Episode: 542 |
William Magnuson:
Author of For Profit: A History of Corporations:


William Magnuson

Author of For Profit: A History of Corporations

Show Notes

William Magnuson, a professor at Texas A&M Law School and former Harvard University professor, discusses his book For Profit: A History of Corporations. The book covers eight different corporations throughout history, illustrating different facets of corporations. William  chose these eight corporations because they were relevant to the modern world and their importance in shaping society. He aimed to explore the origins of corporations, focusing on foundational moments in corporate law, such as ancient Rome’s tax-gathering entities, and the Medici bank. He talks about how studying corporations over 2000 years  brought to light trends and why today’s citizens are more impacted by corporations than at any other time in history.  William considered including the Soviet Union, which was one of the world’s great experiments in trying to structure and economy without corporations. However, he did not include any consumer packaged goods or retail companies on the list. He also considered researching other major tech companies like Apple, Google, and Microsoft, but ultimately chose not to include them. He also considered adding Japanese corporations, as there is a long history within corporate law scholarship that has similarities with US law but also some major differences. He highlights the importance of understanding the legal concept of corporations and the evolution of their features over time. He also acknowledges the potential for further research into other cultures and corporations, such as Japanese corporations, which could provide valuable insights into corporate law scholarship.


Common Characteristics of the Modern Corporation

The concept of a corporation has its roots in various ancient cultures, including the Incas, Chinese, and Japan. Europe was largely based on the Roman model, which outsourced government services to private individuals or organizations. This model was copied in Renaissance Italy and eventually moved up to the joint stock era in the 1600s. Japan has a long history of large conglomerate organizations, which are family-oriented and have evolved over time. The American corporation is largely based on the European tradition. Some common characteristics of modern corporations include limited liability, professional management class; single entity operation, and immortality, where a corporation never dies or ceases to exist, unlike partnerships, which end when one partner dies. This is important because historically, partnerships ended when one partner died, which was problematic for tax gathering in ancient Roman republics. Corporations are immortal, meaning they continue to exist even after the death of a single member or stockholder. 


The Birth of the Corporation

The Roman Republic’s Fabian strategy, which involved avoiding set battles and using private enterprise, played a significant role in the creation of corporations. In 218 BC, during the Punic War between Rome and Carthage, the Roman commander Cornelius Skipio wrote to the Senate, asking for supplies to continue the war. The Roman senate ran out of money, they made a plea to Roman citizens for support, and in return they asked for several terms, and this led to the  idea of private enterprises as a solution to the problem, and legal rights for specific entities. In the Roman Republic, corporations had to have certain institutions in place to function effectively. These institutions included the Senate passing laws, corporate attorneys, banks, and other infrastructure. The rule of law was crucial for these entities to thrive, as it allowed them to enforce contracts in court. This rule of law was a key factor in the rise of the corporation in Renaissance Florence, where fragmented policies and conflicts between duchies, barons, kingdoms, empires, and city states were prevalent. The Medici bank, for example, created a rule of law within the city of Florence, creating separate entities with 15 branches, each serving as its own entity. This allowed them to create a rule of law in a world that didn’t have it. 


Cities and Religious Organizations as Corporations

Religious organizations, such as monasteries, were also considered corporations, but they were not in the same line of business. Cities, on the other hand, were outliers in the history of corporations, as they sought to protect their liberties and rights. Cities were able to benefit from incorporation, as they were protected by the Magna Carta. Corporations are flexible entities that can be used for various enterprises. William explains the element of limited liability, which is a fascinating element of corporations. It provides risk protection for owners, allowing them to gather capital and launch larger enterprises. However, the concept of limited liability was not always clear, and some statutes are still ambiguous. For example, the East India Company, which was one of the first corporations to adopt limited liability, was a case study that illustrates the importance of limited liability in the early years of corporations.


Early Ideas of Governance in Corporations

William discusses the concept of governance in corporations, focusing on the separation of owners and managers and how to align them. This separation is crucial for modern corporations with hundreds of thousands of shareholders, as it prevents conflicts between managers and shareholders. One example of this is Ford Motor Company, founded by Henry Ford in the early 1900s. Ford was known for his fiddling around and raising money from wealthy investors, but faced criticism from shareholders who were concerned about his financial performance. This led to a conflict of interest between Ford and his shareholders, which eventually led to the foundational concept of fiduciary duty in corporate law. William also discusses the history of shares trading hands, mentioning that in ancient Rome, there were physical certificates representing stock ownership. However, there is little evidence on the exact structure or form of the stock market. Today, the system is moving towards an electric electronic system, making it more complex. William teaches a class on the settlement of trades, which is one of the main focuses in FinTech and other research interests. He also discusses the evolution of the stock trading system, highlighting the importance of understanding the complex nature of the process of trading shares.


