I always get a headache when I enter the temple and the chattering hits my senses. Like a party with too many people and not enough music. I know they saved the city from those wine drinking, cigarette smoking existentialists. They – the geese – woke up the city. The mean guard dogs slept through it all. But man, the headache I get each time I enter Juno’s temple. Anyway it’s a contract. I just have to feed them once a day and the senate pays me. A good deal.
Yes, Mr Publicani, it was a good deal, probably one of Rome’s earliest documented public contracts. No, tax collection came later, probably. E. Badian has the details in his wonderful book “Publicans and Sinners” – mainly on that it is kind of hard to know exactly, different sources, not always the best, still he tries his best and does lots of ancient business case calculations.
The Board Room Version: The corporation began in Ancient Rome. The state contracting private capital to perform state functions it could not handle. The deal was good, generated wealth, produced fraud and required periodic correction. The pattern repeated across history: charter companies granted sovereign power to push ocean trade and national control outside of Europe. Then they overreached. Free incorporation in the 1850s democratized the institution while any public purpose was forgotten. Standard Oil showed what unrestrained incorporation produced. Roosevelt named the problem and tried to contain it. The pattern was always the same: necessity created the form, legitimacy is granted, overreach follows, the state needed to correct. Then Berle and Means in 1932 documented what the pattern had been producing: ownership and control separated as the founding condition of the modern corporation, not a corruption of it. Then Pistor showing why the renegotiation never happened: capital rules by law and is protected by it. The corporation remains collectively indispensable and individually unpredictable – and the question to whom it is accountable has never been resolved.
We know for certain that these contracts start to involve serious money once the Hannibalic Wars start – 218 BCE. And that’s also when the societates publicanorum become important. And this, ladies and gentlemen, is the birth of what will eventually become the modern company, the subject of this essay. OK, it’s called proto-corporate, so not quite it, but sort of the first alpha version. I know there are those who dispute any kind of connection between societates publicanorum and the modern corporation, well I happy to introduce you to my roman law professor from back in the days and you can discuss this with him.
See, our geese feeder was a single person with a state contract – sometimes it was also several people but they didn’t pool resources to fulfill their contractual duties. Importantly, these were not state employees, it was more like an outsourced job. But feeding geese is a relatively simple thing to do. When Rome was faced with Hannibal marching over the Alps it had to send sixteen legions – something like 72’000 soldiers – into the field. To supply these proved too much for the administrators of Rome at the time. The complexity of the logistics and a strained Roman treasury led it to contract the private sector. And even then this could not be done by one wealthy person – or family – alone but several needed to pull resources together to be able to supply all the tunics and helmets and food and whatever nonsense is needed in war. So the state had to go into contract with a group, unified with the purpose of fulfilling state contracts, a public purpose. These societates did a lot of what modern companies would do. They pooled capital, even fronting the investment – and the state likely paid interest although, you know, sketchy sources. They had grouped together before the contract, so were not just one-hit bands. And by 200 BCE these contracts were also substantial, before that they appeared to be more of a side hustle for wealthy families. War supplying stayed one of the major activities, although tax collection, mining, construction and salt harvesting also became important.
But we talk corpo here and that means then as it does now there were some bad apples. During the Hannibalic Wars the ship lanes were guaranteed by the state. So there is the story of some fine gentlemen loading worthless goods onto unseaworthy ships. When they sank, the businessmen would collect the loss of the expensive contracted goods from the state. Especially immoral since the state was under attack at the time. Some sources turn this into a corpo-political thriller — the Senate bought off, hired mobs storming the courts, total impunity for the fine gentlemen. Badian, ever the careful historian, complicates the story. The fraud probably happened. But the Senate likely just delayed dealing with it — wartime was bad timing for prosecuting your own war suppliers — and the Senate wasn’t really a court in our sense anyway. The mob that tried to break things up was probably small, and got punished for it. Less Netflix, more bureaucratic mess. Which is somehow more believable, and more familiar. Eventually some accountability arrived, if messily and incompletely.
Another interesting point comes from the fact that there was no specialization in these proto-companies. The same groups would bid for contracts in mining and war supplying. If a contract went from one group to the other, equipment and infrastructure and people were often just sold to the new one. This shows that these groups had assets and an organizational setup that could be sold and transferred.
