Much of the literature on the history of business organizations is the history of winners. It projects backward from the end of the story. The rise to dominance of the joint-stock limited corporation in the late nineteenth and early twentieth centuries led many historians to focus their attention mostly on this form of organization from as early as the sixteenth and seventeenth centuries. They neglected other forms of organization that did not win the day, assuming that the winning was in some sense inevitable from the outset. I argue that it is impossible to isolate the story of the business corporation from the stories of other forms of organization. Entrepreneurs employing these forms interacted and competed with one another in the commodities and financial markets. Lawyers, judges, and legislators shaping these forms copied features from others, and at times rejected features found to be problematic in relation to other forms. I further argue that the rise to dominance of the business corporation was not inevitable in any sense from the perspective of the year 1500 or even the year 1800. Its rise cannot be comprehended in a narrow context, by unfolding the story of the business corporation in a linear and deterministic manner.

This chapter surveys the legal framework of business organization in early modern England.

American political scientists have rediscovered what the foremost historian of the Founding Era calls “the major justification for all the constitutional reforms the Republicans proposed” in 1789, the principle “expanded and exalted by the Americans to the foremost position in their constitutionalism,” in fact “the dominant principle of the American political system” (Wood 1969:449, 604). That principle is the separation of powers.

The impetus for the rediscovery is no mystery: the continuing reality of split party control of Congress and the presidency, “divided government.” In the half century since the end of World War II, from 1945 to 1994, the Republican and Democratic parties simultaneously controlled different parts of the American federal government in twenty-eight years, 56% of the time. By the late 1980s the pattern had become the norm, and political scientists could no longer dismiss divided government as anomalous. The resulting intellectual shock was neatly captured by the title of James Sundquist's influential 1988 article: “Needed: A Political Theory for the New Era of Coalition Government in the United States.”

How could political scientists need a theory of divided government in 1988, when the American federal government had shown such a persistent tendency toward split party control – 40% of the time in the century and a half since the full emergence of the party system in the 1830s? The answer lies in the theory of American government forged around the turn of the century by the founders of modern political science in the United States. For key members of this generation, the separation of powers was not the genius of the American system; it was the problem with the system.

The preindustrial framework of business organization in England was formed over several centuries, from the late middle ages until the passage of the famous Bubble Act in 1720, and persisted up to 1844 when the process of industrialization was already well under way. This preindustrial framework allowed the formation of joint-stock corporations only by specific authorization of the State while outlawing other forms of joint-stock association. It permitted the spontaneous creation of partnerships, yet denied them the privileges of limited liability or of separate legal entity. It explicitly prohibited the establishment of new joint-stock corporations and large partnerships in the financial sectors: banking and marine insurance. After 1825, a gradual transformation ensued and the modern legal framework began to emerge. The Bubble Act was repealed in 1825; minor reforms took place in the 1830s; an Act of 1844 regularized free incorporation by registration and provided for the unobstructed formation of companies with separate legal entity and transferable shares; and, by 1855–1856, general limited liability was attached to incorporation. The framework that developed during this period is essentially the framework that prevails today.

For more than a century during which the legal framework was unchanged, between the passage of the Bubble Act and the mid-nineteenth century, England went through an economic and social evolution known as the industrial revolution, expressed in a profound structural transformation. England's population increased at an unprecedented rate, urbanization reached high levels, and new industrial towns emerged.

This chapter develops three models of veto bargaining. I begin with the second face of power, introduced in the first chapter, and develop it into a model of the veto as a presidential capacity. This model, the famous Romer-Rosenthal model of take-it-or-leave-it bargaining, supplies the theme on which all the subsequent models in this book are variations. The first variation examines the politics of veto overrides. The second explores full-blown sequential veto bargaining.

Each model in this chapter tells a story, the story of a causal mechanism. The mechanism in the first model is the power of anticipated response. The model explores how the president's veto power affects the balance of power in a separation-of-powers system. The mechanism in the second model is uncertainty. The model shows how uncertainty tempers congressional action, allows actual vetoes to take place, and shifts the balance of power somewhat toward the president. However, this model misses an important part of the politics of the veto for it cannot explain how vetoes wrest policy concessions from Congress. The mechanism in the third model is strategic reputation building, the deliberate manipulation of beliefs through vetoes. This model addresses the veto and congressional policy concessions.

Why do I present three midlevel models of veto bargaining rather than one grand model encompassing everything? To tell its story, each model isolates one or two elements of veto bargaining and then examines them extremely carefully. I could yoke several of these stories together into a kind of megamodel, much as a writer might do in a novel.