The History of Corporate Advisors

William discusses the history of corporations using professionals outside their four walls to advise them. He cites KKR, a private equity firm, as an example of a corporation that uses an ecosystem of professionals to help it operate in the world. The role of these professionals has become more important as corporate law and the corporate form become bigger and more complicated in the modern world. Institutional investors have also played a role in the venture capital industry, often spearheading companies with the interests of venture capitalists. Facebook’s structure and story are shaped by its funding model, which was honed into the idea that venture capitalists would take bets and try to reach rapid growth to create a platform effect. This model is emulated by many other startups today. There is a big debate about the corporate purpose, whether they should focus on profit or consider environmental, social, or governance issues. Throughout his research, William was surprised to find that the structure of corporations has always been similar to the debates within society, and major corporations have always led to major changes in how they are regulated. For example, mass production, oil production, and concerns about too big to fail have led to new issues being raised when there is mass production or oil production.


Misconceptions about Corporations and Their Role in Society

William discusses the misconceptions about corporations and their role in society. He argues that corporations were created to promote the common good, not just profit, although what could be debated is what the common good means. This idea is based on historical evidence, such as the creation of the Florentine government and Queen Elizabeth England. He also discusses the debate surrounding fiduciary duties and the role of boards of directors, managers, and officers in determining the interests of shareholders. He disagrees with some scholars about the role of fiduciary duties and the broad discretion granted to managers to consider other interests beyond shareholder profit. He believes that this broad discretion has been informed by his research into the history of corporations and the factors that have led them to thrive. William’s next book is on the history of law, focusing on foundational moments in time when the way we think about law, the rule of law, the Constitution, judges, and democracy have changed. He goes back to ancient Athens, ancient Rome, and the development of the code, moving up through the US Constitution Magna Carta to the current draft of the 1964 Civil Rights Act. 



Some additional book recommendations on corporate history from Professor Magnuson:

  • Ernst Badian, Publicans and Sinners: Private Enterprise in the Service of the Roman Republic
  • Raymond de Roover, The Rise and Decline of the Medici Bank
  • William Dalrymple, The Anarchy: The Relentless Rise of the East India Company
  • John Micklethwait & Adrian Wooldridge, The Company: A Short History of a Revolutionary Idea



Twitter: @profmagnuson

LinkedIn: https://www.linkedin.com/in/william-magnuson-56479473/


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William Magnuson


Will Bachman, William Magnuson


Will Bachman  00:01

Hello, and welcome to Unleashed. I’m your host will Bachman and I am so excited. Today I’m here with William Magnuson who is the author of for profit, a history of corporations. William is a professor at Texas a&m law school he used to teach law at Harvard University. William, welcome to the show.


William Magnuson  00:22

Thank you so much. Well, I’m excited to be here today.


Will Bachman  00:25

So your book covers eight different corporations throughout history to illustrate kind of different facets of corporations. And I’ll just read off the list. And I’d love you to just give us a thumbnail sketch to orient listeners who haven’t yet read the book. So you start with the corpus echonet, you start with associate societat is public interim, that kind of tax forming corporations and Roman republic, you go on to the Medici bank? Talk about the East India Company, the Union Pacific Railroad when the chapter titled the monopoly of a chapter, the assembly line on on Ford, the multinational Exxon, the Raider KKR, and the startup Facebook, I’d love to hear you. Just maybe tell us why you chose these and what companies were on your shortlist that didn’t make it in the book. I’m quite curious to hear which ones you were kind of on your long list of, you know, 20 companies that didn’t get in the final eight?


William Magnuson  01:27

Well, thank you. Well, that’s that’s a great question. And it’s something that I thought quite a bit about that book started out, I had worked as a prior to joining Texas a&m Law School where I teach corporate law and contracts and m&a. I had worked as a m&a attorney in New York for a law firm called Sullivan and Cromwell. And I remember working there, I oftentimes thought, you know, we’ve got these massive corporations that are defining our lives in all these really important ways. In a way, actually, the corporations have become more important today than they’ve ever been to the life of the average human being. But there wasn’t a good book explaining why we have corporations in the first place. And I don’t mean by their corporate purpose. Every every corporation is founded for a different purpose. Their founders have different ideas. But I was curious about going back to the origins of corporations, that is when societies themselves first created these corporations, why did they come up with the legal idea of a company. And so to do that, I wanted to go back and look at some of these foundational moments in the history of corporate law. So go back to ancient Rome, and there were these entities that you mentioned earlier, very good pronunciation of societat days, pubblica, Norham, these tax gathering entities that were formed in ancient Rome. And then I will go through history about how they keep popping up. And what’s fascinating about studying corporations over the span of 2000 years is that you see trends, that you see some similarities pop up over and over again, even when new civilizations recreate this idea. Many of the features of the Corporation had stayed the same things like limited liability, stock ownership, professional professional management classes. And so there’s these reasons why these features keep popping up. I chose the eight that I did, because they were right. I mean, anybody who hears these words, everybody’s heard of all of these companies, right? The Medici bank is one of the world’s most famous or history’s most famous bank, the East India Company’s maybe history’s most famous Corporation, they were, they had an outstanding influence on the society around them. So I wanted to say I wanted to go back and look at why they were created in the first place. Why the entity whether it was Queen Elizabeth, or the senior area of Renaissance Florence, why they why they organized, why the the governments created them. There were some companies that I thought about including and ended up not going with I was some of the ones that I was particularly interested in, where I thought that one that I actually did quite a bit of research on was, so I have these eight major corporations. One that I didn’t include, but I thought seriously about including and may do in the future was actually a non corporation that is the Soviet Union. Part of the idea behind the book was let’s explore why we have corporations, but in a way, a more important question is, well, what would what would the world look like if we didn’t have them? So Soviet Union was one of the world’s great experiments in trying to structure and economy and in a way that doesn’t include corporations and it was not very successful.


