The First Modern Corporation


By Meril Markley, A.B., J.D., LL.M.

At a time when the roles and responsibilities of companies are under scrutiny again, the first modern corporations offer practical guidance on how to achieve a successful and enduring business by attaining the confidence of the investing public and fulfilling the needs of stakeholders.

Please refer to the article that I published in 2012 for a summary of how they achieved this.

Starting with an entity used by their forebears during the Roman Empire and adapting it with elements of the feudal system prevailing at the time, 14th century innovators figured it all out for themselves, free of official guidance or interference. Controlling greedy impulses while enshrining in various legal documents the mechanisms for enforcing new principles, these early investors assured their companies' survival as a vital engine of the local economy for centuries. Without activists and an alphabet soup of theories, through decades of trial and error, they crafted a system of corporate governance for the ages while erecting a foundation for the pivotal role of companies in underpinning free markets and civic life.

The origins of the first modern companies date back to the Middle Ages in the Garonne River Valley near the thriving Occitan city of Toulouse, a hub in medieval France for the production of textiles. The river's current was strong and sufficiently swift to drive waterwheels, attached to mills built of stone, turning gears and powering the massive circular stones used to grind wheat into flour.

Flour mills were essential to the local economy but expensive to build and maintain. They required massive infusions of capital that could be attracted only if cash were pooled but risks limited at a time when investors demanded a healthy return but had no desire to involve themselves in day-to-day operations. The result was the first corporations or joint stock companies. They were legal entities separate from their owners but governed by them.

At a time when the Albigensian Crusade was just a few decades in the past, and as the Church sought to strengthen its presence in the Midi, investors affirmed their faith in the future by endowing their companies with unlimited lifetimes. Shares could be inherited and were passed down for generations to come, indeed, for hundreds of years.

That an obscure river valley could become the incubator for newfangled commercial entities amidst war, pestilence, religious turmoil, food insecurity, and global cooling, seems unlikely but true. It may also help to explain why the achievement remained unheralded until the middle of the last century.

As detailed in the treatise published in French in 1953 by the legal scholar Germain Sicard (1928-2016), it was evident to early investors that for their experiment to succeed they would need to confront human nature and control their greedy urges as well as those of other stakeholders including employees, suppliers, customers, and representatives of the King. Over a period of several generations, and by trial and error, comprehensive governance evolved to meet these objectives. The result was a system destined for the ages — or at least for 600 years.

Innovations enshrined in these first modern corporations included:

🟫 ownership divided into freely transferable shares;

🟫 issuance of new shares to raise additional capital;

🟫 shareholders not responsible for the debts of the company;

🟫 the company's liability limited to the amount of its assets;

🟫 a board of directors elected from among the shareholders for fixed terms;

🟫 delegation of responsibilities to board and management;

🟫 representatives empowered to bind the company in contractual matters;

🟫 transparency in records and decision-making;

🟫 accounting system tracking revenue, expenses, assets, and profits;

🟫 internal controls for documenting transactions;

🟫 annual reviews of the accounts by an independent auditor;

🟫 annual performance reviews for management;

🟫 annual general meetings of shareholders to approve the accounts and significant contracts;

🟫 limits on borrowing and leverage;

🟫 strategies for maximizing cash flow;

🟫 prohibitions on nepotism and self-dealing;

🟫 quality controls and safety standards;

🟫 maximizing dividends while building reserves and reinvesting profits to fund growth;

🟫 minimizing government interference;

🟫 diversification of business lines and revenue streams;

🟫 partnering with and serving the community.

Thanks to the governance they had evolved, these first modern companies nurtured entrepreneurship and the expansion of a burgeoning middle class in southwestern France, whether for the investor seeking a healthy return while limiting risk, the merchant hoping to expand his business with dividends paid out of corporate profits, or families aiming to avoid starvation by investing in a company that regularly paid dividends in flour.

As they improved technology for the mills, the companies sought to protect it and to stay ahead of competitors, eventually becoming leaders in generating hydroelectric power before the last surviving company was absorbed into the French government's electrical grid in the aftermath of World War II.

The fascinating tale of these early corporations is one I encountered in 2003, quite by chance, at my local Barnes & Noble. I happened upon a translation into English of a French book about medieval engineering and bought it, hoping I might learn about furniture-making techniques to use in the French antiques business I owned with my husband. At the same time, I was preparing a speech to give at a conference in the U.K. on auditor independence in the wake of the Sarbanes-Oxley legislation passed by Congress on the heels of spectacular failures of corporate governance at Enron and WorldCom.