Canals. The best study of the finance of canals is by J. R. Ward. According to Ward, the capital raised between 1755 and 1815 for canal construction was £17,201,000. This figure, with the exception of the Bridgewater canal (£300,000) refers to joint-stock canals. The figure is for England alone, in current prices, and does not cover pre-1755 investment in river improvement undertakings. A somewhat higher figure of £23,998,000 can be calculated based on Ginarlis and Pollard, who based their figures on Britain, not England. For my calculations, I have used the lower figure.

Turnpikes. The best available estimate of aggregate investment in turnpikes is by Ginarlis and Pollard. A calculation, based on their annual figures, brings the total investment for the period 1750–1810 to £19,962,000. The figures are of quasi-net investment; they refer only to turnpikes and not to other roads; and they give no estimates of pre-1750 investments. The figures are for Great Britain as a whole. Ginarlis and Pollard estimated that investment in turnpikes in Wales was 5 percent of the investment in England, and those in Scotland 20 percent, which means that the figure for England should be reduced to 80 percent of the British total. The reduced figure, referring to England only, of £15,969,600, is used here.

The previous chapter outlined a theoretical approach to “unpack” firms for studying their internal policy dynamics on environmental issues. This chapter examines the evolution of the environmental function in Baxter and Lilly. It describes and compares their internal environmental policy-making structures. Both Baxter and Lilly have come a long way in developing and institutionalizing their environmental programs. Baxter's and Lilly's experiences are fairly representative of large US firms which confronted a new set of managerial challenges in the 1970s in the health, safety, and environmental spheres. Though many challenges have yet to be tackled, it is fair to say that most firms have undergone a fundamental transformation on how they relate their functioning and policies to the natural environment. This transformation, however, is uneven within and across firms and can be attributed to factors internal and external to firms. The next chapter focuses on the key events in the evolution of Baxter's and Lilly's environmental programs. These cases are examined by employing power-based and leadership-based theories

Baxter: an overview

Baxter International Inc. is a Deerfield, Illinois-based multinational corporation that develops, manufactures, and markets products and services used in hospitals and other health-care settings. On October 1, 1996, a part of Baxter International Inc. was spun off into an independent firm called Allegiance Corporation. As shown in table 3.1 below, the 1995 net sales of undivided Baxter International Inc. (henceforth Baxter) stood at $9.6 billion, and research and development expenditure at $351 million.

This project has a long history. After completing my MBA from the Indian Institute of Management, Ahmedabad, I joined Procter and Gamble's marketing department in 1989. I was a great believer in the dominant paradigm that is often taught at business schools: firms maximize profits, those that do not are punished by the market, and managers can objectively pursue profit maximization by employing tools of investment appraisal. So, armed with technocratic knowledge and naive enthusiasm, I joined Procter and Gamble that was (and continues to be) a well-regarded and profitable company. One of the things that really struck me was the role of organizational dynamics in affecting a firm's tactical and strategic decisions. The neoclassical economic theory and the various sophisticated financial and marketing techniques that I had learnt at my alma mater did not seem to have the desired relevance. I had always thought that only the functioning of governmental bureaucracies was impacted by organizational politics. How wrong I was! As I exchanged notes with my fellow MBAs across firms and functional areas, I realized that they too were having similar experiences. Broad structural factors external to firms indeed outlined a framework within which firms made decisions. Firms also seemed to pursue a loosely defined objective of “high” levels of “profits.” However, internal politics – inter-personal, inter-departmental, etc. – was important in shaping outcomes. Many projects that were pursued were clearly wrong and many “sensible” policies were not adopted. The strategies and power of key individuals mattered in shaping organizational outcomes.

Firms have indeed come a long way in designing and implementing challenging environmental programs. From resisting and challenging environmental laws and regulations, they now are willing to go beyond-compliance. However, there exist variations within and among firms on adopting beyond-compliance policies, specifically Type 2 policies, and this book examines such variations in Eli Lilly and Baxter International. The previous chapters discussed the theoretical framework and laid out the broad institutional context in which Lilly and Baxter have developed their environmental programs. I argued that the neoclassical economic theory cannot adequately explain why firms such as Lilly and Baxter selectively adopt Type 2 policies. For this we need to “unpack” the firm and examine intra-firm dynamics. To do so, I suggested employing power-based and leadership-based theories in the new-institutionalist tradition and also drawing upon insights from institutional theory and stakeholder theory.

