How were the first English Companies governed? Actually far better than today’s companies are but that is a much longer story. Who invented the two-tier Board? I bet you can guess but everyone I have ever asked has got it wrong. Let’s go back to 16thC England and have a look.
[Excerpt from Realipolitik, numerous footnotes sadly extracted as they don’t work well on a blog (too much paging up and down)]
“A thousand years ago the Italian merchant states of Florence, Venice, Genoa et al were far ahead in business. They utilised Commenda and Societas, partnership structures that date all the way back to Old Assyria. Italian businesses/banks were present in London as far back as 1284. However due to “reasons” their influence waned in the 14thC and thus didn’t commend (groan) their business forms as a great example of business structure. England relied on Guilds, amongst many other uses, for trading and the management of crafts. Guilds had no shared P&L and, in simplified terms, were a combination of trade/craft self-regulation and a membership club of sole traders. In the 16thC unless you lived there England was utterly inconsequential. It was less than 2% of global GDP and only grew wool which it traded for everything else with the near-Continent. The desire to trade further afield required far greater capital investment and a consequent upgrade in business structures. This led to the invention of “The Company” which at first was a kind of “joint P&L Guild” (eg you had to first become a member in order to invest).
To create a V1 Company you needed the Monarch’s permission – a Charter. This Charter was the Constitution of the company and defined how you would govern it – principally the powers of the Adventurers (shareholders in our terms) and the role of Committees (Executive Directors to us – those who were “committed” to carrying out their duties). Charters were Anglo-Saxon devices used to record privileges (from Latin privus (private) +lex (law) – something that applies just to you). There was no standard Charter for Companies, each one differed (as they were privileges) even if a common governance pattern was recognisable. V1 Companies and Adventurers had unlimited liability.
The totality of the Adventurers constituted a powerful “Court of Proprietors” or “General Court”. This functioned as a legislature, approving all major decisions, as well as an electorate which voted for Committees drawn from themselves to a “Court of Committees” (an Executive Committee in our terms).
It is ironic that what is these days perceived as “uniquely Continental” – two-tier Boards – is actually a direct import of the English Chartered Company’s governance structure. The East India Company’s governing structure was copied (with one important change namely that the General Court became a subset not a totality of owners) by the Dutch East India Company (the VOC) in the early 17thC from where the model diffused around Europe.
This simple, clear and powerful split of legislature and executive mirrored concepts of how to govern the State. The fact that the legislature/executive split has remained one of the most powerful State Governance models speaks volumes to its strength in any governance context.
If we take the example of the most important company of them all – the East India Company (EIC), the Court of Proprietors met four or five times a year, or more if necessary. In the crisis period of 1770–1773 before its capture by the British State the Court of Proprietors met on average twenty-two times per annum.
The Court of Proprietors had substantial powers and involvement in the governance of the EIC. As an example, once a year they met for the reading of the “Lawes”/Standing Orders – the internal bylaws/rules of the Company – as well as for a meeting with the auditors who provided information on the actual execution of the rules set in the Orders. Disaffected employees or those alleging corruption could air their grievances at the Court. Adventurers were actively involved in the Court of Proprietors. Certainly in the early decades all major capital expenditure (eg and esp voyages) needed approval by the Court of Proprietors. Even a century after its foundation it was not uncommon for 1,000 people, highly diversified by wealth, gender and class, to vote at East India House in the annual elections for the Committees or on such matters as dividend rates and relations with the government.
These days shareholders do not meet with the auditors, nor do they hear how well the company is complying with its own rules, nor do they hear from disaffected employees. In our era such matters have effectively been hidden from the Company’s owners and made private to “the Company”, which really means “the Board” in this context. Auditors and internal compliance are dealt with by a sub-committee of the Board so that not even the whole Board hear from them directly. Disaffected employees are not even heard at the Board let alone by shareholders.
Furthermore, in the V1 Company, Adventurers (and all Committees were Adventurers) had, unlike today, unlimited liability. Which focused the mind somewhat.