Will Bachman  04:37

So I was interested that there was no kind of consumer packaged goods company really on the list. No, retail company. Exactly. Did did. Were there sort of a few other companies that you got close to thinking about other than these eight that for some reason, you had to narrow it down and you did not include.


William Magnuson  04:58

Yeah, there certainly were All right, so Walmart comes to mind is one that I did some research on didn’t wasn’t included on the tech comments of the last. And the last chapter on the startup was focused on Facebook. But there are many other major tech companies that right influenced our lives in lots of ways Apple, Google, Microsoft, all those would have been fascinating books. And I have thought about doing that doing a book and separate book on those in the future. I’ve also thought about sort of other cultures, corporations, right. So it would have been really fascinating. I did a good amount of research on Japanese corporations. There’s a long history within the corporate law scholarship of studying Japanese corporate law, because it has many similarities with US law, but also some major differences. And so I looked into several Japanese corporations ended up not adding those in there, but it would certainly be a fruitful area of research in the future.


Will Bachman  05:54

Okay, well, that would be a longer book. That was actually my next question, which was to ask you about what other ancient cultures, you know, came up with maybe independently generated this idea of a corporation, to the Aztecs, the Incas, the Chinese have corporations, you mentioned, you mentioned Japan, tell us a little bit about you know, how that idea may or may not have originated in other in other cultures.


William Magnuson  06:21

Sure, so, you know, every every culture it, it originates in a different way. And Europe, it was largely based on copied in a way that the Roman model that was founded in ancient Rome, and the Romans were thinking about ways to govern an empire that was expanding very quickly, but didn’t have a large governmental apparatus. And so the Romans said, Well, one way to do that will be to outsource basically, government services, things like tax gathering, building, coliseums, laying roads, right, all these things that we think of today as basic government services, we’re going to outsource them to private individuals or organizations. And so that was proved to be a very successful model, it was copied in a way, in Renaissance, Italy, then moved up to the joint stock era of sort of the 1600s. And that was more or less the model that we still have today with some obviously some major, major changes. Other cultures have done it differently, right. So Japan has a long, long history of very strongly referred to as I bought two, these are large, sort of conglomerate organizations that have a lot of similarities. One, one thing that’s different is that they, they typically are more family oriented. And so that has distinguished them, and there’s less ability for outsiders to come in and take control over them. And so there’s a large literature on how that has changed the the sort of the path and the structure of the Japanese economy versus the that us one. So it’s a they’re they’re fascinating stories about how they’ve evolved in different cultures. The American corporation is largely based on sort of the European tradition.


Will Bachman  08:05

What about any other ancient cultures? Did I mean, the Aztecs I think, I don’t know, Mexico City, or what used to be, you know, Tenochtitlan had something like a million people or more. A lot of, you know, complicated things to coordinate did. Did they have any sort of corporate concept? That we know


William Magnuson  08:25

I did not? Look, I did not look extensively and do Aztec corporations. But they might have


Will Bachman  08:31

we zipped right by it. But let’s just take a step back a little bit. Tell us? What was the kind of originating driver and across cultures? What has been that driver that leads to the creation of the corporate concept? And give us a bit of a definition? What are those common characteristics? You? You listed them quickly earlier? But let’s spend a bit more time on that and expand?


