37

More specifically I mean the very common structure with the following roles:

  • Shareholders

  • Board members

  • CEO

When was this structure invented, and how?

It would also be very interesting to get any hints into why this structure has become the norm for large companies globally.

  • This is my first history stack exchange question. Any feedback appreciated. – dajoh Jul 18 '18 at 7:03
  • 7
    What do you know already (so that we don't point you at information and resources you've seen)? – Steve Bird Jul 18 '18 at 8:43
  • 4
    What research have you done? What did search engines & Wikipedia show, and why was that information inadequate? – Mark C. Wallace Jul 18 '18 at 8:56
  • 5
  • I would mention Stile's bio of Vanderbilt The First Tycoon which explores how things like stock and companies were thought of in the 19th century versus today -- my impression is that companies by definition were different then. I believe shareholder had liability which typically they do not have today. – Jeff Jul 20 '18 at 10:26
41

The governance model for early corporations is the chartered city; a community granted town privileges and, if also free, independence from feudal obligations to local sovereigns or lords and debt of fealty only to the reigning monarch (ie king or emperor).

In such communities the interests of its residents were represented by a council of the leading citizens, who had the responsibility for making the bylaws of the community - civil regulations governing the operation of the town. The council would select one of their own as mayor, who had responsibility both to preside over the council meetings and to oversee the day-to-day management of the community. In the former role, the mayor was president of the council.

With the development and wide-spread adoption of double entry bookkeeping, it became possible to properly track the balance of an organization's assets against the two main classes of equities (or claims) against those assets:

  • debt equities or liabilities; and
  • ownership equities.

Further, double entry bookkeeping complicates the ability of a corporate officer to engage in embezzlement, increasing the confidence of passive investors that their interests are being fairly represented.

About 1600 these two developments come together with the concept of a corporation under a royal charter, creating limited liability for those who merely invest in the organization. Combined with the increased confidence in fiduciary accountability accompanying double entry bookkeeping, and the governance model of the charter cities, this attracts passive investors in sufficient quantity to allow large corporate entities to arise.

The interests of the passive investors are represented by a council of directors that becomes termed the board of directors. From amongst their own number the Board appoints officers of the corporation including one responsible for presiding over the officers - the president. Over time the spatial separation between the investors and the corporate operations makes clear that the two functions must be separated into a president of the management team, and a chairman of the board.

In the 20th century the increasing complexity of corporate structures, with subsidiary corporations and holding companies spun off for additional risk management, requires a multiplicity of presidents (for each corporation) and chairmen (for each board). The terms Chief Executive Officer and Chief Operating Officer emerge at this time to distinguish the most senior of the chairmen and presidents respectively.

The truly modern corporate structure - a plethora of holding companies (ie holding the key conglomerate assets, including subsidiaries) and subsidiary operating companies (holding the key conglomerate long term liabilities) - is a product of both modern computing (enabling the vastly increased number of transactions) and modern corporate income tax legislation (creating differential tax rates by corporate type for various asset financing arrangements). In that sense, the modern structure has only occurred in the last three decades or so, since personal computers became ubiquitous in the office environment.

  • 4
    While this requires the existence of Jos's answer to add up to a full answer to the question, I'd argue the reverse is true as well. Fortunately for us, both were posted. :-) – T.E.D. Jul 18 '18 at 14:25
  • 2
    FWIW: I've seen this claim about double-entry bookkeeping before, and while its probably important to finance like 0 is important to math, I think its equally a pretty obvious invention once you find yourself in a situation that could use it. I independently came up with a spreadsheet-based variant of it myself before I'd ever had the concept explained to me, just because the need to track outstanding payments vs. cleared payments was pretty damn obvious (particularly after a few rounds of screwing things up by not doing that). So clearly any old moron in the same situation can think that up. – T.E.D. Jul 18 '18 at 14:30
  • @T.E.D.: Probably by me, if it was on this site. I'm a CPA CGA as well as a DB programmer. For cash transactions, whether receipts or disbursements, few people struggle with assigning debits and credits. The conceptual leap is in correctly assigning Dr and Cr correctly for non-cash transactions. That seems to have been a trade secret of Italian merchants for some time, possibly centuries, before becoming widely known. Missing dollar riddle – Pieter Geerkens Jul 18 '18 at 14:36
  • 1
    Well cash is obviously easy (perhaps we could call it a degenerate case) because its a physical item, so when you run out of it, it is obvious. Its only stuff that takes time to transfer after the agreement to do so where you can run into trouble and go negative. Still seems like something anyone who frequently works with such things would see the need for immediately. – T.E.D. Jul 18 '18 at 14:45
  • 1
    @PieterGeerkens (1) Non-executive directors nevertheless form part of the board and therefore have significant strategic decision making power, including removing the CEO. Non-executive chairmen are common in the UK. (2) I meant fictions in the sense that they only exist for the legal fiction of corporate personhood to achieve the ends I stated, and do not actually do any real work, employ staff or even control assets. Special purpose vehicles are one example. – James Jul 19 '18 at 13:07
31

The Dutch East India Company (Verenigde Oost-Indische Compagnie) is generally seen as the first company with stocks, shareholders and board members. It didn't have 1 director, it had 17: "De Heren XVII", 'The Lords Seventeen' in English.

Why was it formed? First of all because of the huge investment and risks involved. Sending one ship from Holland all the way to (now) Indonesia was very expensive and risky. A ship returning made the owner(s) very rich, but the risk of not returning was equally high.

Second, to prevent shipowners competing against each other. It was founded by Johan van Oldenbarneveld, amongst others for that reason. (Van Oldenbarneveld was raadspensionaris or prime minister of the Dutch republic.)

Third, because at that time the Dutch were at war with Spain and needed to pull resources together. The VOC had almost national privileges, such as their own troops, the right to declare war, etc. The company was founded in 1602, with a very clear idea to cash in on the coming 12 year Truce, which was being negotiated at that moment.

One of the reasons why those negotiations took so very long was precisely that VOC. The Spanish - not surprisingly - weren't happy with it.

  • 1
    What was the date of its founding? – Todd Wilcox Jul 18 '18 at 19:28
1

Since the other answers are the 17th c., I just want to note that Falu gruva is a bit older.

The organizational structure of Falun Mine created under the 1347 charter was advanced for its time. Free miners owned shares of the operation, proportional to their ownership of copper smelters. The structure was precursor to modern joint stock companies, and Stora Enso, the modern successor to the old mining company, is often referred to as the oldest joint stock company still operational in the world.

Not sure if this is what the OP was looking for.

Edit: the corporation:

The Swedish copper mining company Stora Kopparberg ("great copper mountain") in Falun was granted a charter from King Magnus IV of Sweden in 1347, although the oldest preserved share in the company (granting the Bishop of Västerås 12.5% ownership) dates from 1288. Some claim this to be the oldest existing corporation or limited liability company in the world.

  • The quote sounds like a partnership, at least originally, to me. Can you confirm the actual date when incorporation, and consequent legal recognition of limited liability, occurred? – Pieter Geerkens Jul 19 '18 at 23:42
  • @PieterGeerkens: I cannot find that, or the actual text of the 1347 document, but they call themselves "världens äldsta aktiebolag" (world's oldest limited liability company). – Tomas By Jul 20 '18 at 9:20
  • Royal Charters were the original means by which incorporation of an entity guaranteed legal recognition of limited liability - so the 1347 date looks solid. – Pieter Geerkens Jul 20 '18 at 9:32
  • But this is merely the oldest company that still exists. The idea is presumably much older. – Tomas By Jul 20 '18 at 9:38

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.