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East India Company: the first multinational corporation

Nick Robins

1st November, 2006

The East India Company was the first multinational corporation - until its abuse of power caused a public backlash. Nick Robins examines its legacy to reveal how it set the corporate blueprint for today's firms to operate unchecked

In August 1769, two Armenian merchants, Johannes Rafael and Gregore Cojamaul, arrived at London’s docks. The two were rich men and had made their fortunes in India’s most prosperous region, Bengal. But their purpose was not to trade. Instead they sought justice from the most powerful corporation in the world: the East India Company.

In March 1768, Rafael, Cojamaul and two others had been summarily arrested by the Company’s chief executive in Bengal, Harry Verelst, who then held them for more than five months under guard. When they were released, they found that the Company had pressured its puppet, the Nawab of Bengal, to ban all Armenians from the Bengal market.

Sailing around the world to where the Company was headquartered, Rafael and Cojamaul appealed to its board of directors, complaining of their “cruel and inhuman” treatment. When this was arrogantly brushed aside, the two went to court, suing Verelst for damages. An intense legal battle unfolded with claim and counter-claim, from 1770 until 1777, when the courts found Verlest guilty of “oppression, false imprisonment and singular depredations”. The Armenians won a total of £9,700 in compensation – more than £800,000 in today’s money. Thousands of miles from the scene of the crime, the principle of extraterritorial liability for corporate malpractice had been established in Georgian London.

Fast-forward more than 200 years, and Cojamaul and Rafael’s revenge still has a powerful resonance for communities seeking to plug the justice gap in 21st century globalisation. But this is not all that we can learn from the extraordinary corporate career of the Honourable Company (one of the names by which it was sometimes known).

Founded on a cold New Year’s Eve in 1600, the Governor and Company of Merchants in London Trading into the East Indies – its original full name – was the mother of the modern corporation. From its headquarters in the City of London, it managed a commercial empire that stretched across the Atlantic, around the Cape, past the Gulf and on to India and China. Starting as a marginal importer of Asian spices, the Company became the agent that changed the course of economic history, combining financial strength with military muscle to conquer India and break open China’s closed economy. Always with an eye to the share price and their own executive perks, its executives in India combined economic muscle with a small, but effective private army to establish a corporate state across large parts of the sub-continent.

A treacherous deal

The battle of Plassey (the anglicised version of Palashi) in June 1757 was the turning point, when the company’s forces defeated the last independent Nawab of Bengal, helped largely by strategic bribery of his military commander Mir Jafar, whom it then placed as its puppet on the throne. This is often regarded as the contest that founded the British Empire in India, but is perhaps better viewed as the Company’s most successful business deal, generating a windfall profit of £2.5 million for the Company and £234,000 for Robert Clive, the chief architect of the acquisition. Today, this would be equivalent to a £232 million corporate windfall and a cool £22 million success fee for Clive.

The Company’s new-found market power enabled it to drive down the prices it paid to Bengal’s weavers – to such an extent that rumours spread of weavers cutting off their own thumbs to escape the innumerable fines and floggings. Eight years later, Clive followed up his coup at Plassey with a lucrative acquisition: he convinced the Mughal emperor to out-source tax collection in Bengal to the Company. The Company’s share price soared on London’s financial markets, almost doubling in the next three years. But in the same month that Rafael and Cojamaul arrived in London, the rains failed in Bengal, marking the start of a ferocious drought. What turned this into a ravaging famine was the weakened state of Bengal and the Company’s negligence and callousness – even increasing the tax rate to ensure that the overall revenue remained level. Some estimates put the resulting deaths from starvation as high as 10 million, and it is certain that at least one million people died – more than the population of London at the time – with some regions losing between a third and a half of their inhabitants. Clive managed to escape parliamentary censure for his part in all this, but died – most probably by suicide – with Dr Johnson observing that he had “acquired his fortune by such crimes that his consciousness of them impelled him to cut his own throat”.

Nor did the Company’s footprint stop there. If India was the site of its first commercial triumphs, it was in China that it made its second fortune. Its ‘factory’ at Canton was the funnel through which millions of pounds of Bohea, Congou, Souchon and Pekoe teas flowed west to Britain, Europe and the Americas. In the other direction came first silver and later a flood of Indian-grown opium, smuggled in chests proudly bearing the Company chop (logo). Desperate to find a way of paying for the tea trade without exporting bullion, Warren Hastings (Britain’s governor-general of India from 1773 to 1786) first tried to smuggle opium into China in 1781, defying the Qing Empire’s trading ban. Initially unsuccessful, the Company grew increasingly brazen as its power grew, shipping ever-expanding quantities of contraband into China, turning the country’s centuries-long trade surplus with the outside world into deficit. When the Qing eventually tried to crack down on the import of ‘foreign mud’, Britain sent in its gunboats in the first of a series of ‘opium wars’.