William Magnuson  08:56

Sure, yeah. So some of the core traits of what I think of as the sort of the modern corporation are you have limited liability that its stockholders who own shares in the company, and the corporation cannot be sued individually for their and the debts of the company, right? If Facebook goes out there and get sued for violating privacy, the owner of a share of Facebook does not face liability, right? They can’t go out and get their home in a lawsuit. So limited liability is one of the key features. Another one is professional management class, right? So there’s a separation of the ownership that is the owners of the shares of a company and the managers, the people who are actually doing the day to day work. There’s also another important feature was that they are a single entity and they can operate on their own. That is you don’t need to get paid every stockholder to come sign a contract. Anytime Facebook wants to buy a chair or launch a new business, right? You don’t need separate individuals that come together. They can operate on their own that means they can sue they can be sued, they can enter the contracts right there. single entity, and that in a way, that’s actually the the root of the word Corporation, its corpus, it means it’s incorporated. You’re bringing many different bodies into a single body. And then the final attribute, which I think is very important, is that they are, in a sense, immortal. A corporation never dies, or the doesn’t have to die, there is no end date at which a corporation ceases to exist. And that’s an important feature of them. Because historically, if we go back to the ancient Roman Republic, the alternative was a was a partnership. And so a partnership at the time, and actually still today, as a default ends when any one of the partners dies. And that becomes a little problematic when the entity that you’re talking about sociopathy is pooping in Orem, and ancient Rome, is doing a really important thing like tax gathering, right? Imagine if every time a single individual dies, you have to completely restructure the tax gathering structure of ancient Roman republic, that was a major problem. And so the immortality of the corporation, the idea that this thing keeps going, this body, this entity, this legal entity continues to exist even after the death of a single member or stockholder, as an important feature and allows corporations to be as efficient as they are. So those are the core core features. And I think you also asked about why societies decided to create them. There’s this story from the Roman Republic, I think is enlightening on this. And the basic structure of the story is that it was during the 218 BC. This is in the middle of the Punic War between Rome and Carthage. And at the time, in 218, Hannibal had crossed over the Alps, right with his army of infantry and cavalry and elephants, and he was rampaging through the Roman countryside. And it was sort of looking like Rome was going to lose the war. They ended, they ended up turning it around through a strategy that is now known as the Fabian strategy. Basically, they started avoiding the set battles that they had lost to Hannibal instead kept him in the field for longer. But there’s another important point, which is actually they started to use private enterprise. So there’s this really interesting story from from Livy live, he tells in this history of Rome, where he talks about how the Roman Commander skipio Africa, the Roman commander of skipio, police, Cornelius skipio, writes to the Senate and says, I’m out of troops, amount of supplies, I’m not going to be able to win my battles anymore, unless you supply me with new arms and weapons and equipment. But the Roman senate is out of money. It’s run out of money. And so the question is, how do they continue this war? How do they keep the war going? When they don’t have any money left, they can’t get supplies. From there, they can’t pay for supply, download their own treasury. And a way actually, it has a lot of relevance to today’s world right about trying to make sure that we keep our allies supplied. And so one of the Roman Treasury do what what they said was they they made a plea to the people of Rome, they said, If citizens will supply skipio, with closed grain equipment, weapons out of their own pockets, then they will be repaid eventually, from the Roman Treasury when it’s replenished. And then response live, he says that three companies are associate Tata, Ace and the original Latin of 19 members came forward and agreed to supply the necessary provisions. And the only thing they asked for in return was that they’d be exempted for military duty. And that if they lost their cargoes at sea, either from storms or from enemy action, that the state would make them whole. The Senate agrees to the terms the companies follow through. And eventually the turret the ties returned to Rome goes with the offensive, and they win. And so I think this gives you a little bit of a sense of why we’re why we why we as a society, first decided to create the corporation, right? There’s this governmental need, right, we’re trying to win a war, but we don’t have the necessary resources. Instead, we think the resources are a lot of the resources, a lot of the efficiencies are actually found within private individuals, private enterprises. And so we’re going to give those private enterprises, some special rights, some special legal rights, and in return, we hope that they will contribute to the Commonwealth that will contribute to the common good. And so I think you’ll see a similar pattern followed throughout history wherever corporations pop up, right? There’s this basic societal compromise. We’re going to give special legal rights to these legal entities because we think they’re going to contribute to the well being of our societies.


Will Bachman  14:59

What sort of institutions had to be in place in the Roman Republic, to allow these corporations to exist. So beyond just the Senate passing law, okay, we can now of course associate that does talk to me about, you know, the were their corporate attorneys back in ancient Rome and where their, you know, banks or what other kind of aspects of infrastructure had to be in place to allow them to function?


William Magnuson  15:31

Yeah, so that’s an important and important research question that has been talked about in the literature. And I think there were a couple of things that were really important that allowed these entities to thrive. One was a tradition of lawyering, as you mentioned, and I don’t know if I would exactly call them corporate lawyers. But this idea that there was the rule of law, right, the Senate is going to give these contracts to these enterprises. But if the contracts aren’t in any way enforceable, or if they can’t go out and actually get them enforced in a court of law, or force the Senate to live to live up to them, or the Senate can’t get the companies to live up to their terms. And that’s going to be a problem. And so you do need the the basic structure of the rule of law for corporations to thrive. That, in a way, actually is one of the real mysteries of what happened in Renaissance Florence, which is an era right. So the Renaissance Florence was an era when Europe was really divided into all these fragmented policies, right? We’ve got, you’ve got duchies, and barons, and kingdoms and empires and city states, and they’re all sort of fighting with each other. And so there wasn’t really the rule of law. And so we think of it today, within that European ecosystem. And so how did the Medici bank overcome the lack of rule of law was? Well, well, within the city of Florence, there was a certain amount of law that was recognized by the scenery of the governing authorities of Florence. But also they managed to create these really fascinating, complicated structures for ensuring that their own businesses will be protected when they operated elsewhere. So they created what is really the precedent for the modern bank holding company, right? They created all these separate entities all around the continent, and they had 1314 15 different branches, and each one was its own entity. And so it allowed them to sort of create a rule of law in a world that didn’t have it. So that was, I think, an important part of the rise of the corporation was, was the rise of the rule of law.


