Age of Invention: Birth of the Business Corporation

Welcome to my regular newsletter, Age of Invention, on the causes of the British Industrial Revolution and the history of innovation. If you enjoy it, please share it with someone who might be interested. You can subscribe here:

I discussed last time how the use of patent monopolies came to England in the sixteenth century. Since then, however, I’ve developed a strong hunch that the introduction of patent monopolies may also have played a crucial role in the birth of the business corporation. I happened to be reading Ron Harris’s new book, Going the Distance, in which he stresses the unprecedented constitutions of the Dutch and English East India Companies — both of which began to emerge in the closing years of the sixteenth century. Yet the first joint-stock corporation, albeit experimental, was actually founded decades earlier, in the 1550s. Harris mentions it as a sort of obscure precursor, and it wasn’t terribly successful, but it stood out to me because its founder and first governor was also one of the key introducers of patent monopolies to England: the explorer Sebastian Cabot.

As I mentioned last time, Cabot was named on one of England’s very first patents for invention — though we’d now say it was for “discovery” — in 1496. An Italian who spent much of his career serving Spain, he was coaxed back to England in the late 1540s to pursue new voyages of exploration. Indeed, he reappeared in England at the exact time that patent monopolies for invention began to re-emerge, after a hiatus of about half a century. In 1550, Cabot obtained a certified copy of his original 1496 patent and within a couple of years English policymakers began regularly granting other patents for invention. It started as just a trickle, with one 1552 patent granted to to some enterprising merchant for introducing Norman glass-making techniques, and a 1554 patent to the German alchemist Burchard Kranich, and in the 1560s had developed into a steady stream.

Yet Cabot’s re-certification of his patent is never included in this narrative. It’s a scarcely-noted detail, perhaps because he appears not to have exploited it. Or did he? I think the fact of his re-certification — a bit of trivia that’s usually overlooked — helps explain the origins of the world’s first joint-stock corporation.

Corporations themselves, of course, were nothing new. Corporate organisations had existed for centuries in England, and indeed throughout Europe and the rest of the world: officially-recognised legal “persons” that might outlive each and any member, and which might act as a unit in terms of buying, selling, owning, and contracting. Cities, guilds, charities, universities, and various religious organisations were usually corporations. But they were not joint-stock business corporations, in the sense of their members purchasing shares and delegating commercial decision-making to a centralised management to conduct trade on their behalves. Instead, the vast majority of trade and industry was conducted by partnerships of individuals who pooled their capital without forming any legally distinct corporation. Shares might be bought in a physical ship, or even in particular trading voyages, but not in a legal entity that was both ongoing and intangible. There were many joint-stock associations, but they were not corporations.

And to the extent that some corporations in England were related to trade, such as the Company of Merchant Adventurers of London, or the Company of Merchants of the Staple, they were not joint-stock businesses at all. They were instead regulatory bodies. These corporations were granted monopolies over the trade with certain areas, or in certain commodities, to which their members then bought licenses to trade on their own account. Membership fees went towards supporting regulatory or charitable functions — resolving disputes between members, perhaps supporting members who had fallen on hard times, and representing the interests of members as a lobby group both at home and abroad — but not towards pooling capital for commercial ventures. The regulated companies were thus more akin to guilds, or to modern trade unions or professional associations, rather than firms. Members were not shareholders, but licensees who used their own capital and were subject to their own profits and losses.

Before the 1550s, then, there had been plenty of unincorporated business associations that were joint-stock, and even more unincorporated associations that were not joint-stock. There had also been a few trade-related corporations that were not joint-stock. Sebastian Cabot’s innovation was thus to fill the last quadrant of that matrix: he created a corporation that would be joint-stock, in which a wide range of shareholders could invest, entrusting their capital to managers who would conduct repeated voyages of exploration and trade on their behalves.

Cabot’s reasons for this change are poorly documented, because many of the records of the resulting company were destroyed in the Great Fire of London in 1666. Nonetheless, I think a few facts may allow us to deduce why.

For a start, Cabot’s aim was to discover an elusive shortcut from England to China — one that he believed would be achieved by going northeast, around Scandinavia and Russia. He was thus asking people to invest in one of the riskiest ventures imaginable: a voyage into the icy unknown, to venture farther north and east than any Englishman had ever gone, and using unfamiliar techniques like celestial navigation. Although Cabot was involved in some other English explorations in the 1550s — across the Atlantic, to Morocco, and into the Mediterranean — all of those had at least been able to rely on experienced pilots, who already knew the routes. They had, to be sure, been risky, but nowhere close to what he was now proposing.

