Governance structures and market performance

Contractual Freedom and Corporate Governance in Britain in the Late Nineteenth and Early Twentieth Centuries

by Timothy W. Guinnane (Yale), Ron Harris (Tel-Aviv University), and Naomi R. Lamoreaux (Yale)

Abstract: British general incorporation law granted companies an extraordinary degree of contractual freedom. It provided companies with a default set of articles of association, but incorporators were free to reject any or all of the provisions and write their own rules instead. We study the uses to which incorporators put this flexibility by examining the articles of association filed by three random samples of companies from the late nineteenth and early twentieth centuries, as well as by a sample of companies whose securities traded publicly. Contrary to the literature, we find that most companies, regardless of size or whether their securities traded on the market, wrote articles that shifted power from shareholders to directors. We find, moreover, that there was little pressure from the government, shareholders, or the market to adopt more shareholder-friendly governance rules.

Business History Review, Volume 91 (2 – Summer 2017): 227-277.


Review by John Turner (Centre for Economic History, Queen’s University Belfast)

Tim Guinnane, Ron Harris and Naomi Lamoreaux are three scholars that every young (and old) economic historian should seek to emulate. This paper showcases once again their prodigious talent – there is careful analysis of the institutional and legal setting, a lot of archival evidence, rigorous economic analysis, and an attempt to understand how contemporaries viewed the issue at hand.

In this paper, Guinnane, Harris and Lamoreaux (GHL) examine the corporate governance of UK companies in the late nineteenth and early twentieth centuries. The UK liberalised its incorporation laws in the 1850s and introduced its first Companies Act in 1862. From a modern-day perspective, this Act enshrined very little in the way of protection for shareholders. However, the Appendix to the 1862 Companies Act contained a default set of articles of association, which was the company’s constitution. This Appendix, known as Table A, provided a high level of protection for shareholders by modern-day standards (Acheson et al., 2016). However, the majority of companies did not adopt Table A; instead they devised their own articles of association.

The aim of GHL’s paper is to analyse articles of associations in 1892, 1912 and 1927 to see the extent to which they shifted power from shareholders to directors. To do this, GHL collected three random samples of circa 50 articles of association for 1892, 1912 and 1927. Because most (if not all) of these companies did not have their securities traded on stock markets, they also collected sample of 49 commercial and industrial companies from Burdett’s Official Intelligence for 1892 that had been formed after 1888. However, only 23 of these companies had their shares listed on one of the UK’s stock exchanges.

GHL then take their samples of articles to see the extent to which they deviated from the clauses in Table A. Their main finding is that companies tended to adopt governance structures in their articles which empowered directors and practically disenfranchised shareholders. This was the case no matter if the company was small or large or public or private. They also find that this entrenchment and disenfranchisement becomes more prominent over time. However, GHL unearth a puzzle – they find shareholders and the market appeared to have been perfectly okay with poor corporate governance practices.

How do we resolve this puzzle? One possibility is that shareholders (and the market) at this time only really cared about dividends. High dividend pay-out ratios in this era kept managers on a short leash and reduced the agency costs associated with free cash flow (Campbell and Turner, 2011). Interestingly, GHL suggest that this may have made it more difficult for firms to finance productivity-enhancing investments. In addition, they suggest that the high-dividend-entrenchment trade-off may have locked in managerial practices which inhibited the ability of British firms to respond to future competitive pressures and may ultimately have ushered in Britain’s industrial decline.

Another solution to the puzzle, and one that GHL do not fully explore, is that the ownership structure of the company shaped its articles of association. The presence of a dominant owner or founding family ownership would potentially lessen the agency problem faced by small shareholders. In addition, founders may not wish to give too much power away to shareholders in return for their capital. On the other hand, firms which need to raise capital from lots of small investors on public markets may adopt more shareholder-friendly articles. The vast majority of companies in GHL’s sample do not fall into this category, which might go some way to explaining their findings.

A final potential solution is that the vast majority of firms which GHL examine may have raised capital in a totally different way than public companies, and this shaped their articles of association. These firms probably relied on family, religious and social networks for capital, and the shareholders trusted the directors because they personally knew them or were connected to them through a network. Indeed, we know precious little about how and where the multitude of private companies in the UK obtained their capital. Like all great papers, GHL have opened up a new avenue for future scholars. The interesting thing for me is what happens when private firms went public and raised capital. Did they keep their articles which entrenched directors and disenfranchised shareholders?

Unlike the focus of GHL on mainly private companies, a current Queen’s University Centre for Economic History working paper examines the protection offered to shareholders by circa 500 public companies in the four decades after the 1862 Companies Act (Acheson et al., 2016). Unlike GHL, it takes a leximetric approach to analysing articles of association. Acheson et al. (2016) have two main findings. First, the shareholder protection offered by firms in the nineteenth century was high compared to modern-day standards. Second, firms which had more diffuse ownership offered shareholders higher protection.

