The company we keep says a lot about us

Even with accounting scandals like those at Adelphia, Enron, Tyco, and now Royal Ahold in the headlines, John Micklethwait and Adrian Wooldridge tell us that the "most important organization in the world is the Company: the basis of the prosperity of the West and the best hope for the future of the rest of the world."

This somewhat grandiose language might suggest that these two editors at The Economist magazine have written an apologia for the shortcomings of business, but they have not. In their satisfying primer, "The Company: A Short History of a Revolutionary Idea," the authors realize that the evolution of the concept of the company has been one of fits and starts.

At their best, companies have harnessed the desire and opportunism of entrepreneur, manager, and employee alike to create the railroads, the personal computer, and the Internet. At their worst, they have fallen prey to avarice. Subsequent bubbles have popped in spectacular failures such as that of the Mississippi Company in France and the South Sea Company in England in the early 1700s.

Even when companies have created new economic battleships, their waves have left numerous bankruptcies in their wake. (The Internet debacle is hardly unprecedented: More than 700 railroads gave up the ghost during the last quarter of the 19th century.)

The authors insist that companies have helped found modern America for better - and worse. Through the history of this innovative idea, companies have pulled people to the big cities for work, inspired the creation of labor unions and antitrust law during the more exploitative periods, galvanized opposition to their often cavalier attitude toward the environment, and posed "questions about inequality and meritocracy." And, of course, they've produced great wealth for some.

The tug of war between economic success and failure places companies firmly at the nexus of an ongoing controversy: "To whom does the Company belong?" This "agency problem," the potential conflict of interest between the principals who own companies and their agents who run them, has haunted companies during their entire history, note the authors.

The recently passed Sarbanes Oxley bill in part tried to deal with this agency problem by making corporate officers personally accountable for the veracity of their companies' financial statements, an approach at odds with the concept of "limited liability" and one with which the European Union disagrees. Those governments that have sought to impose restrictions often have found that they stifled the competitiveness of their countries.

When terms like "corporation" and "big business" have become synonymous with entrenched interests, it may come as a surprise that the concept of the company was once considered radical. John Stuart Mill argued that the idea of "limited liability" central to the company would help those who did not otherwise have the capital to establish large scale ventures.

Since then, company structure has varied from country to country. Companies in Germany and Japan have existed to serve "society," while their American and English counterparts have chased profits, say their critics.

Much of that criticism has to do with the size multinational corporations have attained, argue Micklethwait and Wooldridge. Large corporations are perceived as exploitative, since the antiglobalization movement usually associates these corporations with large countries such as the United States, though we are starting to see examples, albeit still few, from countries such as Finland and Taiwan.

Those who fear size, however, close their eyes to the fact that large corporations remain vulnerable to smaller companies adept at shifting market paradigms. Red Hat and Lindows, for instance, battle Microsoft as they seek to draw converts away from Windows. And it was not that long ago that Microsoft itself usurped the technology throne from International Business Machines.

Finding themselves less nimble, the large corporations themselves have sought "to unbundle" their businesses to refocus on "core competencies." Additionally, such whales are vulnerable to growing activism from institutional investors and corporate raiders.

At the end of the day, companies secure their "franchise from society," argue Micklethwait and Wooldridge. Unsuccessful and corrupt companies are often punished by the marketplace. That said, the authors of this remarkably efficient little book do not fully delve into how such market discipline might not always give solace. Their history of the concept of the company is complete and facile, but it glaringly fails to explore the fact that when these corporate whales go belly up, they often take down shareholder and stakeholder alike.

• Wayne E. Yang is a private equity professional in New York. His writing has appeared in The North American Review, The Asian Review of Books, and A. Magazine.