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Last Updated : Mar 06, 2019 12:20 PM IST | Source: Moneycontrol.com

Podcast | Digging deeper - Workings of British East India Company

In this series, we take a deeper look at the businesses and corporations, and the people, that left an impact on the world.

Moneycontrol Contributor @moneycontrolcom

Harish Puppala | Rakesh Sharma

Moneycontrol Contributors

History does not repeat itself, but it does tend to rhyme, goes the old saying. In our inaugural podcast on the companies that changed the world, we narrated the origin story of one of the world's first and largest megacorporations, the British East India Company. Since then, we have seen the emergence of several other companies that have, in their own unique ways, changed the world as we know it. They have introduced technologies that have revolutionised life as we know it; they have built products that have changed the way we understand, and engage with, the world. Along with the bouquets, they have also received several brickbats.

Listen to the previous episode here.

If Volkswagen lied to its consumers about what its cars were releasing into the environment, Equifax, despite discovering a security breach in its network, did not immediately disclose to its customers that criminal hackers had infiltrated the company's servers and accessed personal data thus exposing them to the threat of identity theft. Some companies have risen to the top of the pyramid by flouting environmental regulations thereby putting millions if not billions of people and animals in harm's way, while others have gamed the system to work in their favour by way of bribery and crony capitalism. Some have incited wars between nations if only to benefit from the bounties of the military industrial complex, while others have looted and pillaged resource-rich countries, and in the process, merrily lining their pockets and leaving said countries in a rocky rubble.

Unfortunately, these are not modern phenomena. The blueprint of corporate greed and the tactics used for self-serving gains of corporation can be found several hundred years ago. The British and Dutch East India Companies laid down the foundation, a veritable How To Guide, for much of the egregious mistakes committed by the corporations of our time.

In the last episode on the East India Company, we looked at how the company established itself as a force to reckon with in the 17th and 18th centuries. It colonized India, profiting by being ruthless and businesslike in a land riven by many conflicts, and eventually ruled over all of it. In 1857, of course, what we now know variously as the Mutiny or the First War of Independence occurred. The outcome of that event was twofold: India, as a colony, was taken over by the British crown, and just 14 years later, East India Company ceased to exist.

In this podcast, we will examine how the East India Company was something of a progenitor for modern transnational corporations that span continents.

Reading about the East India Company provides a glimpse of the origins of some practices that have come to mark modern business, from lobbying and corruption to monopolistic practices. But it, was, first  and foremost, a venture for profit. The Economist writes, “The East India Company foreshadowed the modern world in all sorts of striking ways. It was one of the first companies to offer limited liability to its shareholders. It laid the foundations of the British empire. It spawned Company Man...it was the first state-backed company to make its mark on the world. Twenty (something) years ago, as the state abandoned the commanding heights of the economy in the name of privatisation and deregulation, it looked as if these public-private hybrids were doomed. Today they are flourishing in the emerging world's dynamic economies and striding out onto the global stage.”

 Plus ça change, plus c'est la même chose, they say in French. The more things change, the more they remain the same. Let's find out how on this edition of Digging Deeper with Moneycontrol with me Rakesh Sharma.

Modern state controlled companies are not unlike the East India Company

When we talk about modern companies, we tend to focus on American and West European entities. But there are other businesses that stride across the world, behemoths with large appetites. We would be well served to cast our eye eastwards, towards larger countries that have a concentration of power at their centres. Any that come to mind?

These days, state-controlled companies account for 80% of the market capitalisation of the Chinese stock market, over 60% in Russia, and 35% in Brazil. World-class state companies are to be found in nearly every industry. China Mobile had over 900 million customers in June 2018. Saudi Arabia's SABIC is one of the world's most profitable chemical companies. Emirates airlines continues to grow at 20% every year. Thirteen of the world's biggest oil companies are state-controlled. So is the world's biggest natural-gas company, Gazprom.

The Economist observed back in 2011 that state-owned companies would continue to thrive. The emerging markets that they could prosper in were expected to grow at 5.5% per year compared with the rich world's 1.6%, and the model was only becoming popular. The Chinese and Russian governments were leading a fashion for employing the state's power to produce ‘national champions in a growing range of “strategic” industries’.

It must be said that the parallels between the East India Company and today's state-owned firms are not exact. The East India Company controlled a standing army of over two lakh men, more than most European states of the time. (More than the British army in 18th century Britain even!) None of today's state-owned companies has yet gone this far, though the China National Offshore Oil Corporation, or CNOOC for purposes of brevity, has employed former People's Liberation Army troops to protect oil wells in Sudan. If you’ve heard or read somewhere that China is colonizing Africa, one could surmise that not all of those opinions can be termed alarmist. The British government did not own shares in the East India Company (though the same cannot be said of then prominent courtiers and politicians). Today's state-capitalist governments hold huge blocks of shares in their favourite companies.

