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Three centuries of corporate governance in the United Kingdom

Journal: Economic History Review

Date: 2024

Author: John D. Turner

Abstract:
As articulated by Adam Smith, one of the central issues facing companies is that managers will not run the business in the interests of its owners and will misuse resources. This ultimately has a detrimental consequence for the wealth of the nation. This survey reviews the nature and evolution of the corporate governance of UK public companies over the past 300 years. It makes two principal arguments. First, because the separation of ownership and control was one of the rationales for the introduction of the corporate form, we should not be surprised that corporate ownership has generally been diffuse. Second, over time, the way in which owners ensure that managers act in their interests has gradually changed from a system in which shareholders monitored and exercised voice to one where there was more reliance on external forces and exiting ownership.

Link: Google Scholar

Background and Context

Corporate Governance Problem

Adam Smith identified that managers of companies may not run businesses in the interests of owners, creating agency costs that affect national productivity.

Research Focus

This survey examines three key issues: when the modern corporate form emerged, when diffuse ownership developed, and how agency problems have been addressed since 1720.

Historical Approach

By analyzing corporate ownership patterns, governance mechanisms, and regulations over three centuries, the article challenges assumptions about when diffuse ownership emerged.

Corporate Form Evolution Showing Deliberate Separation of Ownership and Control

1720 Bubble Act 1826 Banking Reform 1844 Registration Act 1855-62 Limited Liability Modern Corporation Emerges
  • The corporate form with separated ownership and control was a deliberate innovation, not an accident of history.
  • Freedom of incorporation with limited liability became available to all businesses by 1862, transforming the business landscape.
  • Separation of ownership from control was one of the rationales for adopting the corporate form.

Widespread Diffuse Ownership Existed Far Earlier Than Previously Believed

  • Even in the mid-19th century, companies had hundreds or thousands of shareholders, contradicting the belief that diffuse ownership emerged later.
  • Railway companies in 1855 had an astonishing average of 2,459 shareholders, with some having over 15,000 shareholders.
  • Many early companies deliberately engineered diffuse ownership through shareholder caps and voting restrictions to manage risk.

Ownership Remained Consistently Diffuse Throughout British Corporate History

  • Throughout 150+ years, directors typically owned less than 15% of company shares, contrary to later ownership concentration theories.
  • The largest shareholders consistently held less than 20% of shares, below the threshold for effective control.
  • Ownership concentration remained remarkably stable despite major economic and regulatory changes throughout British corporate history.

Dramatic Shift from Individual to Institutional Share Ownership

  • Individual share ownership collapsed from near 100% in the 1880s to just 12% by 2016.
  • The steepest decline occurred between 1957-1989 as institutional investors became dominant market players.
  • This transformation fundamentally changed how corporate governance mechanisms functioned and whose interests were represented.

Fundamental Shift in How Agency Problems Were Addressed Over Time

18th-19th Century Shareholder Monitoring Dividend Signals Local Knowledge 20th-21st Century Public Disclosure Exit via Takeovers Institutional Investors
  • Early governance relied on shareholders directly monitoring managers through local knowledge and stable dividends as performance signals.
  • Modern governance shifted toward reliance on disclosure requirements, shareholder protection laws, and the ability to exit ownership.
  • The first hostile takeover in 1953 marked a pivotal moment, enabling the market for corporate control to discipline managers.

Contribution and Implications

  • Diffuse ownership has been a feature of UK corporate governance since at least 1720, contrary to assumptions that it emerged later.
  • The separation of ownership from control was not an unintended consequence but a deliberate feature of the corporate form.
  • Agency problems have been addressed differently over time, moving from direct shareholder voice to reliance on institutional and external mechanisms.
  • Executive compensation has transformed dramatically since the 1980s, with questionable alignment to corporate or shareholder interests.
  • Future research should examine the evolution of CEO roles and their impact on corporate performance since 1720.

Data Sources

  • Visualization 1 is based on the description of corporate form evolution from pages 5-8 of the article.
  • Visualization 2 uses data from Table 1 on page 10, showing shareholder numbers for banks, railways, and insurance companies (1849-1879).
  • Visualization 3 uses data from Table 2 on page 12, showing ownership concentration percentages from 1855-2013.
  • Visualization 4 uses data from Figure 1 on page 17, showing the decline in individual share ownership from 1860s-2016.
  • Visualization 5 synthesizes information from pages 14-21 on the evolution of governance mechanisms over three centuries.