Personal Capitalism and Corporate Governance

British Manufacturing in the First Half of the Twentieth Century

Myrddin John Lewis, Roger Lloyd-Jones, Mark David Matthews

• Publisher: Routledge
• Year: 2016
• Print ISBN: 9780754655879
• eBook ISBN: 9781317081968
• Topic: History
• Subtopic: World History
• Index: History

This book is specifically aimed at addressing a gap in the study of the evolution of corporate governance in Britain. In particular its key theme, the relationship between corporate governance and personal capitalism in British manufacturing in the first half of the twentieth century, provides the means for a systematic and critical examination of the dominant Chandlerian paradigm that the long-running persistence of personal capitalism shaped the governance of British manufacturing firms well into the twentieth century and acted to erode their competitive performance. The book helps to identify those aspects of corporate governance that have undergone change, with some critical observations on the magnitude of change and those aspects which have displayed characteristics of continuity. The empirical spine of this book is set out in a series of case studies which provide the basis for the examination of corporate governance in Britain during the period c. 1900 to 1950. By focusing particularly on the responses of a range of businesses to the turbulent environment of the inter-war years, this volume offers an insight into a much neglected, yet vital, area of business and economic history.

Chapter 1
Introduction: Corporate Governance, Personal Capitalism, and British Manufacturing in the First Half of the Twentieth Century

Introduction

An examination of corporate governance involves a study of the ‘the institutions that influence how business corporations allocate resources and returns. [A] system of corporate governance shapes who makes investment decisions in a corporation, what type of decisions they make, and how returns from investment are distributed’.1 In Britain, limited companies have been an increasingly important part of economic activity since the 1855 Limited Liability Act, but it is only more recently that there has been an increasing interest by academics in the historical evolution of corporate governance.

Writing in 1984, Tricker argued that interest in the issue of corporate governance appeared to be of recent origin, perhaps because ‘In the past there seemed little challenge to management’s prerogative to run the company unimpeded, no demand for independent supervision or disclosure, no intervention in matters of accountability, no questioning of corporate power and legitimacy, little interest in involvement or participation in management decisions.’2 More recently, Sheikh and Chatterjee have claimed that while corporate governance is a well recognised concept in Australia, New Zealand, the USA and some European countries, ‘it has received hardly any attention in Britain, primarily because of the traditional view maintained by the [corporate governance] system that directors are responsible to maximise profits for their shareholders, as the interests of the latter are paramount to directors’.3 Corporate governance, according to Keasey, Thompson and Wright, was ‘a term that scarcely existed before the 1990s’, a decade which forms the starting point of their discussion.4

The analysis of governance structures ‘is not simply a gimmick or … an intellectual fashion or an ideological tool’, but is a topic ‘high on the agenda of [the] business historian’.5 It deserves this place because of its crucial importance in understanding important issues associated with systems for internal promotion of executives, the distribution of profits to executives and shareholders, and the accountability of the directors to stakeholders within the organisation.6 These are features of a company’s culture which help determine the performance of top management in setting the strategic direction of the firm, building the core capabilities of organisations, and responding to changes and to business adversity.7

The decades since 1990 have seen a growing concern in the UK with the significance of corporate governance for business performance, resulting in extensive debates about its regulation. The financial scandals of the 1980s and 1990s ‘coincided with the privatisation of nationalised industries and the actions of governments in rolling back regulatory market mechanisms’.8 Examples in Britain during the 1990s included the 1990 downfall of Polly Peck, a diversified conglomerate whose chief executive promptly fled to Northern Cyprus to avoid extradition; the closure in 1991 of the Bank of Credit and Commerce International, described in 1999 as then the ‘biggest fraud in world history’;9 the discovery of huge losses in the pension fund of Mirror Group Newspapers in 1992, soon after the death of its chief executive, Robert Maxwell; and the 1995 collapse of Barings, one of the oldest British banks, with losses of over £800 million. Distrust of the Anglo-American system of corporate governance intensified with the Enron and WorldCom collapses of 2001–02. The UK reaction was a series of initiatives to regulate governance via regulatory codes produced by a variety of City institutions, addressing the issues of financial reporting and accountability, directors’ remuneration and the role of the board of directors, and drawn together in the Combined Code of 1998.10 The ‘comply or explain’ principle of corporate governance set out by these codes stressed the voluntary nature of good corporate governance practice in the UK. Regulatory codes were backed by increasingly detailed standards for accounting disclosure,11 and by the Companies Act of 2006, ‘the longest Act ever passed,’ intended, according to a Government minister, to ‘support stronger shareholder involvement and promote a long-term investment culture’.12

