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Published online by Cambridge University Press: 08 February 2023
As companies became larger and shareholders more numerous in nineteenth and early twentieth-century Britain, the conventional wisdom is that the free-rider problem inhibited active shareholder participation. Discontented shareholders could sell in the market, but it was long before the takeover bid mechanism facilitated the removal of underperforming incumbent boards. We show, using a sample of fifty cases in the period from 1888 to 1940, that UK shareholders overcame the free-rider problem by using committees of investigation on a sufficiently large scale to present a credible threat to board malfeasance. Although there was more to corporate performance than corporate governance, this aspect of good governance plausibly contributed to London's precocity in divorcing ownership from control in domestic companies up to World War II.
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4 This has been mainly so far attempted for the United Kingdom econometrically, generally finding positive correlations of ownership or governance rules with performance outcomes. Foreman-Peck, James and Hannah, Leslie, “Some Consequences of the Early Twentieth-Century British Divorce of Ownership from Control,” Business History 55, no. 4 (2013): 540–61CrossRefGoogle Scholar; Acheson, Graeme G., Campbell, Gareth, Turner, John D., and Vanteeva, Nadia, “Corporate Ownership, Control, and Firm Performance in Victorian Britain,” Journal of Economic History 76, no. 1 (2016): 1–40CrossRefGoogle Scholar. However, they lack explanations of the mechanisms by which shareholders influenced positive outcomes.
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10 Foreman-Peck and Hannah, “U.K. Corporate Law.”
11 Foreman-Peck and Hannah.
12 Acheson, Campbell, and Turner, “Private Contracting.”
13 Carsten Burhop, David Chambers, and Brian Cheffins, “Regulating IPOs: Evidence from Going Public in London, 1900–1913,” Explorations in Economic History 51 (Jan. 2014): 60–76; Sturla Fjesme, Neil Galpin, and Lyndon Moore, “Rejected Stock Exchange Applicants,” Journal of Financial Economics 139, no. 2 (2021): 502–21.
14 Elroy Dimson, Paul Marsh, and Mike Staunton, The Millennium Book: A Century of Investment Returns (London, 2000).
15 Guinnane, Harris, and Lamoreaux, “Contractual Freedom,” 271.
16 Fabio Braggion and Lyndon Moore, “How Insiders Traded before Rules,” Business History, 55, no. 4 (2013): 565–84.
17 Economist, 10 July 1937, 86, cited in Julian C. Franks, Colin Mayer, and Stefano Rossi, “Ownership: Evolution and Regulation,” Review of Financial Studies 22, no. 10 (2009): 4044n21.
18 Edwin Phillips, Railway Autocracy (London, 1877).
19 A search of the Economist shows five or more such inspections in only five of the next seventy-nine years.
20 Sections 56–60 of the Companies Act 1862 (25 & 26 Vict., c. 89).
21 Guinnane, Harris, and Lamoreaux, “Contractual Freedom,” 258–59.
22 Roger Coates, “Apathetic and Outmanoeuvred by Insiders: How True Was This of Stock and Shareholders in Mid-Nineteenth Century British and American Companies?” (PhD diss., University of York, 2021).
23 Richard S. Lambert, The Railway King, 1800–1871: A Study of George Hudson and the Business Morals of His Time (London, 1934).
24 See the appendix for further details on the word “frequency.”
25 Most of the twenty-one companies with shareholder numbers missing have relatively small issued capital.
26 There were no banks or railway companies, though a few COIs in these sectors occurred in a larger FT sample of one hundred companies.
27 For example, during the period 1888 to 1900, the Sheffield Independent reported on nine COIs, made up of one local savings company and two building societies, four local firms quoted on the Sheffield Stock Exchange, and two companies based in London. British Library Newspapers, Gale Primary Archive. There is thus likely to be a London-listed bias in our sample.
28 “The Helplessness of Shareholders,” Economist, 12 Nov. 1910, 460.
29 Linotype's founder and chairman resisted repeated calls for a COI in 1904, 1906, and 1907, using proxy votes as well as personal holdings to keep the rebel shareholders at bay. FT, 10 Dec. 1904, 2; 27 Oct. 1906, 2; 2 Nov. 1907, 2.
30 FT, 26 Oct. 1897, 3.
31 FT, 25 Mar. 1916, 3.
32 For example, Raleigh, FT, 21 Sept. 1898, 2.
33 FT, 25 Mar. 1916, 3.
34 Albert Baker, FT, 11 July 1914, 2; FT, 25 Mar, 1916, 3; Caledonia Copper, FT, 4 Nov. 1905, 2.
35 FT, 27 June 1914, 3.
36 Caledonia Copper, FT, 4 Nov. 1905, 2.
37 FT, 28 Feb. 1916, 2.
38 FT, 12 Oct. 1893, 3.
39 FT, 3 Feb. 1894, 3.
40 FT, 5 Nov. 1905, 12.
41 Slaters, FT, 6 Dec. 1915, 14.
42 Times, 24 Nov. 1928, 20.
43 “The Labourer's Hire,” FT, 17 Dec. 1928, 8.
