Thursday, March 12, 2015

East India Company and Modern Corporations

William Dalrymple has an interesting piece in the Guardian that compares the East India Company (EIC) with modern corporations. He seeks to demonstrate that some of the factors that perpetuated the EIC’s dominance in the corporate and political world for several centuries are found in modern corporations as well, albeit in more measured terms. The kind of power that was wielded by the EIC is unrivalled by what the most powerful corporations presently carry. Although the piece is a bit long, I would recommend it to readers interested in the history and politics of the corporate world.

Some aspects are worth mentioning. The first is the relationship between the state and the corporate sector that is somewhat snug, but often also tends to become tenuous. The EIC benefited directly from monopoly conferred by the state, which is unimaginable in present circumstances, but as Dalrymple argues, that phenomenon exists rather covertly at the moment:

In many ways the EIC was a model of corporate efficiency: 100 years into its history, it had only 35 permanent employees in its head office. Nevertheless, that skeleton staff executed a corporate coup unparalleled in history: the military conquest, subjugation and plunder of vast tracts of southern Asia. It almost certainly remains the supreme act of corporate violence in world history. For all the power wielded today by the world’s largest corporations – whether ExxonMobil, Walmart or Google – they are tame beasts compared with the ravaging territorial appetites of the militarised East India Company. Yet if history shows anything, it is that in the intimate dance between the power of the state and that of the corporation, while the latter can be regulated, it will use all the resources in its power to resist.

The second is the shareholder-oriented approach of the EIC, where it operated largely for the benefit of shareholders, without regard (and often counter) to any other constituencies whatsoever. Matters became further compounded due to the unsavory linkages between lawmakers and the corporates whereby several MPs who continued to support EIC’s dominance also turned out to be shareholders in the company. As Dalrymple notes:

When it suited, the EIC made much of its legal separation from the government. It argued forcefully, and successfully, that the document signed by Shah Alam – known as the Diwani – was the legal property of the company, not the Crown, even though the government had spent a massive sum on naval and military operations protecting the EIC’s Indian acquisitions. But the MPs who voted to uphold this legal distinction were not exactly neutral: nearly a quarter of them held company stock, which would have plummeted in value had the Crown taken over. For the same reason, the need to protect the company from foreign competition became a major aim of British foreign policy.

This also suggests rent-seeking behaviour on the part of the state and the legislators. The fact of utter disregard to non-shareholder interests is evident from the following passage:

The transaction depicted in the painting was to have catastrophic consequences. As with all such corporations, then as now, the EIC was answerable only to its shareholders. With no stake in the just governance of the region, or its long-term wellbeing, the company’s rule quickly turned into the straightforward pillage of Bengal, and the rapid transfer westwards of its wealth.

As a third aspect, Dalrymple also identifies elements of corporate crisis and bailouts in EIC’s history and compares that with the current scenario.

Yet, like more recent mega-corporations, the EIC proved at once hugely powerful and oddly vulnerable to economic uncertainty. Only seven years after the granting of the Diwani, when the company’s share price had doubled overnight after it acquired the wealth of the treasury of Bengal, the East India bubble burst after plunder and famine in Bengal led to massive shortfalls in expected land revenues. The EIC was left with debts of £1.5m and a bill of £1m unpaid tax owed to the Crown. When knowledge of this became public, 30 banks collapsed like dominoes across Europe, bringing trade to a standstill.

But unlike Lehman Brothers, the East India Company really was too big to fail. So it was that in 1773, the world’s first aggressive multinational corporation was saved by history’s first mega-bailout – the first example of a nation state extracting, as its price for saving a failing corporation, the right to regulate and severely rein it in.

The piece deals with several other aspects of EIC and historically accounts them in detail. It ends with the following observation:

The East India Company no longer exists, and it has, thankfully, no exact modern equivalent. Walmart, which is the world’s largest corporation in revenue terms, does not number among its assets a fleet of nuclear submarines; neither Facebook nor Shell possesses regiments of infantry. Yet the East India Company – the first great multinational corporation, and the first to run amok – was the ultimate model for many of today’s joint-stock corporations. The most powerful among them do not need their own armies: they can rely on governments to protect their interests and bail them out. The East India Company remains history’s most terrifying warning about the potential for the abuse of corporate power – and the insidious means by which the interests of shareholders become those of the state. Three hundred and fifteen years after its founding, its story has never been more current.

It appears this piece is a precursor to Dalrymple’s forthcoming book, The Anarchy: How a Corporation Replaced the Mughal Empire, 1756-1803, expected next year, and something to look out for anyone interested in corporate history. 

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