Cabot was also probably conscious of the state’s lack of funds. He received a generous pension from the crown, but it was nowhere close to the amounts required for a proper voyage of exploration: the provisioning of a few ships that could potentially make the long trip to and from China, laden with sufficiently valuable goods that might interest potential customers there, and kitted out with the latest — and most expensive — equipment for celestial navigation. Indeed, the recognition of this lack of funds may have been why in 1550 he obtained a new copy of his 1496 patent monopoly. Such monopolies were, for the monarch, almost costless. Should the venture succeed, the monarch would take their cut of the resulting trade — in this case 20% of the profits — but it was otherwise a means by which the individuals who had the patents could raise the funds themselves.

Under normal circumstances, raising those funds might have been straightforward. Simple unincorporated partnerships backed the English voyages to Morocco and the Mediterranean. Yet those were known trade routes — it was just a matter of tapping into them. For a voyage northeast, the terms of the 1496 patent were crucial: it awarded him a monopoly only over the trade with any (non-Christian) lands he or his agents should discover, and, most crucially of all, for his lifetime. The only problem there was that in 1550 he was about to enter his 70s. He would thus have to offer investors something that might last longer than himself: a corporation that might outlive him, and which would be able to continuously exploit any discoveries made under updated patent terms. After all, commercial exploitation would require more than just a single voyage — especially if it had to go all the way to China, and with all the false starts that such an effort might entail.

In order to attract funds, he thus appears to have leveraged his individual patent monopoly to form a joint-stock corporation. This is why his obtaining an official copy of the patent in 1550 was so crucial. Obtaining the copy would have been no easy matter, involving lots of petitioning, official fees, and (naturally) bribes. It was not simply an administrative procedure, but worth something — especially as his company of about 240 investors was, by the time of its first voyage of exploration in 1553, not technically incorporated yet. The company certainly acted like it was incorporated — it called itself the “Mystery and Company of the Merchant Adventurers for the Discovery of Regions, Dominions, Islands and Places Unknown” with Cabot as its governor — but the expedition needed to leave in the early summer of 1553, before incorporation was finalised, to take advantage of the warmer weather as they sailed into the icy north. If delayed, the entire endeavour would have been postponed by a whole year. It would not have seemed too risky to jump the gun like this, as the charter had already been drafted and was simply awaiting a few changes before being sealed. Edward VI had given his promise that it would be, and had already demonstrated support: he had licensed their voyage, granted the ability to press sailors into their service, and written a letter for them to present to foreign rulers. Edward’s seal on the charter must have seemed an inevitable technicality.

Yet, within a fortnight of the expedition leaving England, he died. With the resulting upheaval, it was not until early 1555, after the first expedition had returned and Mary I was firmly on the throne, that Cabot’s company was finally able to become incorporated. (Unsurprisingly, many of Mary’s newly elevated courtiers were given shares.) Although it officially kept its much longer name, it was soon known simply as the Muscovy Company, or Russia Company — it had not got anywhere close to China, but had at least managed to make contact with Tsar Ivan the Terrible, opening a direct trade route with Russia via the White Sea.

Thus, in the 1550s, Cabot leveraged the patent monopoly on invention to create a whole new institution for funding innovation and discovery. And once he did so, despite the Muscovy Company’s financial troubles, the precedent was set. In the 1560s the next few joint-stock corporations followed a very similar pattern, with the Company of Mines Royal and then the Company of Mineral and Battery Works each using the joint-stock form to initially exploit patent monopolies that had been granted to individuals, and acting as corporations in all but name for a few years before receiving their official charters. None of these experimental joint-stock corporations were that effective, and some of the details still needed to be ironed out before the organisational form became more widely adopted. But from the patent for invention, the modern business corporation had been born.

If you’re enjoying this newsletter, you might also be interested in my new book, Arts and Minds: How the Royal Society of Arts Changed a Nation. Available in the US and UK, and also Worldwide with free shipping and a 25% discount when using the code AAM20 here. If you’ve read it, please leave a review!