6 - Corporate performance

Summary

At the beginning of the nineteenth century the incorporation of business was prohibited by the Bubble Act; companies could be formed only by grant of royal charter or letters patent, and incorporation was restricted to large-scale enterprises deemed to be in the public interest. By the century's end, the limited liability company had become the dominant form of business organisation in Great Britain. This radical transformation of business structures coincided with the sustained growth and structural change in the British economy that turned it into the ‘workshop of the world’, and it is possible that there was some link between these two developments. A strong causal relationship might be one in which economic development created pressure for organisational change, with the new organisational forms themselves promoting further economic growth by increasing the efficiency of business operation. This is the underlying model that institutional economists have commonly applied when considering the rise of what has been called the ‘classical capitalist firm’ – that is, a company with shareholders, managers and workers. The rise to dominance of the corporation is seen to reflect the relative efficiency of that form of business organisation over any alternative. In a competitive economy, organisational forms that are less responsive, less adaptable and less profitable will be crowded out by their more efficient competitors in an economic process of natural selection which will serve to reduce social costs and increase overall welfare.