Monday, February 20, 2012

East India Company: From Traders to Rulers

Wednesday, April 27, 2011
Business Economist

This article dwells on the evolution of – what perhaps became – the world’s first joint stock company, its emergence as a global business and its transformation from a commercial organization to a military establishment, which was the main force behind the colonization. It also attempts to draw valuable management lessons from various stages of the East India Company.

It is not so common that one comes across a company that prospered for over 250 years and ruled a subcontinent. The East India Company (EIC) stands apart as the world’s first major shareholder company, which ruled a fifth of the world’s population, with a quarter million private army and generated revenues much greater than the whole of Britain. It played a key role in the triggering of globalization, long before it became a buzzword.

Though, it looked like a multinational company, in action, it was an expansionist nation state. In fact, there is no other powerful company in the history that can be compared with the EIC in terms of longevity and wide-ranging economic, political and cultural influence. The EIC established a distant empire and then set about governing, controlling and exploiting it from a great distance in London. It ruled India with a private army of 26,000 native troops, twice the size of the British Army. The company’s trade with South-East Asian countries had an impact on the gradual evolution of new customer tastes and the growth of mass markets, for the commodities which were previously unknown.

The Origin

The seeds of the world’s first multinational company were sown on September 24, 1599, when a group of eighty merchants met at the Founders’ Hall in the City of London. Under the Chairmanship of the Lord Mayor, Sir Stephen Soane, agreed to petition Elizabeth I, to set up a company to trade with the East Indies. After a series of political negotiations and finance raising, finally the EIC was incorporated on December 31, 1600. Queen Elizabeth granted a charter to the Governor and Company of Merchants of London for fifteen years with the primary purpose of share in the East Indian spice trade lured by India’s profitable economic market.

In its initial days, it faced stiff competition from the Dutch and the Portuguese. However, it was not enough to stop it from making rapid progress. The early voyages of the company proved quite profitable. For example, in the tenth voyage, in 1611, it earned a return of 148 percent on its shareholders’ capital of £46,092.1 The company developed a routine of sixteen month-long voyages. The company’s cargo included silver, lead, tin, mercury, corals, ivory, armor, swords, and satins. Most of this cargo in India was exchanged for cotton textiles, which was then traded in the Spice Islands for pepper, cloves, and nutmeg. Though some expeditions were made to China, Japan, or Philippines for silk, indigo, sugar, coffee and tea, the normal route back was via India.

Until 1612, it conducted voyages, separately subscribed to, by investors. The company’s main motive was to make money. With this mindset, it made huge profits, resulting in further explorations and entered into new areas of long and tiring voyages. It even began to take big ships on lease, instead of building them, which saved both time and cost.

The merchants’ stated intention in their charter’s sonorous terms was:

“...that they, of their own adventures, costs and charges, as well as for the honor of our realm of England as for the increase of our navigation and advancement of trade of merchandise... might adventure and set forth one or more voyages, with convenient number of Ships and Pinnaces, by way of traffic and merchandise to the East Indies...”

In 1609, the company got a permanent charter, which continued former privileges and added authority to make peace or war with Indian princes. By 1615, the merchants combined as a single joint stock company, and planted the seeds for the beginning of a modern idea of shareholdings and dividends. Then, political control came gradually as residential governors began to establish the foundations of English justice, fixed land revenue in India.

By the late 17th century, it was a well-organized monopoly company. In the process, it emerged as the most powerful private company in history. It established its direct rule in Madras, Bombay as well as Calcutta with its powerful army, while in other Indian Provinces it ruled through a system of alliances.

To tackle competition from Spain and Portugal, sophisticated administration was required. For this, it created a two-tier structure for effective administration. The General Court included all the shareholders with voting rights; many of these were bigwigs from court and parliament. The regular management was entrusted to the court of directors (twenty-four men), all elected by the General Court. The governors and their deputies assisted by accountants, clerks and cashiers, worked through seven committees specializing in accounting, buying, correspondence, shipping, finance, warehousing, and private trade. The court of directors also supervised the overseas network of resident “factors” that managed the local trading posts or factories.

The company also faced severe competition from the Dutch in the Dutch East Indies (now Indonesia). However, the Dutch virtually excluded company members from the East Indies after the Amboina Massacre in 1623 (an incident in which English, Japanese, and Portuguese traders were executed by Dutch authorities), but the company’s defeat of the Portuguese in India (1612) won them trading concessions from the Mughal Empire. The company settled down to a trade in cotton and silk piece goods, indigo, and saltpeter, with spices from South India. Then it extended its activities to the Persian Gulf, Southeast Asia, and East Asia.

