The Past Speaks

Andrew Smith (Coventry University) & Kevin Tennent (University of York)

The fifty years before the First World War have been dubbed the ‘golden age’ of globalization.  Judged by the relative importance of international capital flows, the world in 1914 was more globalized than it is today. Britain was a major exporter of capital and London was a financial  hub that attracted company promoters from across the globe. British savings helped to  transform the economies of many regions. Although most British investment abroad took the  form of portfolio investment (e.g. the purchase of government bonds), some British capital was sent overseas through the purchase of shares in companies that had been incorporated in Britain. These firms included, among others, Free Standing Companies (FSCs), which had head offices in Britain and all of their productive assets overseas. Our paper examines shareholder revolts and protests in British companies with overseas operations in the period 1850 to 1914. Relations between managers and shareholders were sometimes very tense. The annual general meetings of such companies are therefore of interest to cultural historians of power, representation and the public sphere. Moreover, the evolution of investor relations within these companies was influenced by the broader social context, which included the gradual democratization of Britain’s political sphere and shifting ideas about foreigners. In some cases, shareholders were convinced that the directors, who were their agents, were not acting in their best interests. Shareholders felt particularly disadvantaged when parts of the company’s operations were overseas: unless a shareholder was willing to incur the massive costs of travelling to the overseas operation, the managers had a near monopoly of useful information. The informational asymmetries stemming from distance made FSCs and early multinationals (MNEs) fundamentally different from those limited liability firms whose shareholders were located in the same community as the primary asset. This paper undertakes a number of case studies and examines the strategies employed by boards to improve the perception of governance in FSCs and MNEs. It concludes that, although investment was to some extent a form of entertainment for investors, boards were typically able to win investors over by investing in the professionalization of management and providing a clear and predictable reporting structure. This paper is based on a range of primary sources, including company annual reports, investors’ manuals, newspaper accounts of company AGMs, and  pamphlets. These published sources have been supplemented by archival materials, including. These published sources have been supplemented by archival materials.

Previously, it had been relatively easy for shareholders to monitor their investments in companies, since most companies were owned by shareholders who lived close to the firm’s main asset. Shareholders who directly observed mismanagement were able to raise the issue  at general meetings. The emergence of companies with assets in distant countries changed the power relationship between shareholders, directors, and managers and raised new corporate governance issues. Our project will involve examining how the growth in the number of British companies with overseas operations affected the British system of corporate governance. Corporate governance denotes the systems by which companies are controlled.  Since the advent of the limited-liability company, a complex set of rules has evolved to protect the interests of shareholders and, in some jurisdictions, other stakeholders as well. The rules of corporate governance are designed to promote transparency, accountability, equity and efficiency relations between managers, the board of directors and the shareholders. Our paper covers the period from the passage of the Joint Stock Companies Act of 1856 to the First World War, which disrupted the global economy and dramatically curtailed the level ofBritish investment overseas. The 1856 law is widely regarded as a key development in the history of British company law. By making the registration of limited liability companies much easier, it contributed to the rapid growth in the number of corporations in the British economy in the second half of the nineteenth century. The rights and duties of managers and shareholders were modified by statutes in 1862 and 1908, important court cases and evolving norms and customs. We know that some of the crucial court cases related to British FSCs. In other instances, shareholder discontent with managerial decisions manifested itself in rebellions in general meetings and other forums. Our paper investigates the impact of shareholder-manager disputes related to FSCs and multinationals on the evolution of corporate governance in Britain more generally. The period under consideration witnessed the development of a norm, later codified in law by Justice Thomas Warrington, that shareholders did not have a right to interfere with the actual management of the company. It is our view that the development of this norm was connected to the growth in the number of companies with overseas assets.