The Verenigde Oost-Indische Compagnie: the genesis of the modern corporation

Principles of modern corporate governance

For better or for worse, the corporation is an integral pillar of modern society. It is one of the primary driving forces behind our market based economy, and has been a vital component of the rapid progress of modernity. Corporations have a rich developmental history, where notions such as transferable shares, limited liability and corporate personhood came to be important elements of their business operations. Shares of ownership are traded in order to raise money for ventures. Limited liability prevents shareholders and managers from having their personal assets seized should these ventures fail. Finally, corporate personhood essentially means that a corporation is a person at law, who can sue and be sued. These notions are vital to the freedom required by companies in order to carry out their business effectively – to be able to safely take risks, corner niche markets and expand. Their importance is recognised universally.

The Dutch East India Company: a birth in fire

Here I will look at the genesis of these principles – which can be traced primarily to the Vereenigde Oost-Indische Compagnie (VOC); better known as the Dutch East India Company. When the great European sea-faring powers discovered the wealth of financial opportunity that lay in the continents of Asia and the Americas, they sought to capitalise upon them through the formation of great chartered companies. The VOC was without doubt the most successful of these companies in the early periods of Asiatic trade. Formed in 1602, the VOC built more ships, sent more men, traded more goods and turned a much larger profit than any of its competitors. Such success was not a result of mere luck – the Dutch were an economically ingenious nation; and by implementing the above modern corporate principles were able to dominate their rivals with uncompromising efficiency.

Image

Capitalising on such a trade opportunity was an extraordinarily expensive venture. A round trip to the East Indies took approximately 500 days, and the route was fraught with the danger of rough seas, fierce storms and the lurking presence of pirates and privateers. In order to acquire the necessary funds to make the trip, the VOC had to lure investors – as well as give them the assurances that their personal assets were safe. This was done in two primary ways: first, with the construction of the Amsterdam Bourse. This was the world’s first true stock exchange; and sold tradeable stocks and bonds to wealthy Dutch merchants – mere members of the public. They assuaged the concerns of the enterprise’s danger by limiting investor liability for company losses. As such, if the debts became overwhelming and the profits were insufficient to cover the gap, the manacles of the debt collectors would not find their way onto the wrists of shareholders.

Image

Security for director assets

Yet even with this security for investors, at this stage the board of directors of the VOC (the Heeren XVII) were the ones risking their personal assets. As the company’s expenditure began to mount, the board began to realise that the only way the company would be able to stay afloat was by way of debt. As the Dutch government desired a military presence in the East Indies, not all of the ships from each fleet were able to return home; as some were needed to remain behind. As such, the loans needed by the VOC continued to grow. Due to the length of time needed to turn a profit in the Netherlands because of the duration of the voyage and markets which did not grow with supply; the loans needed by the VOC continued to grow.

Thus, 20 years after the creation of the company, the directors decreed that their loans would not be traced back to their pockets, but those of the company instead. This constructed what would be the first instance in the world of corporate personhood – creditors would have to obtain their repayments from the company; and should the company go bankrupt, it was impossible to imprison it. This secured both the interests of its shareholders and directors, and cemented the legal notions which have been discussed earlier. It also set a precedent for the corporate form for years to come – eventually making its way out of the public, chartered sector and into the private sector.

Image

Bond issued by the VOC, secured with the assets of the company rather than the Heeren XVII

The VOC’s relevance to modernity

What is important about the construction of these principles within the VOC was their reactionary nature. It was not planned from the outset to use these notions; they were simply engineered as the Company began to realise that it would not be able to secure the necessary capital to carry out its endeavours without limiting the financial risk to its investors and directors. This is a principle which remains integral to the corporate form today – investors and directors are secured from the failure of their business, allowing secure risk taking. While the risks of investment in the modern day may not be the same sort of physical risks posed by the Asiatic trade route in the 17th century, the principle that progress is encouraged by security still holds true.  The legal structure pioneered by the VOC has allowed such a risk-reward mantra to flourish.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s