, and government bonds?

Immunity from civil damages for destroying a business and the livelihoods of employees used to belong to trade unions when engaged in strikes, but such legal immunities were never conferred on companies. That would not make it advisable to ban trade unions; if a deficiency is noticed, it can be rectified if parliament legislates. And in the case of companies the law has intervened and continues to do so. Corporate misbehavior is punished through courts of law (the East India Company made its own laws for centuries), and the overwhelming majority of companies comply with such laws.

It is a travesty of journalistic, let alone scholarly, exactitude to imply otherwise about Plc’s and Ltd’s. That is why Smith had a different and positive view of joint-stock companies that were denied monopoly status, such as the Bank of Scotland (1694) and the Royal Bank of Scotland (1727). Read the entire book, not selective quotes, please.


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