Spring 2021 | Publication

Corporate America and Government Power: Lessons from the British East India Company

Introduction

Business leaders who assume policy-making powers invite the wrath of the ultimate monopolist: government.  Usurping public-sector authority places the private sector in direct competition with politicians.  Such a provocation carries serious risks to corporations, especially during an era of rising populism on the Left and Right.  Even as particular factions in the short term applaud corporate interventions, political actors long-term tend to unite to reclaim core functions.  As political theorist Francis Fukuyama has argued, the government’s independent and exclusive authority defines the very “meaning of state autonomy: a government that is responsive to interest groups but not owned by them.”1

The fate of the British East India Company demonstrates the hazards of private assumptions of governmental power, even when explicitly granted by a nation’s executive and legislature.2  Although the East India Company achieved remarkable success in advancing British mercantile interests during a critical period of geopolitical rivalry, Parliament nonetheless dissolved the enterprise and nationalized the industry.  Barely a trace of arguably the most important company in history remained.3

The East India Company offers America’s corporate leaders important lessons regarding the high costs of operating in the political system, the capriciousness of public support for private-sector policy making, and the capacity of government to reclaim power even when confronting companies of astounding size and influence.

The Rise and Fall of the East India Company

The East India Company emerged from an agreement in 1600 between Queen Elizabeth I and a group of merchants, led by Sir Thomas Smythe, Auditor of the City of London.4  The enterprise was incorporated by royal charter to “directly or indirectly visit, haunt, frequent, or trade, traffic or adventure” in the East Indies. Not only shareholders, but the crown and the country overall, would benefit. While the state retained the authority to revoke or not renew the charter, the British East India Company received broad powers to do whatever would enrich itself and the commonwealth – even “wage war.”6

The East India Company took full advantage, expanding into new industries and regions, and eventually accounting for nearly half of all British trade through spices, textiles, and tea.7  It also came to wield bold administrative and political powers, including commanding an army, levying taxes, and otherwise performing the typical functions of a state bureaucracy.8  At its peak, “John Company” acted as a global superpower: its shares were practically a global reserve currency, its 200,000-man fighting force was twice the size of the British military of the period, and its annual spending in Britain was equal to roughly a quarter of the British government’s total annual expenditures. Most remarkably, in 1757, the firm annexed and ruled Bengal and other regions of the Indian subcontinent.10

Yet this exercise of imperial power marked the beginning of the end of the British East India Company.  In response to the threat that the enterprise posed to the state’s monopoly on governance, public opinion turned negative, and politicians argued that the East India Company had become a danger.  In 1773, Parliament passed the Regulating Act, which curtailed Company shareholders’ influence and gave the government greater authority over the Indian territories.11  In The Wealth of Nations, published in 1776, Adam Smith noted the “strange absurdity” of the Company having both “the character of the sovereign” and that of the “merchant.”12  Edmund Burke, a member of Parliament at the time, similarly called the Company a “state in the disguise of a merchant” in 1788, arguing that “[t]he constitution of the Company began in commerce, and ended in empire.”13

The 1784 East India Act further attempted to constrain the Company, stating that “schemes of conquest and extension of dominion in India are measures repugnant to the wish, the honour and policy of this nation.”14  Finding these actions insufficient, Parliament in 1833 ended the commercial operations of the East India Company and nationalized the business in 1858, transferring all rights to the British state.15  Despite first enjoying the government’s blessing, the East India Company decisively undid itself and its relationship to the state, never to recover.

Lessons for 21st-Century Business Leaders and Policy Makers

The example of the East India Company illuminates the central question of the proper relationship between private-sector interests and public-sector powers.  The founders of the East India Company received authority as the formal product of deliberate policy making.  Today’s business leaders do not possess any equivalent “charter” when intervening in the essential elements of the American system.

The history of the East India Company suggests that the current expansion of corporate involvement in politics will provoke a severe political backlash.  Senate Minority Leader Mitch McConnell (R-KY), the very embodiment of pro-business Republicanism, recently criticized corporations that behave like a “parallel government.”16  The retirements of Chamber-of-Commerce favorites Senators Roy Blunt (R-MO) and Rob Portman (R-OH), and the rise of populist conservatives, such as Florida’s Governor Ron DeSantis and Senator Josh Hawley (R-MO), reflect a decidedly unfavorable trend, as measured by future tax rates, costs of regulation, and liabilities inflicted by litigation and investigation.17

As business leaders navigate this increasingly hostile and volatile political landscape, the following lessons from the decline of the East India Company should inform decision making:

Live by government, die by government.

Holding a government charter was not enough for the East India Company to avoid Parliament’s ire.  Today, when companies work closely with, or depend upon, government, they risk provoking similar calls for greater oversight of the state’s corporate partners and a clear separation of business and state.  If enough policy makers view businesses as distorting or encroaching upon political prerogatives, then collaboration with government will backfire, leading to stricter regulations and further state intervention.

