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Source: University of Auckland

A few years ago, talking about companies in any way other than that they’re contractual, private, and have to act in the interests of current shareholders by maximising profits was considered fringe.

However, perspectives are changing and University of Auckland Business School Dean, Professor Susan Watson expands on the debate by looking to the past to explore the key features of a modern company and the idea that companies can, and must, think beyond current shareholders.

In her new book, The Making of the Modern Company, Watson also eclipses long-held views on when the modern company began, with historical data indicating that it emerged much earlier than previously thought.

“This understanding of the company is contrary to a prevailing perspective. Many people consider that companies are essentially contractual; that people get together and form a company contractually that they incorporate. These shareholders then employ directors as their agents who act on their behalf and operate the company. The struggle then is to think: what is the company’s role beyond maximising profits for those current shareholders?”
Watson says that any of the newer developments around the fact that perhaps companies should think more about the long term and about their impact on the world are hard to reconcile with the fact that directors are supposed to be acting on behalf of the current shareholders as owners.

“That’s the contractual understanding, but in my book, I argue that actually, you can’t replicate the key features of the modern company through contract.”

The author, who spent years researching the development of companies from the 17th century, says people have typically understood that the modern company emerged in the 19th century based on an understanding that a company was contractually formed and therefore solely the private property of shareholders.

However, she argues that the modern company began in the 17th century when the English East India Company got a charter with permanent capital under Oliver Cromwell in 1657. Watson says it then had all the features of a modern company and for some time, operated in a way that demonstrated a long-term perspective, enhancing the opportunity to grow value, “because it was able to operate in the long term past the life spans of any individual shareholders”.