What a liability The company is the most important kind of organisation in the world and the best guarantee of our future prosperity, argues a new study by John Micklethwaite and Adrian Wooldridge. Lawrence Norfolk takes issue
Saturday November 8, 2003 The Guardian The Company: A Short History of a Revolutionary Idea by John Micklethwaite and Adrian Wooldridge 192pp, Weidenfeld, £14.99 On December 3 1984, 50 tonnes of methyl isocyanate escaped from an Indian pesticide factory operated by the American-owned multinational Union Carbide. The poisonous gas cloud drifted into the town of Bhopal, causing 8,000 deaths and several hundred thousand permanent injuries. Four years later, the company had fought off the Indian government's claim for $3.3bn in compensation and settled for the equivalent of 43 cents per share. The news sent Union Carbide's share price climbing by $4 in 10 days. "The most important organisation in the world is the company: the basis of the prosperity of the west and the best hope for the future of the rest of the world," assert John Micklethwaite and Adrian Wooldridge in The Company. Their account traces the jagged line of the company's fortunes from Mesopotamia to the America of Enron, explains its continued survival and offers some pointers to its future. The underlying trend is upward. The company is good for us, argue this book's authors. Who is that "us"? The Assyrians, the Romans, the Indians, the Chinese and the Arabs all set up organisations for carrying out trade, but all of these eventually lost out to the west owing to their "geographic and cultural shortcomings". Florence, it seems, possessed a more conducive geography and culture, not to mention a surprising fecundity and generosity. The Medici bank, we are told, "spawned four popes, two queens of France and provided much of the capital for the Renaissance". Europe's early internal trade was conducted through loose partnerships and networks of mutually beneficial interests. These relationships developed slowly into self-protective organisations, paralleled by the money-lenders who financed their operations, becoming more bank-like as time went on. The first European joint-stock companies were created by royal charter, which granted a monopoly on trade with a territory for a fixed period. Instruments of foreign policy as well as profit, the East India Company and its Dutch rival, the VOC, fought a long-running war for the right to trade with India and the Spice Islands, ending up as proxy governments supported by private armies in their respective fiefdoms. France, as ever, went its own way, creating the Mississippi Company. No one was ever quite sure what this company did, but its shares rose faster than a Montgolfier balloon until it became, in effect, the national exchequer of France, at which point it went bust and all but took the country with it. By the middle of the 18th century Europe resounded with the popping of such South Sea Bubbles, while governments see-sawed between heavy-handed regulation and laissez-faire indifference. With the Companies Act of 1862, the see-saw stopped. Henceforth, anyone could set up a company, anyone could invest in it and, if it went bust, all anyone lost was their original investment. Micklethwaite and Wooldridge rightly stress the importance of the 1862 Act and the concept of limited liability, which transferred risk from a company's investors to its suppliers, creditors and customers. The modern company was born. The rise of big business in Britain, Germany and Japan is dutifully recounted, but the main thrust of the story gravitates inevitably to America, where the growth of the railroads forced the companies that built them to develop professional management, accounting and information systems. Andrew Carnegie and Henry Ford demonstrated the importance of economies of scale and of control of the manufacturing process from top to bottom. Ford owned the land on which grazed the sheep that produced the wool for the seat covers in his cars. Kodak Eastman went one better by manufacturing not only film and cameras but even the consumers to buy them: the "amateur photographer" was a corporate invention. Soap manufacturers coined "BO". US companies either ate or were eaten. Primitive anti-trust laws could hardly check the growth of such behemoths as Standard Oil or American Tobacco. The $1.4bn for which JP Morgan and Elbert Gary sold Carnegie Steel was equivalent to two-thirds of all the money then in circulation in the States. Within these companies, a quiet revolution was taking place. The managers were taking over, led by their Lenin, Alfred Sloan of General Motors. His reorganisation of the ailing car giant in the 1920s provided a new corporate model. The multi-divisional company consolidated some of its operations (notably the purchase of raw materials) and factored out others, always to its advantage. In GM's case, that meant separate divisions making Cadillacs, Chryslers and Chevrolets, with production switching between them according to demand. In theory, a multi-divisional company could grow without limit. "I do not recognise size as a barrier," Sloan remarked. "To me it is only a problem of management." Micklethwaite and Wooldridge term the next stage in the history of the company "The Corporate Paradox". In the 1970s, managerial confidence proved no defence against an economic downturn that saw mass lay-offs and factory and office closures in even the biggest companies. But since then, the authors argue, the "triumph of private sector capitalism, spurred on by privatisation and deregulation", has seen the company "trampling many of its rivals". This "paradox" grows more puzzling in the pages that follow. Shareholder (or fund manager) power has added to the volatility of companies' share prices and the insecurity of their CEOs. Leveraged buy-outs, takeovers and mergers have made any company potentially vulnerable to any other. Emerging corporate models - the "gazelle companies" of Silicon Valley, the "bamboo networks" of the Far East - are designed for an unstable economic environment, and the notion that any company can guarantee a job for life is, today, absurd. And then there is Enron. And following Enron, the collapse of WorldCom, three times its size. Micklethwaite and Wooldridge acknowledge that shareholder and employee anxiety have both risen sharply since the 1970s, but dismiss the distrust that surrounds the company as a backlash not "against business but against bad business practices". Whether that distinction is finely drawn or non-existent, the conclusion of The Company retreats from its initial fanfare. After a perfunctory chapter on multi national companies, Micklethwaite and Wooldridge settle for the company being "the key to productivity growth in the private sector", adding: "We are all richer as a result." Once again, who is that "we"? Half the world's population, according to a 2002 Unesco report, subsists on less than $2 a day. The authors of The Company note the difference between stakeholder and shareholder capitalism, but the idea that a company might be beholden to any constituency wider than its owners arouses their ire. Government regulations are "bothersome rules". EU employment legislation costs the UK £2bn a year, while US firms foot a $289bn bill for "social regulations". That these costs might result in value elsewhere (for example, in society at large) is not considered. Criticism of "the basis of the prosperity of the west and the best hope for the future of the rest of the world" is, by definition, ill-informed: "People who now protest about the new evil of global commerce plainly have not read much about slavery or opium." For Micklethwaite and Wooldridge, the company is its own yardstick, the number of these entities that a country can boast being "a better guide to its status than the number of battleships it can muster. It is also not a bad guide to its political freedom." Hurrah, then, for such democratic powerhouses as the Cayman Islands and Gibraltar. Even the company's abuses are to be applauded because "they hastened the development of labour unions and anti-trust laws". But this astigmatism conceals a deeper truth. Largely protected from liability for its actions, the company acts in a sociopolitical void. It exists to make money for its shareholders, and cannot do otherwise. Micklethwaite and Wooldridge have written too small a book for the larger implications of this fact. Union Carbide was bought by Dow Chemicals, whose CEO issued a letter to all employees on the 18th anniversary of the Bhopal disaster. He explained: "Responsibilities to our shareholders and to our industry colleagues... make action on Bhopal impossible." Not difficult. Not costly. Impossible. · Lawrence Norfolk's most recent novel is In the Shape of a Boar (Orion).