By 150 BCE the elite class of Rome, members of the Senate, had linked together with the publicani, not in person but within the same network. There was no active lobbying for business interests because it was not needed, the important political and business people were all linked together. There were some control mechanisms on the state’s side but they were rarely used. The state and the proto-corporations seemed to have found a good collaboration, until the story with the Gracchi brothers.
Tiberius and Gaius Gracchus were Roman aristocrats in the second century BCE. Tiberius first attempted to enforce land reforms to benefit poorer citizens. This went against the Senate which had converted public land into effectively private wealth for the political class. Gaius Gracchus went further. He wanted to reform taxation and provincial administration. Both were aimed at breaking the Senate’s grip on power — not by attacking it directly, but by building alternative bases of support. Gaius gave the equestrian (commercial) class controlling power over the governors in the new Asian provinces. Basically giving the publicani power to check the very government that should have kept them in check. That created a strange reverse accountability situation. What sounds like your everyday stupid political move – just some politician giving his wealthy friends some more power – ended in both of them being killed in political violence. These were the first political murders in centuries. Later this would become a lot more common. Rome became an epicenter of power struggles. It took another 100 years but then (and after Caesar and all that) Augustus effectively killed the republic and turned it into a monarchy in disguise. That also closed a lot of the doors for private activities. Tax collection for example was folded back into direct state administration.
That was the end of the first big corporations. Afterwards there were brief glimpses of corpo. The guilds in medieval societies were a bit more than just professional associations but no real companies. Also the Hanseatic League, the Italian banking houses and city-states were all significant, but they never quite reached the importance of Roman publicani. They were smaller in scale, mostly local and not pooling dispersed capital into a continuing entrepreneurial effort. Now some of them – as the Italian banks – were quite complex in setup but nothing comparable in scale. The reason was quite simple. It wasn’t needed. Europe after Rome had broken up again into smaller regions, their significance far less than Rome’s had been. So this Roman invention went dormant for about 1400 years until states had regained enough grandeur. But not just states had gotten larger, also the world had.
In 1492 Columbus crossed the Atlantic and maybe even more importantly Vasco da Gama reached India in 1498 by sailing around Africa. The birth of ocean trade. The south of Europe had much experience with trade by sea. Mediterranean trade routes date back to before ancient Rome. But the ocean trade was a different animal. Voyages took years not weeks. Capital – for ships and trade goods – was locked up for that time. The first voyages were indeed financed by the southern European monarchies Spain and Portugal, but we know how that played out. It took another century and two northern powerhouses to build structures that were better suited for these endeavors. In 1600 the English East India Company and in 1602 the Dutch East India Company were founded. The first Charter Companies.
Both were extremely successful in their enterprise. The English East India Company had over 100’000 employees at its peak and that excludes the more than 200’000 soldiers in its service. Oh, and it basically occupied the whole Indian subcontinent. The Dutch East India Company was economically even more impressive. It sent almost 5’000 ships to Asia and brought back more than 2.5 million tonnes of goods.
And they were actual companies, they had a multitude of owners, legal personality and operated separately from the state they originated from. Although separated economically, their respective states granted them a monopoly and quasi-sovereign power – like waging wars and minting coins – in exchange for a public purpose written into their charters – expanding their nations’ trade and presence.
The English East India Company as mentioned was basically a privately founded occupying force. And the Dutch version was also not innocent. They violently enforced their trade monopoly on the different spice islands. And these were just the two most prominent examples of charter companies. There were many more and they were all just in the hands of shareholders. One was the South Sea Company which had received trading privileges with Spanish South America in return for taking on a part of Britain’s national debt. Now, these opportunities were quite limited since Britain did not control these territories. But despite starting with a huge negative in the books and a bad business plan, the market’s expectations were enormous. In 1720, shares started at £100 and rose to £1,000. But confidence quickly collapsed again and thousands of investors were ruined.
Whereas in Rome there had been bad apples exploiting a system, these newer companies were built to exploit, either through overreaching power granted or by the first forms of financial speculation. In the case of the latter the state realized the danger and reacted with prohibition. Britain passed the Bubble Act banning new joint-stock companies without royal charter for the next hundred years.
