The age of the corporation started in England in the 1600s with the formation of the East India Company. Over the next 400+ years, the idea of the corporation has grown and expanded, evolving with time but remaining fundamentally the same.
The East India Company was formed to share in the East Indian spice trade, and it gradually evolved to become the world’s premier trading company, dominating trade routes across the globe.Get The Full Seth Klarman Series in PDF
The EIC showcased the benefits of a corporate body. Before the company's founding, trading businesses were small entities and lacked any market power. The EIC was able to use its size and scale to get the best prices for goods and services, provide security services for ships and streamline Britain's trading supply chain. At its peak, the company had a standing army of more than 200,000 men and controlled a supply chain with millions of stakeholders. All of this was controlled from a relatively small headquarters staffed by 159 in 1785 and 241 in 1813.
Communication was vital to manage such a large organization efficiently, and this is another area where the corporation excelled. According to the Economist, the EIC's dispatches to and from India for the 15 years after 1814 fill 12,414 leather-bound volumes.
The EIC showcased the benefits of scale and organization possible with a corporate structure, and while the company is often remembered for its dubious (and illegal) trading practices, there's no denying that it played a crucial part in the development of the financial world.
As well as kicking off the age of the corporation, the EIC ushered in the age of globalization. Before the company's expansion, the age Mercantilism reigned -- a form of economic nationalism and theorists believed that the amount of wealth in the world is static and trade is a zero-sum game, where one country’s gain is another country’s loss. After the 1600s Mercantilism started to fall away, replaced with global expansion, and the world has profited handsomely from the rise of the corporate world.The End Of The Age Of The Corporation
In the 1780s, only a small fraction of humanity was employed by corporations, and less than 20% of American's had regular paychecks. When the age of the corporation peaked in the 1980s, over 80% of the population received a steady paycheck.
Corporations developed as highly centralized and hierarchical entities designed for efficiency, facilitating streamlining of production and distribution. The key was efficiency and cost control, investment in process and human capital was required to continue to improve efficiency, which helped create a wealthy, well educated middle class.
The death of the corporation began in the 1980s when the number of US corporate entities began to decline as technology started to disrupt the traditional organizational structure. Technology has allowed companies to disaggregate functions that would previously have been conducted in-house aggressively. Outsourcing became commonplace with different techniques and software interacting through standardized protocols, this reduced risk, and transaction costs while pushing up profitability.
Analysts at the Australian investment bank Macquarie argue that this era -- between 1970 and mid-2000s -- was the " greatest and the deepest-ever integration of the global economy, products and fund flows" because it allowed corporates to "outsource and move a great deal of production to Asia (mostly) and some services to India and the Philippines."
The downside of this globalization is that it hollowed out the middle class in developed markets and increased wealth inequality. Macquarie's analysts argue that the benefits of the tech revolution only lastest until around 2005 when an explosion in data, algorithms, networks, cloud and an exponential improvement in digital hardware further eroded labor pricing power, as robotics and automation started to replace muscle power and AI undermined the benefits of IQ. "The new technology has an almost unlimited scale, and hence, marginal costs decline to near zero. Neither economics nor businesses have a defense against zero. It disintermediates companies from their customers and suppliers and ruthlessly eliminates whatever has been left (post IT world) of middle management and supervisors while granting senior management almost dictatorial powers to control and supervise much larger businesses."
This tectonic shift has moved the world away from the corporation, back to a form of neo-feudalism Macquire argues. Rather than a corporation controlling the entire supply chain, you have "Lords of the Manor" organizing a broad structure, employing a few permanent employees and the rest of the work is done with "casual traveling workers and salesmen." Amazon and Google's business models are prime examples. Two companies with a broad structure and some permanent employees that profit from selling other businesses goods and services.
Unfortunately, there seems to be no way out of this cycle, for the foreseeable future at least. As tech has an unlimited scale, marginal costs are declining towards zero. Companies are struggling to reinvest at attractive rates of return when competitors can quickly replicate a product using technology and start a price war. Chasing ever diminishing returns is not a sustainable business strategy. On the other side of the equation, investors are pushing companies to cut wasteful investment in favor of returning capital via buybacks and dividends.
In this new age, companies that are able to harness the power of technology and consumers will be the winners while the traditional corporation will struggle to remain relevant.