44 FT, 14 Feb. 1919, 2.
45 FT, 11 Mar. 1916, 4.
46 Neuchatel Asphalte, Times, 3 Dec. 1929, 21; Provincial Cinematograph, FT, 12 Feb. 1918, 2; Aerated Bread Company, Daily Mail, 24 Feb. 1910, 2; Slaters, FT, 11 Mar. 1916, 2.
47 FT, 11 July 1914, 2; 2 Nov. 1897, 3.
48 Vickers, FT, 10 Dec. 1925, 7.
49 Forestal Land and Timber, FT, 27 June 1914, 3; B. Morris & Sons, FT, 27 Mar. 1890, 3.
50 FT, 29 May 1927, 3; FT, 9 Jan. 1924, 2.
51 Waring & Gillow, FT, 14 Feb. 1911, 3.
52 Diesel Engine Manufacturers, FT, 3 Dec. 1913, 7.
53 The shareholders of the Trustees, Executors and Securities Insurance Corporation formed two COIs, the second with members specifically constituted as inspectors under the Companies Act 1862.
54 FT, 7 Oct. 1924, 2.
55 Goongarrie United, FT, 24 Oct. 1902, 5.
56 FT, 4 Dec. 1888, 1; Birmingham Daily Post, 13 Aug. 1890, 4; FT, 24 Feb. 1890, 2.
57 FT, 21 Dec. 1898, 3.
58 FT, 6 Aug. 1904, 3: 28 Apr. 1894, 3; 3 Sept. 1903, 3; 20 Oct. 1909, 10.
59 Alexandra Hotel, 16 July 1897, 5; Dunlop, 9 Jan. 1924, 2; James Nelson, 8 May 1904, 5; East India & Ceylon Tea, 28 Dec. 1901, 3.
60 FT, 3 Sept. 1903, 3.
61 FT, 25 Feb. 1897, 4; 5 Mar. 1931, 3; Times, 27 July 1923, 19. See also the Dunlop case below.
62 FT, 24 Oct. 1902, 3.
63 Humber, Daily Mail, 25 Jan. 1909, 4; Kent Coal Finance and Development, FT, 22 Aug. 1899, 3; London Coliseum, FT, 1 Aug. 1907, 5; Dunlop, FT, 9 Jan. 1924, 2.
64 Times, 26 Feb. 1925, 19.
65 FT, 6 Dec. 1915, 14.
66 R. E. Jones, FT, 2 Mar. 1929, 5. The company was an eclectic mix of motor businesses, hotels, and shops, primarily in Wales and London.
67 Provincial Cinematograph, FT, 12 Feb. 1918, 2; Caledonia Copper, FT, 5 Nov. 1912, 5.
68 FT, Cotton Seed Company, 6 Aug. 1904, 5. The chairman was a lawyer, not an engineer.
69 Newport Abercarn Steam Coal, FT, 25 Feb. 1897, 4; Schweppes, FT, 4 Feb. 1919, 2.
70 Bradbury (World's Patent) Drill Sharpener, FT, 9 Oct. 1896, 2.
71 FT, 17 Dec. 1928, 8.
72 Albert Baker, FT, 11 July 1914, 2; Slaters, FT, 11 Mar. 1916, 4; Schweppes, FT, 4 Feb. 1919, 2.
73 FT, 16 Sept. 1922, 4.
74 FT, 9 Jan. 1924, 2.
75 Edgar Jones, Accountancy and the British Economy, 1840–1980: The Evolution of Ernst & Whinney (London, 1981), 148–49, 154–55.
76 Vickers, FT, 16 Dec. 1925, 4.
77 FT, 10 Mar. 1930, 4.
78 Baldwins, FT, 11 Dec. 1927, 3; Vickers, FT, 10 Dec. 1925, 7. The increasing involvement of professional accountants in corporate accounting and consulting is well documented in Derek Matthews, Malcolm Anderson, and John Richard Edwards, The Priesthood of Industry: The Rise of the Professional Accountant in British Management (Oxford, 1998), chap. 4.
79 As was the case for the accountant J. M. Fells, elected as director of Kent Collieries in 1905. Matthews, Anderson, and Edwards, 131–32.
80 Another factor was the growing importance of institutional investors such as insurance companies and investment trusts—increasingly significant equity investors by the 1930s and block holders if treated as a group. They became more involved in corporate governance with investment protection committees resisting board attempts—for example, to deprive preference shareholders of their rights without adequate compensation—but choosing to steer clear of business issues. FT, 11 June 1936, 9; 1 Apr. 1937, 11; 14 Apr. 1938, 7.