Then again, in other ways, the similarities can be striking. Both the East India Company and its more modern incarnations serve two masters, keeping one eye on their share price and the other on their political patrons. Many state-owned companies are monopolies or quasi-monopolies: Brazil's Petrobras, China Mobile, China State Construction Engineering Corporation and Mexico's Federal Electricity Commission, are just a few of the many public or semi-public giants that dominate the business world these days. Many are enthusiastic globalisers that venture abroad as money-making organisations as wells as quasi-official agents of their home governments. In fact, this “evil corporation” theme is the premise of many B-grade action films. The Economist wis no fan of these businesses either. It wrote, “Many are keen not only on getting their government to provide them with soft loans and diplomatic muscle but also on building infrastructure—roads, hospitals and schools—in return for guaranteed access to raw materials.” While the East India Company flourished a very long time ago, and functioned in a world that was shaped very differently, its growth, longevity and surprisingly quick demise hold lessons for those who run today's state companies and debate their future, lessons about the benefits of linking a company's interests to a nation's and the dangers of such an approach.

Let’s examine those close links to government, and what they mean for such large corporations. One major benefit the East India Company derived from its relations with the state was limited liability. Before the rise of state-backed companies, businesses had imposed unlimited liability on investors. If things went kaput, creditors could come after them for everything they possessed, not sparing even their ugly buckled shoes. They could have them imprisoned if they failed to pay up. However, some firms had been granted limited liability, and the Company's officers persuaded Queen Elizabeth that it should be given this handy status too. Another major benefit of state backing - and this is an easy guess - was monopoly. In the 17th century, round-the-world voyages were not too different, in scope, from space missions today. They involved huge upfront costs and massive risk. Monopoly provided some security on returns. A third benefit was military might. The East India Company , as well as its Dutch and Portuguese rivals, could also call on the power of their respective navies.

That monopoly is something every modern corporation has inevitably aimed for. More than one modern company has faced anti-trust laws that are meant to avoid precisely the same exploitative monopolies that all of the “East India Companies” are notorious for. Following Robert Clive’s victory in Bengal in 1757, the company effectively enjoyed monopoly over the subcontinent for another hundred years. What followed next was summed up by Nick Robins: “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.”

It is most interesting then, that, when Facebook’s Cambridge Analytica fiasco exploded onto the front page of news everywhere, the whistleblower at the center of the expose compared Zuckerberg’s company to the East India Company. For the most popular social media platform in the world to be compared to the East India Company - that should tell you how relevant the East India Company is to modern business. Christopher Wylie, who had been director of research at Cambridge Analytics, claimed tech companies are colonising society, and Facebook in particular is our generation’s East India Company. He questioned why there aren’t effective rules in place for dealing with tech giants, saying, “Why is it that as data scientists we don’t have to consider the ethical implications of what we do? I think that’s absurd.” He then added, “Facebook has so much power it is basically making a digital clone of society...It is our generation’s version of the East India Company, going around exploiting people and our government’s aren’t equipped to deal with it...We lionise tech founders and consider them as almost divine with all their shiny technology without stepping back to ask ourselves about how we are letting them colonise our society.”

Joint-stock companies and modern capitalism

The British East India Company was among the first New Model Businesses of its era - a time of innovation. The East India Company wasn’t exactly the pioneer - the Portuguese and Dutch got to the spice trade first, and the French were the first to employ new business structures. The British version was, however, the most successful. It managed the delicate balance between business and national policy and defeated its rivals through business skill and scale, and even military action.

It was the structural changes that had the most enduring impact - the creation of the joint stock company and the concept of limited liability. As early as the 12th Century, the Venetians in Italy had pioneered the concept of assembling fleets of merchant vessels in which the owners received not the profits of an individual vessel but a percentage of profits from the total voyage - a practice sometimes referred to as an early form of insurance. The practice was applied only to individual trading voyages. But the French and British models improved on that.

French and British joint stock companies combined two major innovations - limited liability (meaning, you can lose only what is ventured) and permanent shares, which do not require return of capital after a particular venture, and which can be bought and sold. According to some analysts, these two innovations were the foundations of modern capitalism, and so embedded in the modern understanding of capitalist enterprise that it is hard to imagine a world without them.

Another element of the East India Trading Companies of both France and Britain was that they grew from being a private business chartered by the king to a hybrid of profit-seeking enterprise and an instrument of state policy. The British Company gradually brushed aside the other contenders. The Portuguese had too limited a resource base. The Dutch stuck strictly to a business model, which required that forces supporting trade should be paid for by its profits. The British and Dutch fought four naval wars in that ended with British victory.