Will Bachman  17:39

I kept wondering about reading chapters one and two of the book about what about religious bodies, like monasteries? Were they in some way, Incorporated? So they had to, like the monastery could make agreements or sue people or be sued or have an immortal life? Or, you know, talk to me about any kind of religious institutions that might have had corporate like characteristics?


William Magnuson  18:06

Yes, that’s right. So in fact, many of the first of history’s first corporations were religious organizations, religious organizations. They not only were, many of them were in there were some in England, there were some in an Italy. And I didn’t really focus on them, because they weren’t in the same sort of line of business. Right? I was focused on for profit, right? These profit companies profit organized enterprises that we think of as the corporation today, but at the time, right, when in the Renaissance, and even before then, some of the attributes of the corporation were actually given to religious organizations to university, sometimes the city’s right, and those are right nowadays, we don’t really think of them as a corporation. So I sort of set those aside as a special type of corporation that is more or less died away, although now we have either one c three organizations,


Will Bachman  18:59

and just say a little bit about cities, so cities would also be a corporation in some cases.


William Magnuson  19:09

Yeah, so a lot of that was actually one of the stuff I’ve been working on my new research project is a sort of a history of law. Right. So in one of the one of the chapters is on the Magna Carta, and that was actually one of the big, big areas of dispute between King John and the barons, was that these cities, a lot of the cities actually wanted to make sure that their they had their liberties and rights protected. And so they would, they had a major complaint against King John because King John kept overruling their rights and overruling their privileges and saying that we’re going to take that we’re going to, we’re going to tax you as much as we like because there is no rule of law in England at the time. And so, so cities did benefit eventually from incorporation. And so they were another one that that sort of, I would say, the outliers of the history of the corporation, right? They’re not Really the world of for profit enterprises that I focused on a book. But they do have this really sort of interesting side history about how corporations are a very flexible entity that can be used for all sorts of other enterprises.


Will Bachman  20:14

I’d like to hear your talk, think about how some of these elements like you laid out the four elements of a corporation, how some of those may have evolved over time. And maybe in some cases, there were experiments that they had to iterate to get to the current state, like limited liability, maybe start with that? How did like did the first corporations, you know, have limited liability, did it take a while to innovate and figure out that that was a requirement? Talk us about some of the false starts and how how that came about?


William Magnuson  20:48

Yeah, limited liability is a fascinating element of corporations, because there isn’t a way Central, maybe even the central concept of the corporation, is the idea that you don’t have to either you cannot go after the owners of a corporation, if the corporation hurts you, arms, you injures you, and you sue them, you can’t get the personal assets of the owners. And that provides some risk protection for any owner of a corporation that allows US corporations to gather capital, with additional capital, they can large launch bigger enterprises. And so it has this really magnifying effect of the power of the corporation in the world is that the idea of limited liability, but it was not always so clear what exactly it would mean. And even today, actually, some of the statutes are somewhat ambiguous. And you it requires you to know the case law in order to understand what limited liability really means in any given instance. But there’s a fascinating story from the East India Company, which was one of the companies that sort of pioneered the idea of limited liability. And so one of the things that they learned was, he’s going to a company formed in 1600, by Queen Elizabeth. And the idea was to trade with the East Indies. These were large ships that would sail halfway around the world, and then back again, and trade for spices. And so these were very risky enterprises, right at 1600. ships with founder, sailors would get sick. And so they needed a lot of capital to rig out the ships, and then it would take a really long time to get it back. So very risky. And so the idea was, how do we structure our stocks to make sure that we can raise enough capital to send off these hopefully profitable voyages. But also make sure that the owners themselves the people who buy who buy the stocks are interested in buying and they have a reasonable return. So at the beginning, they didn’t know what to do. So the first thing they did actually was they had a system of separate voyages. So you wouldn’t actually buy stock in the East India Company, you would buy stock in the first voyage of these india company, or the second voyage of the East India Company, the third voyage, and so every you know, year or so, they would launch a new voyage ships, they would go out there and trade, they will come back. So a year or so, after your you first buy your stock, the chips are back, and you know what your returns are. So that the advantage of that, of course, is that, it means that, you know that within 12 1314 months, you’re going to get your money back if the voyage is profitable and successful. So it limits some of the risks. But one of the things that they didn’t understand was that this structure was creating all sorts of conflicts of interest within the company itself. So it turned out that when you sold your shares based on single voyages, so instead of buying shares in the East India Company, you would buy shares on the first voyage to the second voyage, well, then all of a sudden, there’s a conflict of interest between the first voyage sailors and the second voyage sailors, right, the first way sailors who would get some stock in the company, and in that voyage, they would really want to earn a profit on their voyage, but they didn’t really care what would happen to the other voyage and in fact, they might actually want to affirmatively mislead the other voyage as if the other voyages might take some of their own profits. There were those cases have done basically mutinying against the other voyages so that they could get all the shares at the profits. So he’s any company says