81 FT, 4 Dec. 1888, 3.
82 Aerated Bread Company, Economist, 12 Nov. 1910, 9; FT, 11 Nov. 1913, 5.
83 See the appendix for further discussion of this conservative estimate.
84 Although the dozen or so giant banks, railways, and industrials created by interwar mergers—firms such as Imperial Chemical Industries, Unilever, and the LMS Railway—were never, to our knowledge, targeted, the fifty in our sample averaged £1.927 million capital, while the registered British companies in the cited directories averaged only £516,000 capital in 1914 and £945,000 in 1935. Alan Essex-Crosby, “Joint-Stock Companies in Great Britain” (M.Sc. thesis, University of London, 1937), 222–23. Sixteen of our sample fifty (32 percent) had £1 million or more capital, while in the 1915 directory there were only 273 (5 percent) of that size of a total of 5,337 firms of all sizes included, so larger companies appear at more than six times the risk of COIs reported in the press (p. 230).
85 As suggested by Franks, Mayer, and Rossi, “Ownership,” and Janette Rutterford, Dimitris P. Sotiropoulos, and Carry Van Lieshout, “Individual Investors and Local Bias in the U.K., 1870–1935,” Economic History Review 70, no. 4 (2017): 1291–320.
86 Janette Rutterford, “The Shareholder Voice: British and American Accents, 1890 to 1965,” Enterprise & Society 13, no. 1 (2012): 120–23.
87 These lists were included in Standard Form E. Registered companies had to deposit Form Es in Dublin, Edinburgh, or London public registries annually, as well as offering access throughout the year to lists in their own registered office, for a set low fee. Some mailing agencies offered direct mail shots to listed holders for a fee.
88 As also noted in assessing the effect of takeover bids econometrically. Leslie Hannah and John A. Kay, Concentration in Modern Industry (London, 1974), 124.
89 Robert E. Wright, Corporation Nation (Philadelphia, 2014); see also Naomi R. Lamoreaux and Jean-Laurent Rosenthal, “Corporate Governance and the Plight of Minority Shareholders in the United States before the Great Depression,” in Corruption and Reform: Lessons from America's Economic History, eds. Edward L. Glaeser and Claudia Goldin (Chicago, 2006), 125–52. On egregious cases of earlier misgovernance, see Richard White, Railroaded: The Transcontinentals and the Making of Modern America (New York, 2011).
90 Wright, Corporation Nation, 203.
91 Review of A Comparative Study of the Law of Corporations, by Arthur K. Kuhn, in American Economic Review 3 (March 1913): 136.
92 Naomi R. Lamoreaux and Laura P. Sawyer, “Voting Trusts and Antitrust: Rethinking the Role of Shareholder Litigation in Public Regulation, from the 1880s to the 1930s,” Law and History Review 39, no. 3 (2021): 569–600.
93 New York Times, 10 Aug. 1905, and Wall Street Journal passim.
94 We made searches for both terms in the Wall Street Journal and New York Times. The term “protective committee” also proliferated in British newspapers, but largely in relation to US and Canadian corporations.
95 John Harold Sears, The New Place of the Stockholder (New York, 1929), 212.
96 Securities and Exchange Commission (SEC), Report on the Study and Investigation of the Work, Activities, Personnel and Functions of Protective and Reorganization Committees (Washington, DC, 1937), 673.
97 In Hoe & Co. in 1934, a stockholder committee gained 50,000 proxies against the management's 20,000 and compromised on electing five of six directors. SEC, Report, 806.
98 SEC, Report, 759–60.
99 In one case the $895,000 expenses exceeded the compensation wrung from Lee Higginson and other bankers for their deficient performance. SEC, Report, 822–23.
100 SEC, Report, 768.
101 SEC, Report, 861–62.
102 Lucian A. Bebchuk, “The Case for Increasing Shareholder Power,” Harvard Law Review 118, no. 3 (2005): 833–91. He perhaps underestimates early nineteenth-century US stockholder powers.
103 L. C. B. Gower, review of Shareholder Democracy: A Broader Outlook for Corporations, by Frank D. Emerson and Franklin C. Latcham, in Harvard Law Review 68, no. 5 (1955): 926.
104 L. C. B. Gower, “Some Contrasts between British and American Corporation Law,” Harvard Law Review 69, no. 8 (1956): 1372; Leslie Hannah, “Corporations in the U.S. and Europe, 1790–1860,” Business History 56, no. 6 (2014): 865–99.
105 Bebchuk notes a 1987 view that there was not “a single case in which a U.S. court has ordered a management-controlled, publicly traded corporation to increase its dividend.” Bebchuk, “Case,” 847n34.