Take, for instance, our Robert Clive reference from earlier: the British East India Company had won an effective monopoly on all important areas of world trade for over a century - 1740 to 1857. Having a virtual monopoly which it ferociously defended was the essence of Company. There were constant arguments between home office and field operatives and between business and state, along with rampant corruption. Field officers returned to Britain with fortunes and titles. Some analysts argue that “the same fact applies to the relatively uncompetitive oligopoly of the major social media companies.”

Hybrid business models are everywhere now, though not always seen in that light. The hybrid model combining business and government applies most tightly with public utilities and somewhat more loosely for the transportation industry. In the case of utilities, governmental entities put a limit to return on capital but also (as one Mr Warren Buffett figured out a couple of decades ago) more or less guarantee that they will receive the regulatory return. A complex set of rules applies to defense companies, capping but also more or less assuring returns. There are also strict rules based on defense strategy, such as the requirement that shipbuilding be divided between the two coasts. Chinese giants like Alibaba have operated from the very beginning under supervision by the state while also being highly competitive and profitable investment vehicles.

Despite some quarrels, the British government of the 18th and early 19th centuries was generally content with the activities of the East India Company until one problem just exploded in their faces - the violence in 1857. While the reprisals from the EAST INDIA COMPANY eventually put down all rebellion, the British government‘s patience had run out. In 1874, the company was shut down. That blowout holds lessons for modern transnational corporations. Take for example the China-in-Africa angle we mentioned earlier.

Gateways to neo-colonialism?

In 2009, China overtook the USA as Africa’s largest trading partner. China loaned a whopping $95.5 billion on the continent between 2000 and 2015. Though Kenya and Ethiopia were the only two African nations among the 30 countries signing economic and trade agreements at the Belt and Road Forum (or BARF. Yes, BARF) in Beijing in May 2017, China has been keeping busy in Africa. A Guardian article noted, “The flagship Belt and Road project is Kenya’s 290-mile railway from the capital, Nairobi, to the port city of Mombasa, which opened to the public last year. There are plans to extend that network into South Sudan, Uganda, Rwanda and Burundi; it was already the country’s largest infrastructure project since independence.”

Landlocked Ethiopia got a 750-kilometre electric railway from its capital, Addis Ababa, to the port in the neighbouring country of Djibouti, and costy USD 3.25 billion. The Ethiopian capital’s new light rail system was also funded and built by China, and operated by Shenzhen Metro Group. Djibouti, in exchange for major investments, preferential loans, a pipeline and two airports, now hosts China’s first overseas military base. Chinese infrastructure projects stretch all the way to Angola and Nigeria, with ports planned along the coast from Dakar to Libreville and Lagos. Beijing has also signalled its support for the African Union’s proposal of a pan-African high-speed rail network. There have been concerns about these loans. THe Guardian reported that research by the Centre for Global Development found Djibouti was among eight Belt and Road countries significantly or highly vulnerable to debt distress from the loans. IMF figures showed Djibouti’s public external debt swelling from 50% to 85% of GDP in two years. Former US secretary of state Rex Tillerson had accused China of predatory loan practices. Even Hillary Clinton, when she was secretary of state, had warned of China’s “new colonialism”. But, according to the director of China Africa Research Initiative Deborah Brautigam, “The risk for African borrowers relates to the project’s profitability. Will they be able to generate enough economic activity through these projects to repay these loans? Or are the projects seen more as ribbon-cutting opportunities? The Chinese believe that ports and special economic zones are a ‘win-win’ development tool. It’s what they did at home at an earlier stage of their development.”

Gurcharan Das wrote that public monopolies never really died. He explained, “They were popular around the world during ‘socialist periods’ of the twentieth century. The post-Independence government of India between 1956 and 1981, in a period popularly called ‘License Raj’, was as biased in favour of public monopoly and against private enterprise as the mercantile state in Europe. These state monopolies were beset with some of the problems that Adam Smith had forecast: poor poor customer service, high costs, weak profits, poor work ethic among employees, poor capital output ratios and low accountability.”

That paints a dreary picture, one where we never really escaped the clutches of colonialism. Hmm.

Working for the Company

We covered in the previous podcast how working for the East India Company wasn’t unlike working for a modern MNC. Jobs at the East India Company were coveted, and with good reason. One BBC article examined and found that working for the John Company involved many modern staples of a job - interviews, unpaid internships, training modules. In 1806, it opened the East India College, a 60-acre estate to train new clerks. The curriculum included history, the classics, law, and languages like Hindustani, Sanskrit, Persian and Telugu. In its modern day avatar, the place is known as the Haileybury and Imperial Services College.

And they splurged on their HQ much like Google or Facebook. Here’s a description from the BBC: The courtroom had a marble bas-relief of Britannia surrounded by India, Asia and Africa and doors panelled with pictures of far-flung Company ports like Bombay and the Cape. Marble statues of British officers in Roman togas watched over one of the sale rooms. Spoils from war — including the bullet-ridden silk standards, pipe organ of a tiger devouring a European and jewel-encrusted gold throne of the Sultan of Mysore Tipu — were on display in the headquarters’ museum.