During the period 1751 to 1856, it brought under its control, almost all the Indian states and eventually grew as a commercial and a political power. Then it involved actively in Indian politics. The company gained political foothold in India after capturing Calcutta in 1756, defeating the Nawab of Bengal, at the battle of Plassey. The subsequent victory over the Mughals at Buxur in 1764, gave them control over Bengal. Then within a year’s time, without much opposition, the British merchants expanded and consolidated their power in India.

The people behind this transformation are Lord Clive and Warren Hastings. Charles Cornwallis helped to transform the company from trader to sovereign. It virtually created British Raj in India and has left a deep and permanent imprint on the history of India.

From Traders to Rulers

The company’s transformation from traders to rulers had an impact on every nook and corner of India. It ruled entire India with its own army and navy and minted its own currency and traded every corner of the world. Indeed, the company’s history is inextricably bound with Britain’s own rise from a backward European State to a global imperial power. Philip Lawson, the author of the “East India company – A History,” comments that the company’s history can no longer be seen as somehow detached from the mainstream history of Britain itself, which was open to, and influenced by, imperial as well as domestic considerations throughout the years.

All said and done, the EIC has been described as the first ever multinational. It carried goods, people and ideas across the globe. Its powerful legacy endures in India till date in the form of the Indian civil services and the education system.

When they first reached India, it was not only a great agricultural country but also a great manufacturing country3. It had prosperous textile industry, whose cotton, silk, and woollen products were marketed in Europe and Asia. Other important industries included the jewellery and stone carving, filigree work in gold and silver, ivory, glass, tannery, perfumery and papermaking. Besides, India had its own shipbuilding industry in Calcutta, Daman, Surat, Bombay and Pegu.

However, all this altered under the British leading to the de-industrialization of India – its forcible transformation from a country of combined agriculture and manufacture into an agricultural colony of British capitalism. It was the Indian textile industry that impacted the company’s fortunes; going by Indian skilled workmanship and comparatively low prices, these two contributed to the company’s rapid success worldwide. By 1707, the EIC became Britain’s single most successful enterprise and the biggest single employer in London.

The transformation from traders to rulers shifted the company’s role beyond trade. It became responsible for the civil, judicial and revenue administration of India’s richest province with some 20 million inhabitants. Tens of thousands of volunteer Indian soldiers commanded by British officer cadre and assisted by British Army units posted India at the company’s expense. Though the trade continued, the company no longer remained a lobbyist at Indian courts and ports. As the time progresses, the economic structure of the subcontinent came to serve the needs of new rulers. This helped the company’s servants to transform themselves from merchants into administrators, judges, revenue collectors and soldiers.

On the other hand, the growing wealth generated by the company also had an economic and physical impact on London. The company’s trade was a major generator of employment in London and its old wooden headquarters transformed into a great commercial hub in London. However, the increasing political power of East India Company in India raised many issues in London. The company’s officials were returning to London with fortunes equaling, without too much effort or ability (even a seat in Parliament), with those of the wealthy people in London.

Gradually, the concerns grew over the way the company ruled in India. The critics argued that it should be nationalized. In the 19th century, it was brought under tighter control and in 1813; the government abolished its monopoly of trade. In 1833, it was deprived of its rights to trade altogether. The company’s army was passed to the crown, and with the expiry of the charter on June 1, 1874, the unusual East India Company met its closing stages. The 18th century’s dominant world trader, fell from grace and power following the India Mutiny of 1857.

From a humble beginning, the East India Company’s spectacular rise to fame and glory is unmatched. It acquired the status of a business icon, and then, a military power, which ruled nations. It had many of the characteristics which some of today’s long surviving companies desire to possess. What made it survive for so long? History suggests, it was its ability to adapt i.e., keeping pace with change, something akin to modern day’s adaptive enterprises.

Lessons to Learn

Even today, the East India Company is perceived as the most powerful corporation, the world has ever seen. It was not only the first major shareholder-owned company, it was also a pivot that changed the course of the economic history. It played a key role in the development of joint stock company structure, a precursor to today’s multinational corporations. Going by the current turmoil in the corporate world, the close observation of the East India Company has many lessons for modern companies, in the areas of management and corporate governance.

Corruption was one of the main reasons for the demise of the honorable company. It was rampant from bottom, from lower ranked employees to top officials of the company. Companies who solely took care of their own protection costs did not last long.

EIC’s sole objective was to maximize profits with minimum resources. Modern corporations can learn lessons from this episode. The bottomline is that companies solely driven by profits do not survive for long. In long-lasting companies, the essence is mutual trust. The EIC failed at that. The whole entity was distantly bound in trust. Understanding its model could go a long way in making modern businesses achieve the pursuit of global presence and endurance.

N Janardhan Rao, Lead Economist

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