How Companies Evolved Throughout the Years and How They Should be Managed in 2020. Part I: What Unites First and Modern Companies

May 26, 2020

In the last two decades, many industries have been experiencing rapid, massive, and sometimes devastating changes. Old businesses have been working to utilize new technologies in order to achieve better results and new industries emerged completely unexpected for most of us.

Airbnb revolutionized the hospitality industry, Uber and Lyft have done the same to the transportation industry, Spotify changed the music industry for both industry professionals and the final customer. As technology changes, so do the industries that use it. Let’s just roll 10 years back, can you imagine Lady Gaga performing live inside World of Warcraft?  Or another example outside the entertainment industry, could you imagine so many companies switching to remote work with ease in a matter of days, without even thinking about going one last time to the office.  

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Mobile devices and cloud services are piloting major industry shakeups as they either find their way into new markets or change the way people interact with a market. However, a whole lot of processes stayed the same not for 20 but for more than 50 years, while technology allows us to make massive advancements to the way companies are managed.

In this series of articles, we would like to share our approach to company management and how we aim to make processes more convenient and up to date. In the first part, we would like to focus on how first companies were formed and what unties them with their heirs — companies of today.

How Did Companies Form the Way We Know Them Today?

First Companies
First, we would like to briefly go over the history of companies and how they formed. The word ‘company’ is derived from the Latin word (Com = with or together; panis = bread), and originally referred to an association of persons who took their meals together. The company has the most striking features of being a distinct legal personality, perpetual succession, the easy transferability of shares, limited liability, and its centralized and democratic governance.

The very early form of organizations called Shreni have been noticed in India in the eighth century BC. Those were the first firms that could independently enter into contracts or own property, which also meant they could sue and be sued. Basically, it had most of the features applicable to modern companies.

First Joint-Stock Companies
As many forms continued to develop, companies progressed to become more organized, that’s when joint-stock companies started to emerge. Finding the earliest joint-stock company is a matter of definition. Most people take Société des Moulins du Bazacle or Bazacle Milling Company as the first joint-stock company. Around 1250, 96 shares of the company were traded at a value that depended on the profitability of the mills the society owned, making it probably the first company of its kind in history.

But examples much closer to companies of today came later. And most state the Company of Merchant Adventurers to be the earliest joint-stock company recognized in England — chartered in 1553 with 250 shareholders.

Almost at the same point in time, in 1602, the Dutch East India Company issued shares that were made tradable on the Amsterdam Stock Exchange. That invention enhanced the ability of joint-stock companies to attract capital from investors, as they could now easily dispose of their shares. In 1612, it became the first 'corporation' in intercontinental trade with 'locked-in' capital and limited liability.

Transferable shares often earned positive returns on equity, which is evidenced by investment in companies like the British East India Company, which used the financing model to manage trade in India. Joint-stock companies paid out divisions (dividends) to their shareholders by dividing up the profits of the voyage in the proportion of shares held. Divisions were usually cash, but when working capital was low and detrimental to the survival of the company, divisions were either postponed or paid out in remaining cargo, which could be sold by shareholders for profit.

As a result of the rapid expansion of capital-intensive enterprises in the course of the Industrial Revolution in Britain, many businesses came to be operated as unincorporated associations or extended partnerships, with large numbers of members. Nevertheless, membership in such associations was usually for the short term so their nature was constantly changing.

With the development of companies, a special legal framework became a necessity. The special legal framework and body of law that specifically grants the corporation legal personality, and it typically views a corporation as a legal entity or a moral person which shields its owners from "corporate" losses or liabilities. It furthermore creates an inducement to new investors (marketable stocks and future stock issuance).

The legal personality has two economic implications. It grants creditors (as opposed to shareholders or employees) priority over the corporate assets upon liquidation. Second, corporate assets cannot be withdrawn by its shareholders, and assets of the firm cannot be taken by personal creditors of its shareholders. The second feature requires special legislation and a special legal framework, as it cannot be reproduced via standard contract law.

Corporate statutes typically empower corporations to own property, sign binding contracts, and pay taxes in a capacity separate from that of its shareholders, who are sometimes referred to as "members". The corporation is also empowered to borrow money, both conventionally and directly to the public, by issuing interest-bearing bonds. Corporations subsist indefinitely; "death" comes only by absorption (takeover) or bankruptcy.

As the corporation is an abstraction, hence It has no mind of its own any more than it has a body of its own — the directing will must consequently be sought in the person of somebody chosen by owners of the company.

This 'directing will' is embodied in a corporate Board of Directors.

Let’s stop here for a second and dive a little deeper into the subject.

What didn’t change about companies and perhaps will never change? There are several key attributes but one always stays the same. The company is an entity that unites the capitals of several individuals or other entities with the goal to multiply this capital pool.

Right, but which aspect of the company changed the most?
Here again, you will be able to provide around a bazillion answers. However, there is one vital and obvious difference that might not be seen right away — a massive change in the way companies are managed. Previously actual owners (shareholders) had limited power to influence the company, express, and execute their will due to the state of technology and law at that moment.

Right now, using automatization tools and fractional ownership the directing will can be expressed by shareholders more efficiently. We have finally reached the point when we truly have flexible instruments to manage any legal entity. But, most companies still have to live, think, and comply with some principles that might seem outdated or even medieval. Which in some cases, might lead to some unpleasantries. One of the goals of Tokenomica is to change it and we will share our vision in this series of articles.

Throughout the 19th and 20th centuries, special legislation for companies was developed in most jurisdictions. However, there were only minor changes to these regulations ever since, and companies stayed almost the same since then while processes inside companies evolved massively since then.

In the second part of the series, we will talk about capital markets, how they influenced companies, and why they stay stagnant and don’t seem to change their approach.