How do we reconcile GHL and Acheson et al. (2016)? The first thing to note is that most of Acheson et al’s sample is before 1892. The second thing to note is that in a companion paper, Acheson et al. (2015) identify a major shift in corporate governance and ownership which started in the 1890s – companies formed in that decade had greater capital and voting concentration than those formed in earlier decades. In addition, unlike companies formed prior to the 1890s, the insiders in these companies were able to maintain their voting rights and entrench themselves. This corporate governance turn in the 1890s is where future scholars should focus their attention.


Acheson, Graeme G., Gareth Campbell, John D. Turner and Nadia Vanteeva. 2015. Corporate Ownership and Control in Victorian Britain. Economic History Review 68: 911-36.

Acheson, Graeme G., Gareth Campbell John D. Turner. 2016. Common Law and the Origin of Shareholder Protection. QUCEH Working Paper no. 2016-04.

Campbell, Gareth and John D. Turner. 2011. Substitutes for Legal Protection: Corporate Governance and Dividends in Victorian Britain. Economic History Review 64:571-97.


One thought on “Governance structures and market performance

  1. Naomi Lamoreaux

    Response from Timothy Guinnane, Ron Harris, and Naomi Lamoreaux:
    We would like to thank John Turner for his generous comment on our article, “Contractual Freedom and Corporate Governance in Britain in the Late Nineteenth and Early Twentieth Centuries.” We have learned an enormous amount from him and his co-authors over the years and greatly value his response to our article. We do, however, want to clarify a few points. First, we want to emphasize that the methodological innovation of our paper was to move beyond the additive indexes of corporate governance (leximetrics) that are standard in the literature and focus instead on how interactions among a set of the most consequential governance rules affected the distribution of power within corporations. We applied this method to the articles of association drafted by a broad range of British registered companies and found that, whether the companies were small and closely held or large and publicly traded, shareholders were to an extraordinary extent disenfranchised and indeed had little ability to monitor—let alone check—directors’ decisions. We were initially surprised and puzzled by our findings, given the contrary view in the literature, but we ultimately concluded that the governance practices we uncovered are really only puzzling if one views them from the perspective of present-day theory. We found no indication that shareholders at the time found these arrangements problematic. Rather, they seemed to have welcomed the chance to buy shares in entrepreneurial ventures and showed little interest in involving themselves in company affairs. Similarly, we found no evidence that regulators thought governance issues required attention, though they were then taking vigorous steps to curb fraudulent offerings of securities to the public. In our concluding paragraph, we speculate that entrenchment may have negatively affected companies’ ability to respond to competitive challenges, but we also conjecture that it protected managers from shareholder demands that constrained their capacity to innovate. By ending the paragraph with the first alternative, we may have given the reader the impression we favored that view. Our intention, however, was simply to underscore the need for additional research.
    Second, it is possible, as Turner suggests, that governance rules were endogenous in the sense that “the ownership structure of the company shaped its articles of association.” Given the variation in ownership patterns across firms, our samples are not large enough to study this question in the regression framework that would be required. What we can say, however, is that the director-friendly governance rules we observe were if anything more likely to be adopted by large public companies. That is, our findings are exactly the opposite of what Turner supposes in his comment. For example, more than 90 percent of companies in our sample of traded companies (versus more than 60 percent of the firms in our general 1892 sample) wrote provisions into their articles that enabled members of the board to name themselves managing directors, take control of their own remuneration, and in most cases exempt themselves from having to face reelection during terms of office that they themselves set and could extend indefinitely. On the other hand, formal entrenchment—that is, the practice of naming specific people in the articles as directors for life—seems to have been more common among firms in the middle of the size distribution, so that in this instance there may be an interesting relationship to ownership structure that would benefit from further study.
    Third, it is also possible, as Turner suggests, that shareholder-friendly corporate governance was not perceived to be necessary because investments were solicited through networks of trust. Again, we would emphasize that we find director-friendly provisions in companies with thousands of shareholders as well as in those whose securities were closely held, but clearly there is more work to be done on this issue, as Turner justly points out. We would, however, stress the need for studies that look beyond the relatively small number of large companies whose securities traded on the exchanges. After 1907 British companies could elect to organize either as public or private companies, and the vast majority chose the latter alternative, so that by the 1920s private companies constituted more than 90 percent of all new registrations. Companies opted to be private to avoid having to conform to laws that regulated public offerings of securities, but they did not give up the possibility of raising capital externally. To the contrary, many solicited funds by private placement through intermediaries. We know almost nothing about these firms, how they attracted capital, or how their governance rules affected their performance. Yet it is precisely these firms we must study if we want to understand both the “tech sector” of the time and the relationship, if any, between corporate governance and British economic decline.


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