In this article, Rodney Reed and Nick Robins look back to a cold London New Year's Eve in 1600 in order to look forward to a rather warmer 2008 New Year in Bangladesh.
Est India Company-"The greatest corporation in the world"
Established on a cold New Year's Eve in 1600, England's East India Company (EIC) is the mother of the modern corporation-the world's first international corporation. With a history spanning almost three centuries, the Company bridged the mercantilist world of chartered monopolies and the industrial age of corporations accountable solely to shareholders. The Company's establishment by Royal Charter, its monopoly of all trade between Britain and Asia and its semi-sovereign privileges to rule territories and raise armies certainly mark it out as a corporate institution from another time. Yet in its financing, structures of governance and business dynamics, the Company is undeniably modern. It may have referred to its staff as servants rather than executives, and communicated by quill pen rather than email, but the key features of the shareholder-owned corporation are there for all to see.
Our contemporary world
There are many good reasons to look back to the East India Company and the Bengal of the 17th and 18th Centuries. The EIC is typical of concerns over the activities of foreign multinationals and unregulated corporations and conglomerates in the world today. Despite attempts by Adam Smith and Edmund Burke the Company and its Directors were never actually formally held to account for their excesses and abuses. Problems often occur for owner-managers or shareholder-investors when the only driver is profit and more profit. The globalisation agenda of the multinational conglomerates seems to be a headlong race to make profit at all and any cost and with this same agenda the EIC impoverished Bengal. The EIC's corporate ethics were differentiated by geography and ethnic group but then, as now, human rights are universal entitlements. Failure in corporate governance leads inevitably to failure in CSR and a failure to be accountable to all stakeholders breaking the business compact. Contemporary international examples include Enron, Worldcom, Parmalat and News International. So these are not new problems, they are as old as corporations themselves. The absence of a world competition authority is certainly a major gap in today's architecture of global governance but it is not the only thing that is missing.
"This imperious company"-a historically significant EIC
Beyond its status as a corporate pioneer, the sheer size of its operations makes the Company historically significant on a global scale. At its height, the Company's empire of commerce stretched from Britain across the Atlantic and around the Cape to the Gulf and on to India. From its headquarters at East India House on London's Leadenhall Street, the Company managed an extensive import-export business. Trading posts were established at St Helena in the mid-Atlantic, where Napoleon drank Company coffee in exile. 'Factories' were also established at Basra and Gombroon (Bandar Abbas) in the Middle East. It was in India that the Company's impacts were most profound. Some of India's major cities grew on the back of the Company's trade, not least Bombay (Mumbai), Calcutta (Kolkata) and Madras (Chennai). Beyond these coastal ports, the Company established a huge land empire, first as an opportunistic quest for extra revenues and later as an end in itself. Always with an eye to the share price and their own executive perks, the Company's executives in India combined economic muscle with its small, but effective private army to establish a corporate state across large parts of the sub-continent. The battle of Plassey in June 1757 was the turning point when the Company's forces defeated the Nawab of Bengal, and placed its puppet on the throne. This is often regarded as the contest that founded the British Empire in India but it is perhaps better viewed as the Company's most successful business deal, generating a windfall profit of £2.5 million for the Company and £234,000 for Robert Clive, the chief architect of the acquisition. Today, this would be equivalent to a £232 million corporate windfall and a cool £22 million success fee for Clive. Yet, the Company's footprint did not stop there, but stretched on to South-East Asia and beyond to China and Japan. Penang and Singapore were both ports purchased by the Company in an age when territories could be bought and sold like commodities. If India was the site of the Company's first commercial triumphs, it was in China that it made its second fortune. The Company's 'factory' at Canton was the funnel through which millions of pounds of Bohea, Congo, Souchon and Pekoe teas flowed west to Britain, Europe and the Americas. In the other direction came first silver and later a flood of Indian-grown opium, smuggled in chests proudly bearing the Company logo.
Fundamental Flaws
Starting out as a marginal importer of Asian spices, the Company became the agent that changed the course of economic history, combining financial strength with military muscle to conquer India and break open China's closed economy. Its rise and eventual fall highlighted to contemporaries, notably Adam Smith and Edmund Burke, three fundamental flaws in the corporate metabolism: first, the corporate drive to market domination and monopoly; second the inherent speculative dynamic of shareholder-owned businesses; and, third, the absence of effective mechanisms for bringing companies to account for malpractice overseas. The pricking of the 'Bengal Bubble' exposed corporate negligence in India, along with extensive insider trading and corruption at home. In a crisis that almost cost it its independence, the Company's share price ultimately halved in value. Not marked on the share graph, however, were the human consequences of the Company's malpractice, most horrifically in the form of a famine that cost between one and ten million lives across Bengal in 1770, a third of the population in affected areas.
By the time of its demise, the Company had changed the course of economic history, reversing the centuries' old flow of wealth from west to east. From Roman times, Europe had always been Asia's commercial supplicant, shipping out gold and silver in return for spices, textiles and other luxury goods. For its first 150 years, the Company had to repeat this practice, as there was almost nothing that England could export that the East wanted to buy. Then in Bengal and subsequently in China through the opium trade, the Company broke this longstanding pattern of trade and wealth.
