Shareholder Democracies?: Corporate Governance in Britain and Ireland before 1850

Citation

Grace, D. (2013), "Shareholder Democracies?: Corporate Governance in Britain and Ireland before 1850", Journal of Management History, Vol. 19 No. 1, pp. 133-135. https://doi.org/10.1108/17511341311286231

One hundred years ago, Robert Michels concluded his study of political parties thus: “It is organization which gives birth to the dominion of the elected over the electors, of the mandataries over the mandators, of the delegates over the delegators. Who says organization, says oligarchy.” All political parties, including high‐minded social democratic ones and trade unions, became oligarchical. This was Michels' famous “Iron Law of Oligarchy”.

Much of what Michels found in political parties and trade unions applies to the joint‐stock companies studied by Freeman, Pearson and Taylor. In this ambitious study, they trace the transition of the joint stock company from its eighteenth century roots in partnerships to its nineteenth century plutocratic form. In the 124 years between the Bubble Act of 1720 and the Companies Act of 1844, they found more than 16,000 records in British and Irish archives, which they sifted to create a database of 514 company constitutions. The authors calculate that this sample represents about one third of the stock companies formed in Britain and Ireland in the period. Other data – board minutes, bylaws, letter books, accounts and so on – are used to gauge how performance matched constitutional aspirations. The yield from this lode is a rich history of British and Irish joint‐stock companies and their governance in a period of immense change. The authors have a magisterial affinity with their materials, which produces an authoritative and absorbing history conveyed in impeccable English.

In the eighteenth century, public benefit was clearly part of the business purpose of joint stock companies building canals, docks and bridges. These companies were subscribed by local worthies, able to keep a watchful eye on their managers. Control tended to remain with the initiators, and the general meeting of shareholders was paramount. The executive met infrequently and usually members were rotated annually. The industrial revolution changed all that. As companies grew in size and sought state recognition through incorporation, their governance changed too, moving away from the direct participation of shareholders in the affairs of the company towards a system of representative governance through boards of directors. By the middle of the nineteenth century, shareholders were largely passive investors in enterprises no longer justified by the public good.

The authors offer what they call a “starting hypothesis” about this history, namely, that upon attaining a certain size, companies separated ownership and management, thus creating an arena for politics. Well, Michels had already declared this inevitability. Yet they also wish to show the political nature of early joint stock ventures and to draw parallels between later developments in company governance and those in local and central governments. There was a crossover in the membership of local governments and joint stock company boards, and it is likely that political mechanisms, such as regular elections and the ballot, recommended themselves to directors seeking appropriate models of governance. Other parallels are not as convincing: a property qualification for voters was supposed to be a brake on radical politics, not just an indication of fitness to hold office. In a joint‐stock concern, property might initially have been a marker of class and character, but by the nineteenth century it was also a reasonable provision for someone who might be required to meet a future call. Capitalising and sustaining a company, whether incorporated or, more likely, unincorporated, required political acuity: the recruitment of imposing subscribers, such as peers, judges and persons of local standing; the thrashing out of a constitution that offered protection to investors; the shrewd calculation of issued share capital and the denomination of shares; and, perhaps most importantly, the demonstration of public benefit. This last was the whole raison d'être of many joint stock associations, such as those for street paving and lighting, lending libraries and coffee houses, but commercial companies had to assert a public good too. Hence, the constitutions of companies were particularly important in assuring governance that would restrain directors, protect the objects of the association and reassure investors.

As democracy progressed socially, it receded in joint‐stock companies. Of course, the interpretation of historical developments in terms of democracy depends on how “democracy” is defined. The benchmark in this book seems to be direct democratic participation, as exemplified in county meetings. These permitted ratepayers, not only enfranchised property owners, to bring local office holders to account. The authors find such inclusivity a political model for early joint‐stock companies. This is an interesting connection to make, but it is questionable whether such limited political “participation” approximates democracy in any real way, and whether it is relevant to the general meeting of joint stock companies. In the latter context, the use of “democracy” is best taken figuratively rather than literally, for when pressed, political theory diverges from business.

This is not to suggest that discussions of politics detract from this work. Far from it, but pace the authors' professed intentions, the political conception of the joint‐stock company does not serve as the organising principle of this book. Formal political parallels are really subsidiary to the history of joint‐stock companies. Were they absent, the book would retain its strength. I say this not because the authors' hypothesis is wrong but because it is right. Who would deny the political nature of the joint‐stock company? Were there struggles for power between shareholders and executives as companies departed from the partnership model and assumed their modern corporate forms? Of course, but this kind of politics is not peculiar to companies with 13 or more shareholders, the threshold entity studied here. Politics happens in partnerships, in family businesses – in families. A fair reply might be that the real object of attention is the politics of constitutional, as opposed to inter‐personal, checks and balances on the executive as the power of the general meeting declined. But the authors embrace politics in all its shades. They tell many stories and drawing parallels with local and central governments is just one. The questions they ask of joint‐stock politics are far broader. Why did companies seek incorporation? What qualifications were necessary to hold stock in a company? Did women hold stock? The joint‐stock company took many forms. Banking and insurance companies differed from canal and bridge enterprises, which differed again from railways. How were these differences reflected in corporate governance?

Answers to such questions weave a rich texture of stories that resists political abridgement. Considered as part of a zeitgeist, parallels with politics are plausible, but the authors admit that they cannot find a causal link between political changes and corporate developments. The most that can be extracted from a political interpretation of corporate evolution is to probably to be found within these pages.

There is one parallel, however, for which there is ample evidence. Michels hoped that it would be possible to realise democracy in some degree, but that could only occur if his iron law and its power were recognised. If there is a political lesson to be learned from the history of joint‐stock companies, it is the truth of that observation in business as well as politics.