But a total ban couldn’t last, the need for private enterprises didn’t go away. On the contrary, the Industrial Revolution demanded it even more. The machinery, the mills, the infrastructure — the required capital at a scale made the partnership form genuinely inadequate. By the 1850s new legislation was needed. Enter the Limited Liability Acts in the UK and similar state laws in the US. The main twist was that everybody could become a corporation and more importantly for the first time there was no public purpose required – other than making money of course. Nobody voted to abandon public purpose — it just stopped being a precondition once anyone could incorporate by filing paperwork. The publicani only existed because of state contract. The charter company had to justify itself to the state. The free incorporation didn’t have to justify anything to anyone. And it caught on like a wildfire – in the UK alone nearly 5’000 limited-liability companies were established by 1866.
One big business of the time was railroads and large companies like the London and North Western Railway with around 20’000 employees. This was also the birth of a new kind of profession: the manager – moving freight without trains colliding required coordination, oversight and administration on a scale nothing before had been known. But where to get people who had some idea of command and control activities. Well, you take them from the army – retired officers. So by 1850 50 to 60 managers had been hired by railroad companies, hundreds more would follow. Just if you were wondering where what McGregor would later call Theory X management originated, here is your answer.
These new incorporations were largely free of governmental checks. They also had no public purpose. They just developed on their own and of course grew. Let’s take Standard Oil as an example in the US. In its first form incorporated in 1870 it grew in just ten years to control roughly 95% of US oil refining. It was then organized in a trust, coordinating 40 companies worth 70 million dollars. John D. Rockefeller – the principal owner of Standard Oil – had amassed a fortune of 900 million dollars by 1913, roughly 2.3% of US GDP held by one man. Free incorporation did not make Standard Oil dominant. But it allowed companies to grow without having to prove that they served a public purpose. Weak regulation and the economics of oil did the rest.
The government had to react and did so first with a law in 1890 – the Sherman Antitrust Act – and then with the so-called trust-busting under two US presidents – Roosevelt and Taft. In his first message to Congress in 1901 Roosevelt gave a clear description of the situation: “They are indispensable instruments of our modern civilization; but I believe that they should be so supervised and so regulated that they shall act for the interests of the community as a whole.” More and more people realized why these new companies posed a problem for societies and again Roosevelt put it into the right words in 1902: “We have a great, powerful, artificial creation which has no creator to which it is responsible.” The law had created an artificial, a legal persona, but it had no soul. Standard Oil was eventually split into 34 separate companies by 1911 by the courts.
Academia became more interested in corporate business at the turn of the century. Not just in establishing education for the new profession of the manager, but also as a study object. Adam Smith had been an early outlier in 1776, most literature came around in the early 1900s. But few got as much practical insight as the Austrian immigrant Peter Drucker. After writing his social analysis “The Future of Industrial Man” in 1942, he was invited by GM to study the company. Drucker was fascinated by the decentralized M-form of the company. The different car brands – like Chevrolet, Pontiac, Cadillac – were organized as largely autonomous operating divisions and GM had only a coordinating control function. This solved the issue that top management in large organizations cannot make operational decisions. Smaller divisions keep decision making at a lower level where it is still feasible. This was very much in line with what Drucker had propagated for companies and he further developed the idea in his book “Concept of the Corporation.” He also pleaded with GM to treat workers less as a resource or cost element and to take seriously their social role in creating function and status for them. GM implemented Drucker’s structural recommendation. But when it came to the human and social argument their response was to start an employee essay competition: “My Job and Why I Like It.” This shows the gap between one of the most sophisticated corporations of its era and the most important management thinker of the era. Social responsibility had become a gimmick, not a central aim of the corporation.