In assessing the desirability of an environmental project, managers often have multiple objectives and varying preferences. All objectives cannot be collapsed into a single dimension – maximizing quantifiable profits – that standard procedures of project appraisal require. The book focuses on the most widely accepted procedure by US-based firms – capital budgeting. Type 2 policies create a political space for discursive struggles, where intra-firm dynamics shape managerial perceptions on the long-term benefits and costs of such policies. Profits are no longer an objective criterion that is invariant across managers. If Type 2 policies are adopted, it is due to two types of processes – power-based or leadership-based.

This book seeks to understand why firms selectively adopt Type 2 policies. At a broader level, it examines the evolution a specific genre of institutions – firm-level environmental policies. To explore the research question, it departs from neoclassical economic theory and employs a new-institutionalist perspective. Instead of treating firms as unitary actors, it views them as composites consisting of multiple managers. The ultimate unit of analysis is the individual manager within the firm.

Managers may have different preferences for Type 2 environmental policies: some – policy supporters – prioritize environmental objectives over a simple effort to maximize quantifiable profits while others – policy skeptics – do not. Once we acknowledge that some managers may pursue environmental objectives that do not or cannot meet the (quantifiable) profit criteria, firms' policies can no longer be explained as their passive responses to external stimuli, in particular, market signals and governmental regulations. Rather, policies also reflect intra-firm dynamics and it is difficult to predict ex ante whether policy supporters or policy skeptics will always prevail. The final outcome depends on a variety of factors such as policy supporters' hierarchical position, their persuasive or canvassing abilities, their expertise in the issue area, and how they invoke external factors to shape perceptions of policy skeptics. Policy outcomes are also influenced by the degree of organizational change required for the policy implementation: the greater the predicted change, the stronger the incentives are for the “losers” to oppose policy adoption. Consequently, the likelihood of policy adoption decreases.

This book examined environmental policymaking within two firms – Baxter International Inc. and Eli Lilly and Company – by exploring the internal processes that led them to selectively adopt Type 2 policies. Ten cases were examined: four common to these firms (underground tanks, 33/50, ISO 14000, and environmental audits), and one each specific to them (Responsible Care to Lilly and Green Products to Baxter). All cases pertain to policymaking during 1975 to mid 1996. Cases were selected to ensure variation on independent variables (factors external and internal to firms). Further, as advised by King, Keohane, and Verba (1994), given the small sample size, I also ensured variation on the dependent variable (policy adoption or non-adoption). This discussion is summarized in table 5.1.

Firms' environmental policies were classified on two attributes: (1) whether they meet or exceed the requirements of laws and regulations, and (2) whether or not they meet or exceed the criteria specified in investment appraisal procedures. Based on this classification, four modal types of environmental policies were identified: Type 1 (those which go beyond-compliance and also meet or exceed the profit criteria), Type 2 (those which go beyond-compliance but cannot or do not meet the profit criteria), Type 3 (those which are required by law and also meet or exceed the profit criteria) and Type 4 (those which are required by law but cannot or do not meet the profit criteria).

Though environmental problems have challenged humankind since time immemorial, policy scientists have given serious attention to environmental issues only since the 1960s. A series of industrial accidents and media events such as the publication of Rachel Carson's Silent Spring (1962) highlighted the environmental consequences of unfettered industrialization. Responding to public concerns, from the 1970s onwards, the United States Congress has enacted a series of laws stipulating environmental standards and technologies for firms. These policies were often backed by zealous monitoring and enforcement. In the 1980s the policy community and the regulatees began articulating their dissatisfaction with the inefficiencies of command and control policies, specifically questioning the capacities of governmental agencies to implement detailed regulations.

Since the late 1980s, particularly after the Rio Summit of 1992, policy-makers appear to have accepted that governmental coercion alone will not be sufficient in forcing firms to adopt environmentally sustainable policies; “right incentives” must be provided (Hahn and Nell 1982; Lee and Misiolek 1986; Baumol and Oates 1988; Oates, Portney, and McGartland 1989; Atkinson and Tietenberg 1991; Tietenberg 1992). More recently, policymakers are beginning to play down their adversarial role, and are highlighting the potential gains of collaborating with firms in developing and implementing environmental policies. Further, as opposed to a reluctance in implementing environmental laws, firms are increasingly inclined to adopt ‘beyond-compliance’ environmental policies, the ones that are more stringent than the requirements of the extant laws and regulations.

Beyond-compliance initiatives could be designed and implemented by regulators, industry associations, or individual firms.