A footnote in the engineering book stated that water-driven mills on the Garonne River in southwestern France formed the basis for the first sociétés anonymes or corporations. Perhaps if I read about the mills, I would uncover some insights into early corporate governance to include in my speech. Fortunately, there was a citation to Professor Sicard's treatise about the mill companies.

It was not easy to track the book down but eventually I found it at La Fnac, the acclaimed French retailer of hard-to-find books and recordings. La Fnac's website offered but one copy and I snagged it. Within a few days it had arrived and I dug in eagerly after meticulously cutting apart the pages (an obligation dating back to when books were sold in this antiquated form requiring buyers to make them functional).

Treatise by Germain Sicard

Professor Sicard's treatise is well worth reading, replete with scholarly detail and data from the companies' archives. He also offers an analysis of early forms of joint ownership of assets, both within France and in other parts of Europe dating from the Early Middle Ages to the 20th century, comparing and contrasting characteristics with those of the mill companies. His passion for documenting the first modern corporations leaps off the page as he details the hurdles faced by these early companies and how ingeniously the investors surmounted them despite lacking any legal construct promulgated by a government.

The companies' priority was the generation of profits to distribute to their investors. In securing these profits the companies were driven to serve conscientiously all of the other constituencies wanting something from them, including customers (the farmers whose wheat was ground into flour), suppliers (who provided the replacement parts and donkeys necessary for running the mills), employees (at a time when life was short and labor scarce), the local municipality (for which a mill represented infrastructure in time of war), the bread-eating public (who depended on the mills to produce high-quality flour), anyone reliant on the river (such as fishermen and bargemen), and a populace that took pride in the growth and prosperity spurred by the novel mill projects in their midst.

Professor Sicard draws numerous parallels to 20th century companies and speculates about the future of corporate governance at a time when socialism was sweeping across Europe and long-established enterprises were being nationalized.

Some familiar aspects of today's corporations would be startling to 14th century investors. For example, their model envisioned only individuals (personnes physiques), as opposed to corporations, investment funds, and governments, as shareholders. Outside directors were forbidden owing to concern that their priorities would not align with those of the shareholders. Members of the board were the public face of the first corporations, not management or anyone approximating the role of a modern chief executive. These early investors likely never contemplated huge publicly-traded companies, led by fêted CEOs, having hundreds of subsidiaries spanning the globe and earning revenues in the billions of dollars. They might have concluded that corporations had grown too large to be governable.

Despite some dissimilarity, the principles underpinning medieval French corporate governance remain vital for modern commercial enterprises. How they were evolved, and the sweeping changes for the better that they wrought, still merit study and engender awe.

Perhaps the most telling similarity from the perspective of today's investor may be that these first modern corporations were developed to ensure that energy was plentiful and cheap for powering the machines of commerce and improving the daily lives of the populace, all while making a profit for the owners. Over 600 years later, companies still strive to attain these goals.

In addition to my initial speech on this subject in 2003, I have published articles and made presentations with the objective of fostering recognition for these first modern corporations.*

Along the way, I have faced push-back for denying that either England's East India Company or Holland's Dutch East India Company, enterprises from a later time, was the first modern corporation. Some of these objections I attribute to Professor Sicard's treatise being in French and not available to scholars in English until 2015. It may also be that 14th century French corporations had little influence over commercial enterprises outside of southwestern France, such that the British and Dutch companies arose sui generis. None of this should negate the ground-breaking nature of the French companies as, undeniably, the first modern corporations.

*Selected articles and speeches:

Who Shall Guard the Guards? How Can Auditor Independence be Guaranteed? (Wilton Park Conference Centre and Centre for Business and Public Sector Ethics, Cambridge, Conference on Business Ethics, October, 17, 2003)

The Consequences of Sarbanes-Oxley in the U.S. and Abroad (Wilton Park Conference Centre and Centre for Business and Public Sector Ethics, Cambridge, Conference on Making Corporate Governance a Reality, May 12, 2004)

Modern Lessons from Ancient Internal Controls (Accounting Today, November 27, 2007)

No Time Toulouse? The Origins of Governance, Risk, and Compliance in Medieval France (UHY Business in the Eye of the Storm, 2008)

Roadmap to Prosperity in Medieval Archives (Letter published in the Financial Times, May 3, 2009)

Fraud Detection and Prevention in International Business (French American Chamber of Commerce of Houston, May 11, 2010)

Innovations from 14th Century France — How the World’s First Energy Companies Sparked Modern Corporate Governance and Survived for 600 Years (Rome International Conference, McGeorge School of Law, May 26, 2012)

No Time Toulouse — The Origins of Modern Corporate Governance in Medieval France (Houston's The Art of Business Luncheon Series, March 30, 2016)

This website is for information purposes only. It constitutes neither the provision of legal advice nor an offer to perform legal services.