After World War II companies changed mainly in how they were financed and owned. The original model of companies being mostly financed by outside sources started to shift to internal – two-thirds of capital raised by non-financial companies between 1945 and 1970 came from internal sources. At the same time numbers of shareholders grew in the US from 6 million in 1952 to 25 million by 1965. The old small club of owners started to be replaced by a large – mostly passive – population of owners. Top management was free to invest long-term without needing shareholder approval. This financial architecture is what made Drucker’s vision of the corporation as social institution briefly look real. And there were signs of it – P&G’s guaranteed employment, Heinz’s citizenship education. But there was also the risk of the old saying “Everybody’s business is nobody’s business.” Dispersed share ownership threatened to turn everybody’s company into nobody’s responsibility.
And by the 1970s something else happened, accelerating dramatically in the 1980s. The patient internal financing started to be replaced by external pressure from shareholders to see returns. We are entering the period of hostile takeovers and leveraged buyouts. The golden age of the big old companies was dismantled and with it also the stability and the – although always limited – social purpose corporations had given themselves. By 1993 Manpower – a temporary staffing agency – had replaced GM as the largest employer in the US.
Besides Drucker’s early social theory, there were other voices that looked at the corporation critically. In 1932 Adolf Berle and Gardiner Means wrote “The Modern Corporation and Private Property” to point out some systemic weak points. They saw that if you concentrate the wealth of many people, the control over this wealth needs to be surrendered to a unified direction. Somebody needs to take charge of the business. That somebody is not the owner of the wealth anymore. It’s what came to be known as top management. That creates two questions: what is the motivating force driving the person – or persons – in charge? It’s not their money that is on the line. The second is how is wealth, more specifically profit, distributed. The person in charge is doing the work, but it’s the wealth-owner’s money. That leads to a funny symmetry between owner – or better investor – and worker. Both become wage recipients. The worker for labor and the investor for capital. Both are just resources in the company’s process. Neither of them is really owning or controlling anything. The manager is somewhere in the middle – not middle management in this case, but between capital and labor – but who can actually name them as the person in charge? Their legitimacy is unclear. So does the old proverb really come true: everybody’s business truly is nobody’s. And the stakes – as already mentioned with GM – were very high in the 1930s. AT&T is another example. By 1930 its wealth was bigger than that of 20 US states, but it was “owned” by 10 million shareholders. 10 million people don’t own any one thing. That would be chaos. Have you ever tried to co-own a car with somebody?
Berle and Means tried to solve the problem from different angles. Traditional logic of property would mean that control stays with the owner/investor. But that would mean management has no control and is therefore impotent to act. Management cannot negate that logic either because they used it to get capital from investors in the first place. Give me money and then you own part of our great gummy bear company!
Traditional logic of profit isn’t doing much better. It says that profit should reward effort put into an endeavor. Meaning profit would have to follow control. If management is the controlling force it would get all the profit, not the passive owner. Obviously that is not satisfying either.
That results in the traditional concepts not being of any use anymore. There was a split between active ownership – the actual enterprise – and passive ownership – the shares. And since motivation of management could not be profit it had to be newly defined as a combination of salary, prestige, power and empire-building. Making the new top executive more like an Alexander the Great figure. Well, that didn’t solve the problem of who was to be in control.
According to Berle and Means there were three possible answers. One – give shareholders more control — but Berle and Means saw this only as an interim safeguard against management stealing from investors, not as a description of what the corporation is actually for. Two – give management unrestricted control over companies. Well, that could leave them to wreak havoc with other people’s money. The third option was to create corporate power as a community or public trust. Neither shareholder nor management can claim corporations exclusively. Companies have also grown beyond just two parties because they affect workers, consumers and communities. That power needs to be directed toward broader social interests as well as financial interests. So it becomes a complicated construct of balancing different interests. It actually becomes more like the state, juggling different stakeholders and accountabilities. Not an easy thing to accomplish and it never has been. Instead, by the mid-1970s one economist called Milton Friedman simply declared the first option – the interim safeguard – to be the right and only answer.
Why capital’s privilege was never really renegotiated needs an explanation and it was my introduction to this discussion — because it comes from a legal scholar. Katharina Pistor wrote in 2019 her analysis “The Code of Capital: How the Law Creates Wealth and Inequality” and for non-legal people this might be quite eye-opening. See, capital rules because of the law. We see effects of this in times of economic crises – the US banking rescue of 2008-09, when the state rescued banks whose legal architecture had privatized gains and socialized losses – or the Covid-19 crisis or the Great Depression and on and on. But we also see this further back in history when the state gave feudal status or colonial race hierarchy that had direct influence on ownership. Max Weber already saw at the beginning of the 1900s that feudal society had given different groups privileges. Modern capitalism replaced these with laws that were supposed to be equal. But businesses quickly learned to use increasingly complex laws to gain new advantages, all under the motto of efficiency and what benefits business is good for everyone.