But before the second opium war was over, the Company itself was no more, the victim of the public backlash in Britain in the wake of the 1857 Indian Mutiny – otherwise known as the ‘first war of Indian independence’. The Company’s most senior executive, the utilitarian philosopher John Stuart Mill, pleaded with Parliament, but effective nationalisation followed the Company’s failure. Always solicitous for the needs of its shareholders, the Company managed to continue paying dividends for another quarter century – financed by taxes from India – until on April 30, 1874, its stock was liquidated and the Company’s financial heart finally stopped beating.

At first sight, this extraordinary corporate biography might seem to be merely of antiquarian interest. There is clearly a world of difference between the Company’s operations in the 18th century and the business landscape of our own times. The Company’s establishment by royal charter, its monopoly of all trade between Britain and Asia, and its semi-sovereign privileges to rule territories and raise armies certainly mark it out as a corporate institution from another time. Yet in its financing, its structures of governance and its business dynamics, the Company was undeniably modern. It may have referred to its staff as servants rather than executives, and communicated by quill pen rather than email, but the key features of the shareholder-owned corporation are there for all to see.

This imperious company

What is equally striking, looking back at the legacy of John Company (another name by which it was known, reflecting its ubiquity) is how it not only shaped the modern multinational, but also prefigured the same bundle of tensions exhibited by today’s global corporations.

In ways that are immediately familiar to us today, the East India Company lay at the centre of a web of commercial relationships. Internally, the interactions between owners, executives and employees defined the fundamental direction of the business. Externally, fiscal and regulatory interactions with states at home and abroad defined the Company’s scope for action, while in the marketplace, its standing with customers, competitors and suppliers determined its chances of success.

Ultimately, however, it was the Company’s ability to maintain a basis of trust with society at home and abroad that decided its fate – and once this trust was broken, protest, rebellion and its eventual downfall would follow. What makes the story so inspiring is how the Company’s bid for unbounded economic power was repeatedly met by individuals fighting to make it accountable.

From the beginning, the East India Company’s monopoly control over trade with Asia had been disputed by its competitors. But it was with the Company’s acquisition of unprecedented economic power following Plassey that it came to be seen as a more structural threat to political liberty back home. Poems, pamphlets and plays poured off the presses, accusing the Company of oppression and corruption. For the editor of London’s Gentleman’s Magazine, by April 1767 it had become the “imperious company of East India merchants”, with the issue at stake being whether “freedom or slavery” would result from the Company’s immense power.

A critique of corporate design

Nine years later, political economist and moral philosopher Adam Smith published his Inquiry Into The Nature And Causes Of The Wealth Of Nations, containing one of the most powerful critiques of the Company – and, by extension, the corporate form. Written in the wake of the Company’s ‘Bengal Bubble’, Smith’s Inquiry dissected the corporation as an institution and evaluated the factors that led to the East India Company’s own particular crisis.

Uniquely, Smith was emphatic in downplaying the actions of individuals as the root cause of the problems. “I mean not to throw any odious imputation upon the general character of the servants of the East India Company,” he wrote, stressing that “it is the system of government, the situation in which they are placed, that I mean to censure.” The problem was one of corporate design. Monopoly didn’t just create economic injustice; it was also “a great enemy to good management”.

Smith was equally critical of the Company’s joint stock model of corporate control, which separated managers from owners and was a licence for speculation, where “negligence and profusion must always prevail”. Adam Smith was certainly a believer in open markets. But freeing the world for exploitation by corporations formed no part of his vision.

Smith’s critique of the Company provided a powerful intellectual platform, but it was his friend, the statesman and philosopher Edmund Burke, who sought to bring the Company to justice in the 1780s. Often known as the father of modern conservatism for his defence of the monarchy in the French Revolution, Burke himself believed that his greatest contribution was his battle against the East India Company. In Burke’s view, the Company had become financially and institutionally bankrupt, breaching the implicit terms of its Georgian “licence to operate”. Drawing from the rich tradition of legitimate resistance to tyrannical government, Burke argued that “every description of commercial privilege [is] all in the strictest sense a trust, and it is of the very essence of every trust to be rendered accountable”.

Burke continued with a rhetorical flourish: “To whom then would I make the East India Company accountable?” he mused. “Why, to Parliament, to be sure.” When George III intervened to block Burke’s East India Bill – which would have replaced the Company’s board of directors with parliamentary commissioners – Burke turned to law, like the Armenians before him. In 1787, he impeached Warren Hastings for “high crimes and misdemeanours”. The trial, which began in 1788, lasted seven long years and gripped London society. Burke’s mission was clear. “I must do justice to the East,” he declared, “for I assert that their morality is equal to ours.” Eventually, Hastings was cleared by a grateful House of Lords, more interested in imperial acquisition than points of principle.