Will Bachman  24:13

that was a story in your book that I just thought was hilarious. Well, not hilarious, but it was kind of quite memorable of how they arrive and they arrive to one port and then one of their other, you know, East India boats is already there, and they kind of get attached.


William Magnuson  24:30

Exactly, they get they get attacked by their own their own company, shipmates. Yeah, it’s a pretty wild story. And that was fun. It’s part of the fun of researching it was going back and even read the journals, right? This was the era of seafaring voyages and journals. That’s what Jonathan Swift made based Gulliver’s Travels on right. You can go back and you can read the journals of all the sailors many of whom were working for the East India Company, and they’re just fascinating stories of adventure and enterprise and these weird kind emanations of how to create a company in a time when the company doesn’t really, we haven’t worked on all the concepts yet.


Will Bachman  25:09

Talk to me a bit about, you know, one of the four that you listed was not governance. So and you did you know, the owners are separated from the professional manager. So, talk to me a bit about early ideas around governance and how that’s evolved.


William Magnuson  25:26

Yeah, so the this idea that in the corporation, there’s a separation of owners and managers, it’s a important feature of the corporation, right? We wouldn’t want or it’d be very difficult, right for the modern corporation that has hundreds of 1000s of shareholders to allow all the hundreds of 1000s of shareholders to have a say in every decision that the corporation makes. So you need managers. But again, this creates a conflict, it turns out that maybe the managers will have an interest in promoting their own salaries rather than protecting the interests of the shareholders. And so one of the big questions that has percolated throughout history has been, how do we align the interests of the managers and the owners over time. And again, different structures have been used. And one interesting wrinkle of it was Ford, the Ford Motor Company was founded by Henry Ford, early 1900s. And Ford actually didn’t really like the idea of the share of shareholders. Throughout the early years of Ford, he was constantly feuding with them. And the basic problem was, he was the manager, right? He new cars, he loved to fiddle around, he was this great tinkerer, he really didn’t cars. But what he wanted to make was the perfect car. So we kept fiddling around, but and he would raise money from wealthy investors to do that. But the wealthy investors wondering return on it. And so there were these just sort of hilarious stories about him fighting with the fighting with his, the the shareholders, and they were saying, Okay, what’s, where’s your model? And he says, Okay, I’ve got this model, but it’s not quite ready yet. I’ll be, it’ll be ready in six months, and they patiently wait, and then six months later that he comes back and said, Well, you know, just the, the tire is not quite right, I’ll give you I’ll fix it in six months. And so they keeps delaying keeps delaying keeps delaying. And there’s, there’s a famous case that I teach in my corporate law class called dodge V. Ford, where he has this massive blow up between himself and a shareholders, board ultimately holds right you actually have a duty to promote the interests of the shareholders. And so that’s one of the foundational concepts in corporate law, now, this fiduciary duty to protect the interests that don’t that managers have to promote the interests of shareholders. So you see, these things slowly work out through experience, you learn, oh, there’s this there’s this conflict of interest between the managers and the owners? Well, how do we figure out how do we resolve that, eventually, a court has to decide it.


Will Bachman  27:56

Talk to me a bit about how shares have traded hands over history. In ancient Rome, did they have slips of paper that were stock certificates? Or was it written on a tablet and stolen somewhere? Like, did they actually, you know, have a functioning stock market?


William Magnuson  28:16

Yeah, there isn’t a lot of evidence on exactly the structure, whether they were, you know, written documents or not, there certainly were written documents with with respect to the actual structure and the societat days themselves. And there’s some debate in the literature about whether that how much they were these stocks were traded, alright, something there actually was really a sort of a form of a stock market, that would take place in the forum where people would buy the shares and companies. And there are these lines from Cicero and other people that say, actually, these are widely held shares of ownership in these companies. And these corporations are widely held in ancient Rome. So there’s pretty strong evidence that they were, they were being traded, but unclear exactly what form it took, and is obviously now nowadays, it’s starting to shift, right. And for a long time, there actually were just physical certificates that would represent what your stock ownership was. Now we’ve moved on to an electric electronic system. It’s still mind bogglingly complex, where where shares are held. I teach an entire class about the way that you settle trades. And that’s actually interestingly enough, one of the big focuses nowadays, and in sort of FinTech and one of my other research interests is how to make our stock trading system more efficient, because it is still still so Byzantine, this process of of trading shares.