But Pistor found that asset holders did not want the rule of law, they just wanted legal protection for themselves. That leads to absurd situations. Take English landlords in the seventeenth and eighteenth centuries. They fought for land titles to be legally recognized, then they took out debts on them. But when the creditors enforced the mortgage they cried foul. They had lawyers build trusts to shield their wealth from the creditors. The courts defended the shield and the creditors lost their money and ownership rights. Big creditors later learned the same game and fought for bankruptcy law placing their claims ahead of those of employees and customers.
Yet the real funny bit – at least for legal people – is that all these capitalist games require the law to constitute ownership in the first place. See, having possession of something and owning it is not the same thing. Possession is more or less an actual thing. I have an apple in my hand, I possess it. Now, the apple might come from my apple tree or I might have bought it at the supermarket and then I also own it. But what if I picked it from somebody else’s apple tree. I still possess it but I don’t own it. Ownership is having the right to something. Now rights are given by law – at least in modern states. So without law there would be no ownership. But why then do we have all these funny business shenanigans. Why can’t law do a better job at regulating all of this. The problem is that law is necessarily a generalization – it tries to cover all activities, not a detailed few – and it always suffers from incompleteness – it cannot anticipate every future case. So there is always the possibility of it being exploited before the system can close the gap. What makes this stranger still: the legal protection capital enjoys is never called a subsidy, while welfare payments always are — “it is legal” ends the conversation before anyone asks whose interests the law is actually serving. The exploiting of law is even more absurd since it works against a system that is required to constitute wealth. Or as Pistor says: “law is the cloth from which capital is cut.”
Corporations are an interesting thing because they are artificial entities, but they contain so many useful activities without which modern society would not be possible. But as with all things that need definition, a lot of things are forgotten. The social scientist and systems thinker Gregory Bateson explained what the semanticist Alfred Korzybski meant when he said that the map is not the territory. The reality is not drawn onto paper. It is only the differences – the lake, the mountain, the path. If there was nothing special about a piece of land all you would see on a map would be the boundaries. Same with corporations, what was drawn were only the specificities: the ownership and liabilities and contractual relationships. That’s what got coded. Everything uniform – work, communities, effect on the ecosystem did not appear. So we have only a fragmented picture of what corporations are.
Drucker said it was the first autonomous institution, a power center within society yet independent of the national state. An indispensable instrument as Roosevelt described it. Or as the Economist writers Micklethwait and Wooldridge described it: “collectively indispensable, yet individually unpredictable.” There are many questions that have never been resolved. Yet that does not make the corporation something to abandon but something to be worked on.
I guess there is more to explore.
Is the corporation a flawed necessity or an alpha version of something truly great? LinkedIn
Don’t just take it from me, here is some good stuff to read:
Badian, E. Publicans and Sinners: Private Enterprise in the Service of the Roman Republic. Cornell University Press, 1972. (Available on Internet Archive.)
Micklethwait, John and Wooldridge, Adrian. The Company: A Short History of a Revolutionary Idea. Modern Library, 2003.
Berle, Adolf and Means, Gardiner. The Modern Corporation and Private Property. Macmillan, 1932 (revised edition 1967). Book I, Chapter 1 and Book IV, Chapters I and II only.
Bateson, Gregory. “Form, Substance and Difference.” 1970 Korzybski Memorial Lecture. In Steps to an Ecology of Mind. Chandler, 1972.
Drucker, Peter F. The Future of Industrial Man. John Day, 1942.
Drucker, Peter F. Concept of the Corporation. John Day, 1946.
Pistor, Katharina. The Code of Capital: How the Law Creates Wealth and Inequality. Princeton University Press, 2019. Last chapter.
Roosevelt, Theodore. First Annual Message to Congress, December 3, 1901.