106 Christopher Grandy, “New Jersey Corporate Chartermongering 1875–1929,” Journal of Economic History 49, no. 3 (September 1989): 677–692; Brian R. Cheffins, Steven A. Bank, and Harwell Wells, “Law and History by Numbers: Use, but with Care,” University of Illinois Law Review 2014, no. 5 (2014): 1739–64. Delaware did not require a provision enabling a shareholder veto on changes to bylaws until 1967 and, even then, did not specify a minimum threshold. Illinois allowed a shareholder vote from 1872 but did not reduce the prohibitive threshold (two-thirds) for it to succeed to 20 percent until 1919. Later US shareholder activists continued to complain about inadequate access. Janet Traflet and Robert E. Wright Fearless: Wilma Soss and the Forgotten Investor (New York, 2022).
107 See note 98 above.
108 Gower, “Some Contrasts.”
109 Jennifer G. Hill, “Who's Afraid of Shareholder Power? A Comparative Law Perspective” (unpublished paper, 2009), 17.
110 Gower, “Some Contrasts,” 1389.
111 Hill, “Who's Afraid,” 23.
112 Richard C. Nolan, “Shareholder Rights in Britain,” European Business Organization Law Review 7, no. 2 (2006): 556–58.
113 The difference in quorum size between the United Kingdom and the United States was, and still is, non-negligible, with British companies “usually” having a quorum of three and a US corporation “customarily” having a quorum of one-half or two-thirds of the voting capital. Gower, “Some Contrasts,” 1391.
114 FT, 4 Feb. 1919, 2.
115 There is also evidence of earlier access to share registers. See Armand Dubois, The English Business Company after the Bubble Act, 1720–1800 (New York, 1971), 300; Freeman, Pearson, and Taylor, Shareholder Democracies, 226–31.
116 James Taylor, Boardroom Scandal: The Criminalization of Company Fraud in Nineteenth-Century Britain (Oxford, 2013).
117 New York Post, 1904, cited in Taylor, 259.
118 William Lazonick, “Innovative Business Models and Varieties of Capitalism,” Business History Review 84, no. 4 (Winter 2010): 675–702.
119 This combination of terms gave the highest number of hits.
120 Online press searches have the usual problems of undercounting because of deficiencies in optical character recognition, and Gale determines “relevance” using the Okapi BM25 ranking. The three criteria used are the number of times the search term appears within a document, the inverse document frequency (how rare the term is within the document), and the field norm (when the term is mentioned twice, how short the separation is between mentions). The scores for each are multiplied to rank articles by “relevance.”
121 In 1883 the official list accounted for about 22 percent of all corporate securities in Burdett's Official Intelligence. Leslie Hannah, “London Stock Exchange, 1869–1929: New Statistics for Old?,” Economic History Review 71, no. 4 (2018): 1353n32; see also the following two notes.
122 By 1939 the number of corporate securities in the official list (4,425) was slightly below the 4,479 in the supplementary list. Hannah, 1353n30. Note, however, that some companies issued multiple securities. On the importance of provincial markets, see Meeghan Rogers, Gareth Campbell, and John Turner, “From Complementary to Competitive: The London and U.K. Provincial Stock Markets,” Journal of Economic History 80, no. 2 (2020): 501–30. The largest provincial market, Manchester, listed 709 corporate securities in 1895, compared with 2,315 on the LSE. Thomas Dreydel, “A Fifteen Years Record of the Stock Exchange 1880–1895,” Transactions of the Manchester Statistical Society (1896): 59.
123 A. Essex-Crosby, “Joint Stock Companies in Great Britain 1884–1934” (M.Comm. thesis, University of London, 1937). He excluded statutory and chartered companies and all Irish companies, but none of our sample were registered in Dublin (nor post-1922 in Belfast). “Registered” companies are those (relatively simply and cheaply) registered at three UK Board of Trade company registries. They therefore exclude statutory and chartered companies (those created by private act of parliament or royal charter), though one of our fifty (Metropolitan Electric) was both statutory and registered. The most significant firms thus excluded were domestic railways (all of which were statutory), though some British-owned foreign and colonial railways were “registered.”
124 Essex-Crosby noted £209,000 in 1885, rising to £263,000 in 1895 and to £324,000 in 1915.
125 Compare Table 1 of the paper with A. Essex-Crosby, “Joint Stock Companies in Great Britain 1890–1930” (M.Sc. thesis, University of London, 1937), 220–24.
126 Janette Rutterford, David R. Green, Josephine Maltby, and Alastair Owens, “Who Comprised the Nation of Shareholders? Gender and Investment in Great Britain, c. 1870–1935,” Economic History Review 64, no. 1 (2011): 163.
127 We used Burdett's Official Intelligence from its inauguration in 1882, then from 1899 its successor Stock Exchange Official Intelligence.
128 Investors’ Four Shilling Year Book (London, 1912); Committee on Industry and Trade, Factors in Commercial and Industrial Efficiency (London, 1927), 126–29.