Then there’s the on-site sleepover. Some modern companies offer their employees nap rooms. Well, the East India Company went a step further. Before the 1790s, some workers lived at the office with their families — some even for free. And if corporations today have found that their workers can abuse their napping privileges, well, fear not - so did employees in the 17th and 18th centuries. One housekeeper who pushed his luck in 1680 was forced to turn out his son-in-law – though his wife, daughter, grand-child and maid were allowed to remain. That’s a soap opera at the workplace. Who says the English are frigid and can’t be dramatic? What about on-site, you ask? They stayed in the factories. And rules were strict. One decree from the 17th century reads, “If any be drunk or abuse the natives, they are to be set at the gate in irons all the daytime, and all the night to be tied to a post in the house.” And much like today’s companies, longevity paid their employees well. In the late 18th and early 19th Centuries, the East India Company’s clerks were some of Britain’s highest paid. The longer you worked at the Company, the higher your salary. In 1815, a new clerk would start at £40 per year (compared to average western worker salaries, which are at about $41,000 today. But that rose quickly: an employee working for 11 to 15 years would earn £220 a year , or 200k USD in today’s money. After 39 years of service, £600 a year, or upwards of half-a-million dollars per year in today’s money.

East India Company and modern supply chains

What fascinates me most about the East India Company, indeed all such early companies, is that they put in place the rudimentaries of the global supply chains that we now take for granted. One Business Insider retrospective on the East India Company noted that its business model is entirely recognizable in the 21st century: “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.” In the words of Nick Robins, “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.”

Stephen Grenville, who works with an Australian think tank named Lowy Institute, wrote an incisive piece on the Dutch East India Company, that could hold very true for the East India Company as well: Here, surely, was a very early, fully operational manifestation of international integration, the embryonic form of today's ubiquitous globalisation. We would recognise its constituent elements. Here was the tenuous but well-structured supply-chain, extended all the way from Banda to Amsterdam, via numerous ports and functionaries, administered with brutal efficiency by the Dutch East India Company, perhaps the first business organisation that bears resemblance to today's multinational corporations. The company raised money by issuing shares. It had the first widely-recognised commercial logo. Even without today's computers, the company's officials were linked through a hierarchy of regular detailed reporting and accounting. Production was brought together in plantations and processed in 'factories'. Near-subsistence agriculture was replaced with scale and quality control, supervised by the perkeniers with an incentivising profit-sharing deal with the company. Customer feedback was insistently relayed to producers.

This mighty machine produced 3000 tons of nutmeg annually and transported it across hazardous waters to deliver it to the burghers of Holland and on to the rest of Europe's spice-hungry upper-class. Ad hoc trade between nations, with goods passing through many hands, many owners and many markets, was replaced by 'straight-through' processing by a single entity – the Dutch East India Company. One key characteristic of the Dutch trade might serve as a reminder that globalisation is not always exactly the same as the 'free market' expounded in economic textbooks and extolled by business. The central organising principle of this Dutch trade was that it would be a monopoly. The Dutch East India Company had a royal charter – a government-endorsed monopoly. Today we would call it a 'national champion', taking on the world on behalf of Holland.

The end sounds familiar

The Economist noted that the East India Company’s demise was caused by bad management, and the greed and power of its shareholders. How often do we hear that these days?

So where it once received a large bailout from the government because it was, in modern terms, too big to fail, in the 19th century, it had attracted plenty of critics who despised everything it stood for. Adam Smith, yes that Adam Smith, called it a bloodstained monopoly that was “burdensome”, “useless” and responsible for grotesque massacres in Bengal. In 1857, the mutiny occurred and, as a consequence, in 1858, the government took over all administrative duties in India. The Company's headquarters in London was demolished in 1862. It paid its last dividend in 1873 and was finally put out of its misery in 1874. An organisation that had been given life by the state was eventually extinguished by it. But the company provides an interesting case study. It survived for over two centuries with some pretty modern thinking - prospering from trade in good times and turning to the government for help in bad ones. It showed that it is quite possible to rely on the government for support while at the same time remaining relatively lean and inventive.

Another fascinating lesson the East India Company has for supersized modern corporations is that they would be foolish not to expect to be corrupted by politics. The Economist noted that “the merchants who ran the East India Company repeatedly emphasised that they had no intention of ruling India. They were men of business who only dabbled in politics out of necessity.” However, as rival state companies tried to muscle in on their business and local princelings turned out to be either incompetent or recalcitrant, they ended up claiming huge swathes of land, all in the name of commerce. Most modern corporations say they are only in business for the sake of business. They dismiss their political connections as unimportant or plain incidental. The history of the East India Company suggests matters are never quite that simple.
First Published on Mar 5, 2019 08:36 pm
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