A Re-interpretation of UK Corporate Law and Corporate Governance before 1914

A new EHES Working paper by James Foreman-Peck and Leslie Hannah 

Companies were the principal institution through which investment was channelled into the nineteenth and early twentieth century economy. The close cross-country correlation of company numbers and GDP around 1910 is therefore no surprise (figure 1). In the top right of the figure are the United States and other regions of recent European settlement. Just below them, and almost as intensive in companies per head of population, is one of the largest and certainly the richest of the ‘old’ countries, the United Kingdom.

Figure 1. Companies and GDP 1910/1913

Although companies created opportunities for higher productivity and income in nineteenth century Britain they also were an unprecedented chance for fraud and misappropriation of shareholders funds by unscrupulous directors. In Victorian literature dishonest companies and their officials abound  –  Charles Dicken’s Anglo-Bengalese Disinterested Loan and Life Assurance company (Martin Chuzzlewit 1844) and  Anthony Trollope’s financier Augustus Melmotte in The Way We Live Now (1875) are instances.

Satirical cartoons in periodicals pilloried crooked and predatory directors – figure 2 represents the law as the giant killer of a joint stock banker. These concerns might reflect the widespread damage that such companies wrought. But given the correlation noted in figure 1 it seems more likely that public concern gave rise to a regulatory framework that controlled such potential damage. Yet the consensus among legal and economic historians is that British law between 1844 and 1914 provided little protection to corporate shareholders. We contend that the consensus is mistaken.

Figure 2. Cartoon satirising speculation and fraud in joint stock companies, from 1858. 

Until towards the end of the nineteenth century, statutory companies accounted for the great bulk of capital quoted on UK stock exchanges. These companies were subject to the Companies Clauses Consolidation Act (CCCA) of 1845 that required substantial shareholder protection. The Act prescribed corporate governance and liability rules for all subsequent statutory incorporations in 164 model clauses. Hence the traditional view that legal compulsion played no role in nineteenth century British corporate governance is only sustainable for the companies registered under the much laxer Companies Acts. Yet we find evidence that even these companies usually voluntarily adopted governance rules that were very similar to those compelled by the CCCA for statutory companies. The professionals guiding registered companies through the process of initially offering shares to the public probably were “nudged” by the earlier legislation and the default table A of the Companies Acts. The role of law in spreading good corporate governance practices in British quoted companies therefore has been underestimated.
Shareholder protection by corporate governance is now sometimes summarised by “anti-director” rights. The CCCA rules score quite highly on this index. Clause IX allowed attendance at general meetings of shareholders whose names were on the register, without the deposit of shares , scoring one on the index. In contrast to the lax Companies Acts, shareholders under the CCCA had rights to new shares if existing shares stood at a premium to par value (clause LVIII), increasing the score to two. Holders of at least one-tenth of the share capital  could requisition an extraordinary general meeting, if the directors failed to do so within 21 days of a formal request (clause LXX), increasing the score to three. Proxy votes were routinely allowed, if the nominated proxy was also a shareholder (clause LXXVI), raising the score to four. Tiered or cumulative voting rules were probably intended to protect minorities against majority oppression (raising the score to 5), though there are other interpretations.

UK statutory companies under the 1845 CCCA then generally scored four or five out of six on the anti-director rights index. This was a level not legally required in the UK registered company sector until the last quarter of the twentieth century. Moreover boards of CCCA companies wishing to modify their statutes had to obtain parliamentary approval, deterring directors from attempting prejudicial changes and giving shareholders an opportunity to lobby against them. The obligatory provisions for removing directors and calling extraordinary general meetings also made boards reluctant to introduce major strategic moves without consulting a shareholders’ meeting.

Turning to registered companies, our investigation considered changes actually made in their articles of association before applying for stock exchange official listing. These show company promoters recognised that encouraging good corporate governance brought advantages for raising capital. Articles of association of large registered companies submitted to the London Stock Exchange Listing Committee show high scores on the anti-director rights index, even though the Companies Acts did not require it. The freedom to attend meetings without prior share deposit and proxy voting were universal in our large quoted sample, and only two companies failed to provide for minority rights to call a meeting. Pre-emption rights were more varied, but the general requirement for shareholders to permit any increase in capital usually gave those without explicit pre-emption rights the power to insist on them as a condition of any issue. Thus many registered companies scored four (or, on a stricter interpretation of pre-emption rights, three) on the anti-director rights index.

In the complex Victorian commercial society an (endogenous) culture of business morality and reciprocal trust, as well as the long arm of the law both played roles in creating an efficient business environment. That they did so was among the reasons why the London Stock Exchange remained the largest in the world before 1914. Their joint effectiveness also explains why numbers of companies with ownership substantially divorced from control was comparable to those of today. Nineteenth century British ‘anti-director’ protections for shareholders were not as different from today’s as legal analysts have suggested.

This blog post was written by:
James Foreman-Peck and Leslie Hannah, both at Cardiff University
The working paper can be downloaded here: https://www.ehes.org/EHES_72.pdf