Early Development of Corporate Structure – Song Dynasty China

Hello Everyone,

I am writing this post to share more information on how other civilizations & cultures moved toward the corporate form. In this case, I’d like to highlight the early development of corporate structure in the Song Dynasty (960-1279) that we briefly touched upon in class. Please note that most of the information I am sharing here is from Chinese sources, and I am providing a rough translation & paraphrasing of what I have found. As I am not an expert in ‘old Chinese’ (a style of writing that is very distinct from modern Mandarin or Cantonese), I cannot guarantee the accuracy of my translation beyond a genuine effort to understand some of these manuscripts.

A Brief History:

Many would characterize the Song dynasty as the most prosperous economy of its time during the 11th century. The Song dynasty saw a greater acceptance of the merchant class than in earlier periods of Chinese history. Rather than being seen as a parasite to a predominantly agricultural society, Song incorporated the merchant class into its economic engine by implementing a version of sales + travelling tax for all merchants (usually 5% before corruption). Furthermore, the imperial state loosened its grip on critical productions such as milling, metallurgy, and alcohol, allowing large merchants to partner with state actors to facilitate production and delivery. Combined with the rise of urbanization, maritime trade, and a general increase in population flow, economic activity during the Song Dynasty observed a tremendous period of prosperity. Thus, this economic vibrancy gave rise to many ‘intelligent merchants’ who sought to take advantage of this financial opportunity by forming early embryos of our modern corporate form.

The Basics:

For the most part, there are three common ways ‘corporations’ are formed in this period in China:

1. Party A and Party B (and maybe C, D, E…) pool their resource together to start a business venture. All parties own a percentage of the business and share its profit/loss
   1. Parties may co-manage the business, or
   2. The Parties may rotate/take turns managing the business, or
   3. Hire a professional manager (CEO)  to run the business
2. Party A (with capital) and Party B (with skill or connection) join together to start a business
   1. Both Party A and Party B own a piece of the business
   2. Both Party A and Party B share the profits to a pre-arranged percentage cut
3. A combination of the first two

Please note that all of these collaborations/associations are Unofficial. The Song Dynasty had no written statute or adopted common law that governed or applied to any formal requirements for forming these joint business ventures or companies. As a result, these companies exist almost purely on a contractual basis and often without written records, as literacy is a luxury (10-15%). These transactions happen frequently upon no more than a piece of paper stating the transacted amount and its purpose. This informal nature created many opportunities for fraud and dispute, which were extremely difficult for local officials to settle as they did not understand the nature of the dealings (Business law is not a required course in the Civil Service Exams). Consequently, most companies are only formed by people with kinship ties or long-standing relationships. Even then, it is a widespread cause of conflict, especially when interests in a company are being passed down to successors.

Some Examples

1. In 1201. many wealthy merchants pool their capital together to run a Loan-Shark business. The merchants (Board) will run the business on a ten-year rotation. During each decade, a merchant (Director) will oversee the business. The actual daily operations of the business are delegated to a group of professional accountants, managers, and thugs (to enforce the loan).
2. In 1140s’, merchants worked with smugglers to begin a maritime tea smuggling operation. Profits were paid out based on capital investment, risk incurred (usually punishable by imprisonment, disfigurement, or conscription to be canon fodder), and connection (to pay off corrupt officials)
3. Merchants form a company with shipowners to ran an export business of spice and luxury goods. Both parties own a piece of the business and profits are divided accordingly. The merchants is involved in the operation of the trade but only provides capital and supply.
4. In 1050, A merchant, relying on his massive land holdings, started a company that will serve as a family Trust. The beneficiaries were designated descendants of the family and the property of the company is to be managed in a way to provide for the beneficiaries. The family rule (company charter) stated that no one is allowed to dispose of the property of the family other than for rental purposes.

Why it Failed (Or Stagnated)

As good as it sounds in this period, the development towards the corporate form as we know today is eventually halted. The most prominent obstacle is the absolute state control in an imperial governing system and the lack of official support to distribute liabilities and regulate operations. For the most part, a company is successful if it can enlist the government (often through bribes) to help enforce its contracts. On the other hand, there is little preventing the local government to nullify the entire arrangement or to rule unfavorably in an unfair manner when it suits the interest of the arbitrators. Furthermore, the imperial government never allowed for the separation of liabilities or limited liabilities. When the business goes under or faces bankruptcy, each interest holder is often individually responsible for the downfall in their personal capacity, with punishments ranging from a heavy fine to elimination of the entire family tree.

http://economy.guoxue.com/?p=2398&page=2

https://www.21jingji.com/article/20230726/herald/0cd568a1f42441727d5caff33998119c.html

https://finance.sina.cn/2023-03-22/detail-imymtrua9952302.d.html?from=wap