For Profit: A History of Corporations
William Magnuson 2022
"I see in the near future a crisis approaching that unnerves me and causes me to tremble for the safety of my country... corporations have been enthroned and an era of corruption in high places will follow, and the money power of the country will endeavor to prolong its reign by working upon the prejudices of the people until all wealth is aggregated in a few hands and the Republic is destroyed." Abraham Lincoln
It's amazing the Lincoln saw the dangers of corporations long before the robber barons and excesses of the next 50 years led to the Great Depression. For all of history mankind has had a love/hate relationship with corporations. On the one hand, they can produce remarkable wealth and useful products beyond our imaginations. But on the other hand, they can corrupt entire systems and initiate a race to the bottom where only the bottom line matters. Where did corporations come from? And how can we reap their benefits while taming the immense powers they hold over workers, politicians, and ordinary citizens?
For Profit- A History of Corporations takes an in-depth historical view of some of the most consequential corporations and what they have taught us. It is a fascinating book and look inside the world of corporations, written for the average person for whom the corporate world is a mystery. The author, William Magnuson, is a law school professor and expert in the field of corporate law. This is his second book, and it takes a look at eight famous companies in history that transformed our world.
For most of history, businesses remained small because they were run by single business owners, and when the owner died or retired, so did the business. Expanding to multiple cities or regions was unthinkable. The only institutions that mattered were the church and the monarchy, both of which existed independently of any one person. Churches spread because of this entity immortality, and kings raised armies and ruled territories that long outlived their reign. Corporations evolved as separate immortal business entities for the same reasons- to grow and make money, able to outlive any one owner or founder.
For all of history, mankind's biggest advantage wasn't its intelligence or brute strength, it was its ability to cooperate, communicate, and coordinate on big projects that led to powerful technologies and societal progress. Corporations took this advantage that churches and governments were exploiting, and put it to the task of making money. Magnuson starts his book with the Roman Empire and its societates publicanorum, the first ever limited liability companies. Shareholders in ancient Rome could invest in these companies that filled a great need- administering all of the conquered territories of the empire. Armies can only do so much. Someone else had to build the roads, aqueducts, and infrastructure to make the cities rich and powerful.
The book then looks at the first powerful bankers- the Medici Bank of the 15th century. This was the first bank to spread to multiple branches, inventing the idea of a holding company with semi-independent franchises spread all over Europe. Banks today are integral to our financial system, but the Medici's were the first to perfect the cycle of taking deposits and loaning out money to put capital to its best use. For all of its success, this family-run bank had its share of greed and mismanagement, dominating the 15th century but closing forever before the 16th century began.
The East India company may have been one of the most powerful and evil corporations in all of history. Founded in the early 17th century, this far-reaching corporation went on to dominate the subcontinent of India as a quasi-government complete with troops and governors. East India made its fortune on the lucrative spice trades between Asia and Europe, dominating the areas that it operated in and cooperating with a booming slave trade of that period. It was one of the first corporations to issue stock that could be traded on open stock exchanges, and set the stage for the entire shareholder system that provided limited liability while sharing in the profits.
Union Pacific, which still exists today, was a ruthless corporation that embodied the term "railroaded", meaning ruthlessly rolled over. Great fortunes were built by the railroad monopolies in the 18th century, and Union Pacific was one of the earliest and most powerful in American history. Railroads were essential in the late 19th century in taming the west, and the first transcontinental railroad was completed in 1869. While the new system of transportation opened up commerce and growth in the growing nation, it also exploited Asian workers and displaced Native Americans in the process. The great power of Union Pacific inspired the first ever anti-trust legislation in 1890 that is still weakly in force today.
Henry Ford transformed American transportation with his inexpensive cars and efficient assembly lines. He built Ford Motors, still in existence today, and demonstrated how a single man and corporation could transform an entire economy. His assembly lines brought in an age of efficiency that made cars cheaper, workers more productive, and workplaces less enjoyable. His ability to outproduce demand resulted in creating an entire new industry- advertising- that would go out and create demand. And he revolutionized work by championing the 5-day workweek and higher salaries, so that workers could buy his cars and travel more when they weren't working.