The Company legacy
There is clearly a world of difference between the Company's operations in the 18th century and the business landscape of our own times. Nevertheless, there are two profound reasons why it is essential to understand the Company's legacy if we are to make a success of corporate accountability in the 21st century.
To start with, the Company's story provides a powerful explanation for the deeply rooted historical mistrust of foreign multinationals in emerging markets. With few exceptions, most European and North American approaches to corporate accountability assume that the challenge of business and development is somehow a recent phenomenon. Yet, across South Asia, the Company's deeds (and misdeeds) remain close to the surface, informing current attitudes and actions. This gulf in perceptions matters. Without an appreciation of the history of multinational practice, of which the East India Company is just one of the more egregious examples, today's global corporations are likely to under-estimate the degree of historically compounded mistrust in emerging markets.
Equally profound are the insights we can gain from the way in which the Company's contemporaries struggled to curb its market power, bring its executives to justice and establish systems of public accountability. It was however the Company's inability to maintain a basis of trust with society at home and abroad that decided its fate-and once this trust was broken, protest, rebellion and, ultimately, removal followed.
Outside the state sector, few companies today have similar monopoly privileges, except those managing infrastructure utilities, such as energy, telecoms, transport and water. However two decades of global deregulation have resulted in increasingly economically distorting and politically dangerous levels of corporate concentration.
Profit before everything
It was the speculative behaviour of corporate insiders and short-term investors that emerged as the most powerful factor in the Company's spectacular fall from grace in the middle of the eighteenth-century. Financial engineering, flimsy managerial controls and inadequate regulation all played their part-just as they did in the late 1990s. Indeed, the Company's much earlier boom-and-bust cycle becomes eerily familiar-the same passion for aggressive acquisitions, the same obsession with exclusive perks for corporate insiders, and the same focus on executive self-preservation as ordinary shareholders started to suffer the consequences of excess. Instead of securing a "moderate but permanent profit", the Company seemed hell-bent on producing "immediate and excessive returns".
Beyond the law!
Perhaps what infuriated the Company's contemporaries most through the seventeenth, eighteenth and nineteenth centuries was its impunity, its ability to shrug off the consequences of its actions. For an insidious corollary to the Company's speculative drive for market dominion was its willingness to engage in immense crimes, safe in the knowledge that domestic and international remedies were not in place.
Lessons from the EIC for today's world
Both theory and practice teach us that the conditions under which the corporation can contribute to human welfare are clear and precise. First of all, its market power and political influence must be limited. If its sway in the marketplace grows too great, it will deny choice and invariably use its position to narrow the opportunities for others, squeezing suppliers and gouging consumers. Also should the corporation become a powerful political force then it can 'rig' the rules of regulation so that it enjoys unjustified public subsidy or protection. Next, stringent rules are needed to ensure that management and investors do not use the corporation as a tool for their short-term interests at the expense of others. Finally, clear and enforceable systems of justice have to be in place to hold the corporation to account for damage to society and the environment.
In conclusion
Today trade is worldwide, with raw materials and finished goods sourced globally for an international market. For example raw material procured from Egypt, Eastern Europe or Turkey, is manufactured in Bangladesh and then transported across the globe for sale in North Australia, New Zealand, America and Europe. Evidently the need remains for 'home countries' to be able to regulate overseas activities by their companies. Businesses need a 'corporate conscience' because human rights are a universal right-not a variable between the races or dependant on geography. The EIC 'walked away from Bengal' leaving it impoverished-not the relatively wealthy nett exporter it found. All stakeholders were abused by EIC, their UK customers as well as their manufacturers and trading partners and suppliers in South India, Bengal and China. Many European historians have sanitised the EIC story and made it instead into a positive example for corporate growth and expansion worldwide. There are dire consequences for the poor and the Corporate's trade partners for ungoverned human greed by Corporations.
Making these connections across the centuries will not only help to enrich a corporate accountability with some much-needed historical depth, but could also help to encourage some much-needed modesty in the arena of multinational practice in emerging markets. Knowing 'The Company's' story, the obligation is on us to remember and then to act.
Nick Robinsworks in the City of London, running socially responsible investment funds. A historian by training, he has nearly twenty years experience in corporate responsibility issues. He is the author of 'The Corporation that Changed the World: How the East India Company Shaped the Modern Multinational' (Published by Orient Longman 2006) and he has contributed all of the historical material for this ET article.
Rodney Reedis the Company Chairman of Reed Consulting Bangladesh Ltd. Reed Consulting Bangladesh Ltd www.reedconsultingbd.com was incorporated in Bangladesh in July 2006 and works in partnership with a European company Reed Consultancies Ltd. www.reedcons.co.uk Reed Consulting has two resident Directors in Bangladesh, Rodney Reed and his wife Mrs Ann Reed, who is the Managing Director. The Company employs Bangladeshi staff as Consultants and Trainers. Reed Consulting specialises in Human Resources, improving management effectiveness and the policy and practice of Corporate Social Responsibility.