Will Bachman  29:39

In your course of learning about or studying the professional managers in these corporations. I’ve always been curious as a management consultant. What can you tell us if anything of the deep history of you know business advisors, people who are not necessarily full time professional managers, but either accountant type people bookkeepers or attorneys or someone familiar with corporate law or someone who’s, you know, a business expert. Is there any deep history of that of corporations using professionals outside their four walls to advise them?


William Magnuson  30:17

Yeah, that’s that’s such a fascinating question. I mean, that there obviously has always been that ecosystem of professional advisors, lawyers, accountants, consultants, who are who surround these corporations and help advise them and help them operate in the world. One of the interesting ones is KKR. So I have a chapter on KKR, the private equity firm. And obviously, there are a lot of the structures that they use, and that they really, they create in the first place. These are really complicated legal structures, right. And so they have to use law firms, to help devise them to make sure that they’re complying with the law, and also taking advantage of all the potential tax incentives. And so that has created an entire ecosystem right now of private equity attorneys, right, there’s a law firms have large departments devoted solely to that. There’s also management consultants who focus on that as well. And I think that that the role, as are the outside consultants, whether it’s law firm, partner, or management consultant, or accountant, that has become more and more important, as corporate law and or just the corporate, the corporate form is bigger, more complicated in the modern world. Nowadays, we have large ecosystems around all those different elements that are not within the corporation, but allow the corporation to do things that it wouldn’t be able to do if it didn’t have those assistance.


Will Bachman  31:39

Now, I’ve heard that some of the origin some aspects of the venture capital industry, trace back to the whaling ships of the United States, but perhaps it goes even further back, you talked about the East India Company, and individual voyages would have investors. Talk to me a little bit about what you learned around the history of, you know, investors, other than individuals. So have there been kind of institutional investors dating way back?


William Magnuson  32:13

Yeah, I mean, though, you do see them pop up over and over and over again, right. Oftentimes, the the early the early, find finance, ears of corporation are some some type of large organization or wealthy individual who, who spearheaded, and now they’re there, and they’re looking for my profit, they’re looking for a return on their investment. One of the, one of the chapters that focuses particularly on this is the startup chapter, the last chapter on Facebook. And one of the interesting things about the structure and the story of Facebook is how the way that it funded itself shaped its path and the future, right, the fact that it was being funded largely through venture capital, meant that it was responding to the interests of venture capitalists, right. And oftentimes, that model is now been honed into this idea that what we’re going to create, we’re going to take a bunch of bets, sort of hoping that we get home run eventually. And we’re going to try to reach rapid growth so that we can create a kind of platform effect, right, so everybody goes on to this network, once everybody’s on the network that everybody else wants to be on the network. And so that really was the model that venture capitals spearheaded, and that leads to Facebook. And that then is emulated by so many other startups today. And it was, again, it shows just how, just how much of a difference it makes where you’re getting your money from right, who was funding this company, and the person that the identity, the interests, the characters, the psych psychology is so solid sociology of the people who are financing the corporation are almost as important as the people who are actually managing it.


Will Bachman  34:06

As you mentioned, you teach corporate law and so you, you studied it, obviously, you practiced it. As you research this book. What did you discover that surprised you? That had not been part of your formal legal training about the corporate form and its history?


William Magnuson  34:27

Yeah, I mean, it was a lot of things surprise me. i Some of the things that so when I, when I first started writing the book, I actually did not have I didn’t have a thesis, right. It didn’t start with a thesis about what made corporations tick about why societies created them. And so it was actually for me quite surprising showing just how consistent this both the structure of the corporation has been through time, and also the reason why society is the way People talk about why they created these entities, right? There’s this big debate today about what the corporate purpose is whether they can think about the environment or social causes or governance issues, or whether they should just focus on profit. And all those debates have happened, right? Forever, right? Almost for as long as the corporation has existed, those debates have been happening. And even let me just go back, go back to the ancient Roman republic, talk about the societat days pubblica norm will help fund the Roman Republic allow them to keep their wars going allow them to gather taxes, Livy also tells a story about some, some societat days to actually commit fraud and wind up loading up their ships and then sinking them and they don’t have any, they don’t have any Where’s within them. But then they claim to the Roman government, they say, hey, you’ve got this, I’ve got limited liability, you have to make me whole. And so they ended up being accused of fraud. And so these big debates about the role of the corporation in society have always been playing out. There’s even elements right of the too big to fail model that have popped up over and over again, through history. So I guess one of the things is just how consistent these big questions have been, and how insistent they’ve been right that societies keep asking themselves these problems that we’ve never really solved them. So I guess someone that’s what surprised me about the consistency is just how, how similar the structures have been just how similar the debates within society have been. And there’s also an interesting question, right about how things have changed. For me, one of the most surprising things is just how the major corporations in history have always led to some major change in ways in the way that they’ve been regulated, right, they’ve always some new issue is popped up when there’s mass production, or when there’s oil production, or when there’s worries about too big to fail. But more and more, I find that actually, we are not leading to changes in law. The worries that we have about corporations today are not leading to major changes in the way that we regulate them. And so I that has surprised me, right, there was this trend of lots of reform, historically, and then less reform lately. And that in a way is a cause for concern, right, that maybe the the structures by which we go about regulating corporations are starting to fail us.


