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Feature
Roots of a Nation’s Wealth Why we can look forward to a 21st century of greater prosperity and human progress.In his landmark book, “The History of the Corporation,” Bruce Brown noted the roots of the modern corporation reach back to the guilds of the eighth-century B.C. Roman kingdom. It later attained its first known written form in St. Benedict’s organizational rules for his monastic order at Monte Casino in the sixth century A.D. In fact, it was the early Christian Church that established the corporation as a central organizing principle -- and even many of its aspects we regard as modern. For example, in the 12th century, Cistercian monks held the first corporate convention on record. There were even early versions of the leveraged buyout phenomenon, resulting in a complaint by the Dominican bishop of the ill effects of borrowing against the assets of a corporation to gain control of it. By the Renaissance, secular corporations expanded, with merchant guildsmen in Italy using such business devices as compound interest, double-entry bookkeeping, and even expense accounts. Two centuries later, the joint-stock company became the earliest means of the British colonization of North America -- Virginia by the Virginia Company and New England by the Massachusetts Bay Company -- selling stock to numerous investors who expected to earn a tidy profit. Barely nine years after they landed at Plymouth Rock, the Puritans bought enough stock in the Massachusetts Bay Company to take control from London shareholders -- probably the first recorded corporate takeover on our soil. The Puritans later transformed it into the Commonwealth of Massachusetts -- established by contract with the British Crown. By the 19th century, corporations became the established way to organize businesses in America. Chief Justice John Marshall gave it legal prominence in the Supreme Court’s landmark Dartmouth College case, which upheld the legal standing of its corporate charter. As Justice Marshall wrote, "A corporation is an artificial being, invisible, intangible and existing only in the contemplation of the law. Among its most important qualities are immortality, and individuality; properties by which a perpetual succession of many persons may be considered the same, and may act as a single individual....” Aided by such legal protections, 19th century America corporations propelled our nation to industrial supremacy. We went from a small agricultural nation clinging to the Atlantic coastline to a continental economic and military powerhouse that overtook and passed its European rivals in those brief 100 years. One of the great historic ironies was that this agrarian nation literally had to steal the technology for the world’s first industry, textiles, to begin our own industrial revolution. British law made it a crime to export textile machinery or even for skilled machinists to leave the country. But Samuel Slater memorized the plans, left England surreptitiously, and re-created cotton spinning equipment in America’s first textile mill in 1790. By 1900, America accounted for more industrial output than Great Britain and Germany combined -- due to a competitive advantage far more important than rich natural resources. This was the ability to organize businesses into ever-far-reaching corporations that achieved great marketing and distribution reach, economies of scale, and access to capital. We also enjoyed a uniquely low level of government regulations or artificially limited resources that burdened our European competitors by distorting markets and discouraging competition. As editors of The Economist magazine put it in their book, “The Company,” the central good of the corporation is that “It is the key to productivity growth in the private sector: the best and easiest structure for individuals to pool capital, to refine skills, and to pass them one. We are all richer as a result.” Today, corporations form the underpinnings of most things we know about America, including our economic power. Four of the five largest corporations in the world are American. The largest is Wal-Mart, with more than a quarter-trillion dollars in sales and 1.4 million employees last year. There is no official figure for the number of U.S. public companies, but the number usually quoted is about 15,000. Investments in these companies form the basis for most pension funds, mutual funds, and retirement plans, and collectively form most of the U.S. private net worth. Of the $10.7 trillion U.S. GDP, 82% comes from the private sector -- American corporations are our economy, not the government. This wealth has led to creation of the greatest superpower ever known to mankind. The late Ronald Reagan said, “Individual freedom and profit motive were the engines of progress that transformed an American wilderness into an economic dynamo that provided the American people with a standard of living that is still the envy of the world.” Adam Smith very wisely observed in the 18th century that wealth was not driven by accumulation of commodities or exploitable natural resources. Rather, the true source of a nation’s wealth exists in the productive knowledge of its people and their ability to efficiently transform resources into desired goods and services. - It is the dynamism and openness of our markets that has sustained our nation as the world’s strongest economy for more than a century now -- that has provided work and rewards like no other nation -- and that has enabled us as a people to confront civilization’s greatest moral and ethical challenges, from racism to poverty. Our wealth can be put to great and good deeds -- but our wealth requires constant tending. The parable of the vineyard in Isaiah asks why a vineyard on a very fruitful hill produced only sour grapes. The answer was, “There was no tilling, no weeding, no care. Just expectation of harvest.” Similarly, we cannot run our economy simply with the expectation of harvesting its rewards without cultivation and effort. Fulfilling our moral and ethical obligations to each other requires us to keep strong the American economy we benefit so greatly from. I’m convinced that effective corporate governance -- free from conflicts of interest, corruption, and unethical behavior -- is essential for the long-term success of any business. While not perfect, the U.S. has the best corporate governance, financial reporting, and securities markets systems in the world. These systems work because of the adoption of best practices by public companies within a framework of laws and regulations. While there have been exceptions to the overall record of success, generally the system has worked very well. A corporation and a society based on strong governance principles and high ethical standards are in the best position to face unexpected challenges, overcome them, and prosper. And as long as we can keep that idea central, we can continue to look forward to a 21st century of greater prosperity and human progress. I believe that we can indeed accomplish that task. |
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| Steve
Odland is chairman, president, and CEO of AutoZone Inc. With more than
$5.4 billion in sales and 45,000 employees, it is the nation’s largest
auto parts retailer. In January 2004 he was named chairman of the
Business Roundtable’s Corporate Governance Task Force. A longer version
of this article appeared in the Fourth Quarter 2004 edition of
Directors & Boards. The text was originally adapted from his
presentation at the Chautauqua Institution Lecture Series in July 2004. Copyright © 2004 Directors & Boards, P.O. Box 41966 Philadelphia, PA 19101-1966. All rights reserved. Contact the webmaster. < Privacy Notice > |
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