Low prices no longer shield America’s largest enterprises.

Even as the East India Company was bringing new products to consumers and enriching the commonwealth, it faced a deteriorating public image and growing opposition from politicians.  Whatever the case law, increasing consumer welfare measured by prices does not guarantee public and political favor.  Unless corporations convince policy makers that C-suites are in the business of business, not governance, political goodwill will prove temporary.

Antitrust is only the beginning.

Parliament initially increased regulations on the East India Company but later decided that only dominating the entire industry would counter the Company’s threat.  If today’s corporations continue to act as a de facto government, the business community should expect policy makers to reach a similar conclusion.  Although antitrust enforcement and legislative reform offer politicians attractive opportunities to constrain corporate power, government possesses vast powers to intervene even more directly and dramatically.  For an indication of the potential for various forms of nationalization, simply consider the proliferating application of the tobacco addiction metaphor to energy, financial services, food, and tech.18 

Outlook

The British East India Company succeeded for a time in mollifying politicians who objected to the market dominance granted by the charter of 1600 and later such proclamations.  The enterprise fatally lost political support, however, when its actions, even having been authorized by the government, grew to rival the state’s inherent functions.  Contemporary business leaders should recognize that their deepening involvement in governing makes aggressive antitrust reforms and nationalizations more likely, as politicians on the Left and Right urgently seek to constrain companies as unwelcome competitors for political power.

Image: A view of the East-India House, Bowles & Carver

© 2021 Baron Public Affairs, LLC. All Rights Reserved. No part of these materials may be reproduced or transmitted in any form or by any means, electronic or mechanical, including but not limited to photocopy, recording or any other information storage or retrieval system known now or in the future, without the express written permission of Baron Public Affairs, LLC. The brief does not constitute advice on any particular investment or commercial issue or matter. No part of this brief constitutes investment or legal advice and is not to be relied upon as such. The unauthorized reproduction or distribution of this copyrighted work is illegal and may result in civil or criminal penalties under the U.S. Copyright Act and applicable copyright law.

Endnotes

 

1 Francis Fukuyama, Political Order and Political Decay: From the Industrial Revolution to the Globalization of Democracy, New York, NY: Farrar, Straus and Giroux, 2014, 182.
2  Formally, Governor and Company of Merchants of London Trading into the East Indies, and later, United Company of Merchants of England Trading to the East Indies. “East India Company,” Encyclopaedia Britannica, https://www.britannica.com/topic/East-India-Company.
3  William Dalrymple, The Anarchy: The Relentless Rise of the East India Company, New York, NY: Bloomsbury Publishing, 2019, 3.
4  Dalrymple, 1.
5  Rupali Mishra, A Business of State: Commerce, Politics, and the Birth of the East India Company, Cambridge, Massachusetts: Harvard University Press, 2018, 29.
6  Mishra, Chapter 1, “The Patent and the Formation of the Company”; Dalrymple, xxiv; and Nick Robins, The Corporation That Changed the World: How the East India Company Shaped the Modern Multinational, Second Edition, London, UK: Pluto Press, 2012, 31.
7  Robins, 30; and Dalrymple, 233.
8  Philip J. Stern, The Company-State: Corporate Sovereignty and the Early Modern Foundations of the British Empire in India, New York, NY: Oxford University Press, 2011, 3-6.
9  Dalrymple, 388, xxix.
10  Dalrymple, Chapter 3, “Sweeping with the Broom of Plunder.”
11  Robins, 111-112; and Dalrymple, 233.
12  Adam Smith, An Inquiry in the Nature and Causes of the Wealth of Nations, Vol.II, London, UK: Methuen & Co., 1904, 136.
13 The Works of the Right Honourable Edmund Burke, Vol.VII, Speeches on the Impeachment of Warren Hastings, London, UK: George Bell and Sons, 1881,23.
14 Robins, 178.
15 Robins, 6, 146.
16 Press release, “McConnell: Corporations Shouldn’t Fall for Absurd Disinformation on Voting Laws,” Office of Senator Mitch McConnell, U.S. Senate, April 5, 2021, https://www.mcconnell.senate.gov/public/index.cfm/2021/4/mcconnell-corporations-shouldn-t-fall-for-absurd-disinformation-on-voting-laws.
17 “Sen. Roy Blunt,” U.S. Chamber of Commerce, https://www.uschamber.com/how-they-voted/2019#/roy-blunt; and “Sen. Rob Portman,” U.S. Chamber of Commerce, https://www.uschamber.com/how-they-voted/2019#/rob-portman.
18 “Crony Cannibalism Threatens America Innovation,” Baron Public Affairs, 2019, https://baronpa.com/library/crony-cannibalism-threatens-american-innovation.