Will Bachman  37:23

What would be the last big shifts in how we regulate corporations thinking?


William Magnuson  37:32

So I mean, to be honest, the really, probably the last, the last big shift of the way we regulate regulate corporations was 1933 1934 Securities Act, right? They basically say after, whenever you sell stock, you have to register it with the SEC. And there really hasn’t been any, in my opinion of there’s no, there has been nothing of that level of importance since 1934. Which is a long time ago with a major, major reform.


Will Bachman  38:00

What misconceptions about corporations? Have you heard as you teach, or encountered when you speak to professionals, particularly misconceptions among, you know, business professionals who you think might might might? No different? You know, are there as you have you heard people, you know, have misconceptions about corporations?


William Magnuson  38:27

Yeah, so the one that I think pops up the one that’s most central to my belief about the role of the corporation in the world today. Is that, right? I think there is this this strand of thought, right, that says, Corporation was created to seek after profit, its sole obligation is to seek after profit. And I think that’s wrong from historical standpoint, right? When you go back and you look at these moments in history, when society created them, that is, why did the Florentine government create the idea of the corporation? Why did Queen Elizabeth England create the idea of the corporation right? Over and over again, the reason why they did it was not to right, promote the interest of a few merchants, at those merchants, they created their own corporation to get rich, but that’s not why we as a society created them. We as a society, and you see this over and over again, it’s in the historical record, that we as a society created governments created them to promote some idea of the common good. Right? It’s not out of the question to say that the reason why we created the corporation was to promote the interests of the Commonwealth. And again, that that that those interests have shifted over time, right when Queen Elizabeth’s idea of what the common good was, it’s quite different from what our idea of becoming good is today. And it’s certainly different from the idea of the common good and ancient Rome. And so those things, I think, are a matter of debate. But as a historical matter, I think it’s quite wrong to say the reason why we as society why the corporation was created in the first place was to pursue profit. That may be a means to an end, but it’s a mean because it’s not the end.


Will Bachman  40:04

In addition to that argument, are there other arguments that your book is making? That would be sort of in contention with, you know, other books out there? Other arguments out there? What, what in your book, would you say is, you know, a bit of a debate where it’s where it’s, you’re putting forward an argument?


William Magnuson  40:29

Yeah, I think the other so there’s many other areas where I think I’m in contention with the sort of the, well, he’s continuing with other scholars in the field. Right. So I think that I disagree with some scholars about the role of fiduciary duties about the kinds of things that a board of directors or a manager or an officer can think about, I think that there’s why there’s broad discretion granted to managers to be able to consider things beyond just the sole interests of profit of shareholders, and even right with the interests of the shareholder themselves. I think those are also matters for debates. I think I’m more, I have a broader understanding of fiduciary duties than many people do. And that hasn’t been informed right, by my by my research into both why we as a society created them, but also what has actually happened in history. What are the things that have led corporations to thrive? And I do think it is, right, this giving managers the leniency to promote what they think, is that in the best interest of the corporation? I think that’s one another area where I stand slightly in contrast to other scholars.


Will Bachman  41:39

Tell us about some of the research that you have going on right now. What are you working on next?


William Magnuson  41:45

Yes, well, I’m so my next book is a it’s a history of law. It’s sort of in the same model as this current one, this history of corporations, where I have done that writing an encyclopedic history of every law that the past, but instead it focuses on these foundational moments in time when sort of the way that we think about law, the way that we think about the role of the rule of law, the role of the Constitution, the role of judges, the roles of democracy, have changed. And so I I go back to the ancient Athens and the development of the court system, go back to ancient Rome and the development of the code and then move all the way up through the US Constitution Magna Carta. The Final Chapter, at least currently, current draft is the 1964 Civil Rights Act. So I’m starting to expand my horizons, but I hope it’s a it’s a fun project.


Will Bachman  42:34

All right, I’m ready to reorder that one. Preorder as soon as it’s ready. Where can listeners find you online share any links that we should put in the show notes?


William Magnuson  42:48

Yet, so I haven’t Twitter. I have a Twitter page at at Prof. Magnuson. And then I’m on LinkedIn as well. Those are my two


Will Bachman  42:59

major places. Amazing. We’ll include those plus a link to the book in the show notes. William, this was a fabulous conversation really enjoyed getting this. This overview. I loved the book and it was really great speaking with you about it.


William Magnuson  43:15

Thanks so much. Well as this is a lot of fun today.




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