Bailouts, Bribes and Insider Trading: Here’s What the World’s Leading Business Looked Like 300 Years Ago

robinaNick Robins has had his book, The Corporation that Changed the World (2nd edition; Pluto, 2012) reviewed in Business Insider, by Rob Wile. The article describes the book as ‘an excellent and exhaustive look at the legendary [East India] company’, before going on to list some of the ‘fascinating lessons we learned from Robins’ book’.

We’ve reproduced some of these selected points below, but for the full article you can always go to businessinsider.com.

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Instant Profits

The English East India Company received its charter from Queen Elizabeth on Dec. 31, 1600. Though not the first chartered company in England (the Muscovy Company predated it by 45 years), it pioneered the concept of joint stock ownership as a way of raising the massive amount of capital needed for successful overseas trade, as well as managing the risk inherent in the enterprise. At first joint stocks were constructed for each voyage, but by 1657 the company was formalized as a “continuous unlimited investment taking place without reference to individual voyages.”

Prior to the arrival of the English, Asian trade was controlled by the Portuguese, and to a lesser extent the Dutch. And the main trade target was Indonesia, not India. Still, the company was an instant success, generating returns of 155% in its first decade, mainly by eliminating the need for an overland passage.

But the company was ultimately out-manoeuvred in the “Spice Islands” (as Indonesia was known) by the Dutch, who in 1667 gave up some American backwater called New Amsterdam as a consolation prize.

But by then the company had already turned its gaze to India and a different set of commodities.

In 1635, after a series of skirmishes, the company signed a treaty with Portugal giving it access to a large swatch of the coast of eastern India, including Madras (now Chennai). It added Bombay in 1668, a gift to Charles II from his Portuguese wife.

By 1684, the company had imported 1.76 million pieces of Indian textiles, representing 83 percent of its entire trade.

As ever, the company’s share price was its “heart beat,” broadcasting its current and future prospects, Robins writes. By 1693, company shares were worth nearly 150 pounds.

New Tactics

The company’s founders, according to Robins, had been “a band of merchants;” there does not appear to have been a central figurehead lobbying for trading rights.

Rather, the first chairman to make international headlines was Josiah Child, a career merchant who served as either a board member or governor (a name that also applied to the heads of England’s American colonies…) for 17 years.

Josiah ChildIt was Child’s idea to raise a proprietary army and navy to turn the company from a “parcel of mere trading merchants” into a “formidable martial government in India.” While the force’s initial incursions against Indian forces did not lead to significant gains, it set a precedent for how far the company would be willing to go to maintain dominance over the subcontinent.

Child was also the first to open a line of bribery with the crown. Upon his election as governor in 1681, he “awarded” Charles II 10,000 guineas to help smooth the company’s charter renewal. This sum would become an annual “gift” from the company for the next seven years. After the Glorious Revolution in 1689, Child gave the government a 1.2 million pound loan at zero interest to again secure an exclusive trading charter.

An inherent tension in the company’s operations was the relationship of its overseas executives with the home office. The salaries paid by the company were barely enough to cover living expenses. Yet nearly every executive joined the company in the hopes of adopting the conspicuous consumption habits of the British landed gentry.

So to reconcile this dilemma, an executive frequently used his privileged position overseas for what Robins calls private “adventurism.” Executives accepted “presents” from local merchants in exchange for the company’s business. The phrase “a lass and a lakh a day” — a “lakh” being 100,00 rupees — was coined to describe the lifestyle Bengal executives came to enjoy.

Insider trading was also common. Overseas executives would write agents at home to buy as much stock as possible to capitalize on favorable developments in the subcontinent. At one point the company set up what Robins describes as a “special purpose vehicle” was set up to conduct side trades with local merchants.

Still, by 1740 its stock price had reached 200 pounds, and it had supplanted the Dutch as the dominant mercantile force in the East.

The company’s business model should sound familiar: keeping supply and production costs low while maximizing the price of goods sold in England. It ended up outsourcing as much as it could, including manufacturing, shipping and retailing. The value it added was in the selection of goods and in keeping the supply chain humming.

As Robins writes,

“In a situation characterized by extremely poor information, the Company’s strength lay in its ability to achieve an equilibrium between supply and demand on opposite sides of the planet.”

A Decisive Victory

Despite the company’s dominance, the rest of Europe had not yet given up. In particular, the French still commanded an important trading fortification near Calcutta. Plus, local Indian rulers were still seeking to retake control of local trade. In June 1756, the Nawab, or regent, overwhelmed poorly prepared company forces and captured Calcutta, which the company had controlled since 1690. As a result, the company lost 2.25 million pounds.

But already, the company had been preparing a counteroffensive. Led by Robert Clive, a commander of a nearby company fort who’d started out his career in India as a young writer, a small but focused expedition was able to retake the city in February 1757.

Battle of PlasseyThe victory proved decisive for the company’s fortunes, which rose 12 percent when news of the victory reached London.

It was a conspiracy engineered by India’s own merchants that the company an ironclad monopoly over the subcontinent for another hundred years.

Believing they could control the “foreign barbarians” to their own ends, three Indian aristocrats offered to help the company overthrow Bengal’s Nawab in exchange for exclusive business deals. But one of the aristocrats, Amir Chand, demanded a 5% cut of the company’s earnings.

Outraged by Chand’s audacity, Clive drew up two treaties, a real one for a separate conspirator that promised to install him as Britain’s Bengal puppet, and a fake another for Chand pretending to agree to his terms. The operation went forward, and in the summer of 1757 the Nawab was overthrown and Plassey, then capital of Bengal, was taken.

The plot cemented the company’s hold not only in Bengal but the rest of the subcontinent. Clive won an immediate 2.5 million pounds for the firm, to be followed by enhanced revenues in the future. The victory also sent shares climbing to nearly 275 pounds.

Robins sums up the event thusly:

“In the space of less than a decade, the Company had rerouted the flow of wealth westwards. Yet, this was a corporate revolution, designed to acquire the riches of an entire people for the benefit of a single company.”

To read the rest of the article go to businessinsider.com

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