What is the Purpose of a Company?
Today, we associate companies with giant corporations, big brands, labels, stores, factories, stocks, and money. A company, by modern definition, is a separate, legal entity which is shareholder owned and created to generate returns to it’s investors. Previous to the company, all businesses were owned by people, either an individual or partnership. The ownership of the resources of that business fell into the hands of the individuals. It’s still that way for many businesses, such as my own, but it makes it hard for long term sustainability as a single owner can pull their resources and equipment out of the company if desired, which could cripple said business.
Hence the birth of the company. A thing that can own other things.
With definitions out of the way, I want to explore the purpose of a company. Sure we just established that companies are a way to keep resources intact to ensure long term returns, but I have a hard time accepting that as the only purpose. After all, people, naturally social beings, would not set out to create a thing and name it a company, also defined as people around you, and give it a singular goal of returning shareholder value.
Turns out, I was partially right. Let’s step back to London in 1599. This was an exciting time in world history. Navigation had seen technological advances. The Spanish Armada had been defeated, opening up trade waters in Europe. And the English were ready to use their newfound knowledge of navigation to explore the richest waiting in the East Indies.
Enter group of merchants who, knowing of what lay around the cape of Africa, set out to garner the Queen’s support for their business. Just like today, they had to receive a license from the government to operate. They banded together for two reasons. One, it was an expensive proposition totaling an investment of 68,373 pounds, equivalent to over 8 million pounds today. Secondly, this venture was dangerous. The Cape of Good Hope, formerly known as The Cape of Storms, is home to over 1,000 shipwrecks. When pooling resources and ships, you could make a lost ship less debilitating.
They achieved approval from the Queen and set off on their adventure to return home with spices worth many times the investment, creating an entirely new trade route and industry. But they had a problem and their competitors, the Dutch, recognized it.
The problem the Dutch recognized is the British were beholden to operating insofar as the owners continued to create one off voyages. There was no governing body, a board of directors if you will, nor pooled, shared, and controlled resources. Every individual resources were individual.
So they created the first ever company in 1602, the Dutch United East India Company. This new company did not disband after each voyage. The resources were owned by the company. The board of directors set direction and made decisions. And the company operators ran the voyages and established relationships with business partners. The company owners were awarded shares and were paid via company profits through a device called dividends.
It all worked because the company, the group of owners, were invested not in ships, but in money. If they wanted out or had personal debts to settle, they could sell shares instead of ships, keeping the company whole. If the company needed capital to invest in ships, they could sell shares. And the risk was owned by the company, but spread through shareholders rather than falling on individuals.
Quite an invention which revolutionized the business world.
Companies were formed to protect the people in the company by ensuring a loss was spread, risk was reduced, and longevity maintained.
Today, companies work in similar ways. We have an entity which holds assets and liabilities. It has shares owned by people, or the entity itself. Those shares are sold to produce capital which allow the company to grow. Okay, great, that’s the what and how, but what about why. Why does a company exist.
I think of companies as playing a team sport versus an individual one. In basketball, if one person is sick and cannot perform there is someone ready, waiting on the bench to take their place. The team can win the game because support exists. But in golf, there is no team. You are alone and one bad game can spoil a whole tournament. One bad hole or one bad shot could be the end.
The original purpose of a company was to bring people together, to work together toward a common goal. Hence the alternative meaning; a gathering of friends. Having company over for a dinner and being in a company working together is supposed to be similar. You are supposed to enjoy company, share experiences and explore ideas together. A working company is the same, we work, we share, we learn new skills, all on our own accord because together we are better.
The problem is modern companies have been transformed into corporations. Profit driven, people using organizations designed to maximize return and minimize cost.
How do we change it? How do we go back to a place where companies were about the people? There are two ways. One, go find one and work for it. There are examples of companies which set people above profits. Second, create one. Whether you are working for a company and have the power to influence change or you want to start your own company. Keep people at the center. Remember why you started your business in the first place.