To the leading lights of its age, such as Smith and Burke, the East India Company’s rise and fall highlighted three fundamental flaws in the corporate metabolism: first, the unrelenting drive to market domination; second, the inherent speculative dynamic of shareholder owned businesses; and, third, the absence of effective mechanisms for bringing companies to account for overseas malpractice. Looking back, the parallels with today’s corporate leviathans became overpowering, with the Company outstripping Wal-Mart in terms of market power, Enron in corruption and Union Carbide in human devastation.

The Company’s example shows us that open markets and corporations do not necessarily mix – that economic diversity and enterprise often flourish best where corporations are kept in check. From Smith’s contemporary analysis of the rising commercial economy of 18th-century Britain, it emerges that the truly entrepreneurial company is likely to be locally rooted, limited in size and liable for the costs it imposes on others.

Indeed, for Burke, there was something fundamentally suspicious about the Company’s chartered rights. Speaking to Parliament in 1783, he made a clear distinction between human and corporate rights, arguing that “Magna Carta is a charter to restrain power and to destroy monopoly”, while “the East India charter is a charter to establish monopoly and create power”. It was this corporate tyranny that Burke tried – but failed – to break, urging Parliament to recognise that “this nation never did give a power without imposing a proportionable
degree of responsibility”.

Today, justice still goes begging

Drawing from Smith’s analysis of the corporation, it is clear that the privilege of limited liability needs to be balanced with a social “duty of care” to curb the speculative quest for excessive rates of return. The
Company Bill currently going through Parliament is an ideal opportunity to impose a legal duty of care upon company directors, to ensure that their actions do not damage society or the environment. At the time of The Ecologist going to press, the Bill in its present draft does not introduce such a duty of care, but it is being pressed for by the Corporate Responsibility Coalition (CORE), which represents more than 130 charities and campaigning organisations pressing for new laws to make sure that companies do not profit at the expense of people and planet.

Through this simple, yet profound alteration in the corporation’s genetic code, its inner dynamics would be reshaped to match its social obligations. Shareholders would also thus become aware of the wider implications of their investments, stimulating a search for companies that take a pro-active approach to reducing their harmful impacts on others. Not just corporations, but capital itself would start becoming
accountable.

Although he is frequently cited as the theoretical inspiration for globalisation, Smith would be horrified at the way in which the unlimited corporation now dominates economic and political life. Corporate scale magnifies an underlying problem of behaviour. When it was small, the damage that the East India Company could inflict was relatively limited. When it grew in size to dominate whole markets and territories, its potential for harm grew correspondingly large.

While 21st-century corporations rarely enjoy the chartered monopolies that the East India Company fought so hard to sustain, global deregulation has meant that concentration in key markets has climbed to economically destructive and politically dangerous levels. At local, national and global levels, unrelenting action is needed to break up the corporate giants that currently hold the world to ransom. For this effort, Smith’s passionate critique of the East India Company holds out the promise of new and creative alliances between those seeking open markets and those wanting to tame corporate power, whether it be ‘big oil’ or ‘big retail’.

The example of the Armenian merchants winning their battle for reparations from the Company can also inspire us in today’s efforts to hold corporations to account. As we know from the unrelenting pain of incidents such as the Union Carbide disaster at Bhopal, instruments of justice need to be as international as business. Rafael and Cojamaul’s legal triumph can give us hope that we too can put in place effective legal mechanisms to enable those affected by corporations to bring action, either in the company’s place of registration or in an international court. The realistic prospect of judicial intervention to penalise malpractice, wherever it may occur, would be a powerful deterrent, further encouraging business to adopt responsible practices that prevent problems in the first place.

The Company’s legacy still haunts both Europe and Asia; and, knowing its story, the obligation is to remember and then to act. This was certainly the stance taken by Jawaharlal Nehru, who in 1944 was serving his ninth – and final – term of imprisonment for his campaign to achieve India’s independence from the British. From his prison cell in Ahmadnagar, Nehru wrote what became The Discovery Of India, presenting his vision of how India’s rich and complex past related to its freedon struggle. For him, the writing of history was not a remote, academic exercise, but intimately bound up with taking action to change the present. Running through the book was Nehru’s conviction that the two centuries of British rule had imposed a terrible burden on India that needed urgent removal.

But it was when he describes the English East India Company and its plunder of Bengal following Clive’s victory at Palashi that this cool voice of humanist reason boiled over in anger. “The corruption, venality, nepotism, violence and greed of money of these early generations of British rule in India,” he thundered, “is something which passes comprehension.” To underline his distaste at the Company’s practices, Nehru added: “It is significant that one of the Hindustani words which has become part of the English language is ‘loot’.”

This article first appeared in the Ecologist November 2006

 

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