Up until World War II, most companies were based in single countries and operated across borders in a limited fashion. The rise of the oil industry in the 1950's changed all of that, and Exxon was at the forefront. Technologies were emerging that could find oil fields all across the planet, and new lucrative oil enterprises were launched in the Middle East, Russia, Venezuela, Alaska, and wherever it was buried in the ground. The era of the multi-national corporation emerged with Big Oil, and nothing has ever been the same. While trade and globalization have made economic possibilities endless, the race to the bottom has offset many economic gains. The race to the bottom encourages different nations to cut wages, neglect working conditions, relax regulations, and toss out environmental protections- all in order to attract multi-nationals and their jobs.
In the 1980's. a new type of corporation emerged- the corporate raider. Rather than make money the old-fashioned way by coming up with a unique service or product and scaling it, these corporations bought existing companies with borrowed money and tried to flip them in short periods of time for a tidy profit. Sleepy companies that were too comfortable in their niche could be targets for hostile takeovers where the new owners would slash salaries and lay off employees, all with the goal of temporarily improving the bottom line for a quick sale. The book tells the tale of KKR, aka Kohlberg, Kravitz and Roberts, and how they stumbled on this unique way to take on enormous debt and pay it back while making outsized profits. Kohlberg later regretted many of their actions, and the increased focus on short-term profitability still haunts us today.
The book concludes with Facebook, an example of startup culture in Silicon Valley that grew from nothing to dominate social media from 2008 onward. The problems with Facebook have been much discussed, and its algorithms have been cleverly designed to increase engagement and time spent on the site. Facebook algorithms prioritize extremism, novelty, and anger to keep people engaged, which supercharges polarization and conspiracy theories. The meteoric rise of startups has validated the Silicon Valley ethos of using technology to break things and cut corners to see what new opportunities can sprout from the destruction of old ways of doing things. Social media has grown at the expense of traditional print and televised media, which are now shadows of what they once were.
On the whole, have corporations been good or bad for humanity? This book cherry-picks some of the most consequential corporations and shows how they transformed the economies of their day. It leaves out the many ethical corporations like Aflac, Toms, or IBM that treat their employees well while giving generously to their community, winning awards for ethics and sustainability. The corporations in this book embody the spirit of extreme capitalism- making profits above everything else, even if it means negative consequences for the unfortunates that fall on the wrong side of the balance sheet. In an era when quarterly profits are everything, ethics and responsibility can get lost in the shuffle. The rise of ESG investing (Environmental, Social and Governance) shows that maybe we are expecting more from our corporations than just the biggest profits possible.
Without corporations, much of the progress that we've seen wouldn't have happened at near the pace. Without railroads, the Wild West would have remained wild much longer. Without Henry Ford's assembly line, cars would have only been for the rich, and without Exxon and other multinationals the world would be a much darker and poorer place- at least until climate change catches up with it. The strengths of corporations- limited liability to encourage risk-taking and stable lifespans independent of any one owner- have made them the most powerful engines to raise capital and make useful things without the red tape that most governments have to negotiate. The problems come when they become too powerful, taking over governments, monopolizing industries, and hoarding money and resources while neglecting workers, communities, and the environment. Clearly someone must act as a counterweight to the power of corporations- reining them in when they go too far. And that responsibility has to fall to governments, many of which are too beholden to the corporations that contribute to their political campaigns.
Magnuson closes the book with guiding principles based on the companies he detailed in the book. They are nice but unlikely to be voluntarily followed by most corporations without a little regulation and pressure.
1- Don't overthrow the republic. Protect democracy.
2- Think long-term and don't chase after big short-term rewards that come with long-term problems.
3- Share the wealth with the shareholders and stakeholders
4- Compete, but fairly. Monopolies distort everything.
5- Treat your workers right.
6- Don't destroy the planet.
7- Don't hog the pie.
8- Don't move too fast or break too many things.
These principles seem far-fetched, but remember that democracies are responsible to the voters, not shareholders. If enough voters get motivated to correct the abuses of corporations, things can happen, as they did in the Progressive era under Teddy Roosevelt and during the New Deal under Franklin Roosevelt. While corporations show what's possible when people cooperate on something big, democracy can show the best of human cooperation when it's allowed to work properly.