The global financial crisis of 2008 – ‘arguably the greatest crisis in the history of finance capitalism’13 – again drew attention to the role of corporate governance, in particular in the financial services sector. The Turner Review of 2009 called for reconsideration of the quality of financial services regulation, and a move from a system of supervision that trusted in the ability of the market to correct itself and of senior management to ‘make appropriate decisions’.14 Turner recommended a ‘more intrusive and more systemic’ supervisory approach with much closer regulatory involvement in ‘published accounts and accounting judgements, with far more intense contact with bank management and auditors on these issues’.15 It remains to be seen whether reaction to the quality of financial services governance will trigger a generally ‘more intrusive and more systemic’ regulation of corporate governance in general.

As suggested in the preceding brief overview of recent changes, corporate governance is an evolving practice, and one whose changes reflect wider issues in business history: corporate governance is seen as implicated in economic success or failure, so that part of public reaction to an economic crisis is a call for reform of governance practice. This book is specifically aimed at addressing a gap in the study of the evolution of corporate governance in Britain. In particular its key theme, the relationship between corporate governance and personal capitalism in British manufacturing in the first half of the twentieth century, provides the means for a systematic and critical examination of the dominant paradigm of Alfred D. Chandler that the long-run persistence of personal capitalism shaped the governance of British manufacturing firms well into the twentieth century and acted to erode their competitive performance.16

Our examination of corporate governance in Britain covers the period c. 1900 to 1950, chosen because it focuses particularly on the responses of business to the impact of two world wars and the turbulent business environment of the inter-war years. A range of organisational types are considered, from the family-controlled firm to the operation of personal capitalism within large holding-company structures.

Financial reporting and corporate governance

The Limited Liability Act, 1855, and the Joint Stock Act, 1856 represented major changes in the legal status of companies, but despite regulation the UK continued to have ‘the most permissive commercial law in the whole of Europe.’17 For companies in general, other than utilities, insurers, and building societies, there was no requirement to make an audited balance sheet available to shareholders until the 1900 Companies Act. It was not until the Companies Act of 1929 that companies were required to publish a profit and loss account, and only the Act of 1947 required audit. There were continuing difficulties until 1947 because of this low level of information, as well as the lack of disclosure about the performance of subsidiaries within a group and the opportunity that was afforded directors to camouflage reserves. Brooks identifies, for instance, fifteen major financial scandals in Europe and the USA in the 1920s and early 1930s, which included in Britain the notorious Royal Mail Steam Packet case, revealing how secret reserves could be used to conceal profit or make transfers between profitable and less successful years.18 Other than observing dividend performance over a number of years, investors had little chance of gauging profitability or of making fair comparisons between different companies. The major force for disclosure before the statutory requirements of the 1947 Act was the Stock Exchange, which in 1939 required that companies must produce a consolidated balance sheet and profit and loss account in order to be allowed to issue new securities.19

Given this absence of statutory regulation, the amount disclosed by the manufacturing companies studied in this book and any changes made in their voluntary disclosure are therefore revealing as an indication of the directors’ willingness to highlight or downplay aspects of corporate performance. Hence the level and type of disclosure are symptomatic of the relationship of directors with shareholders and other interested parties. Some directors of large British holding companies during the inter-war years, for example, admitted their reluctance to disclose information to stakeholders. Arthur Chamberlain, for instance, the chairman of Tube Investments, a diverse holding company, announced at the company annual general meeting (AGM) in 1935 that he did not disclose the company’s entire profits: the decisive accounting policy was to reveal ‘so much as we consider will make a pretty balance sheet’.20 At Unilever, Britain’s largest holding company in the inter-war years, the chairman Francis D’Arcy Cooper, giving evidence before the Greene Committee on company law in 1925, asserted that consolidated balance sheets would convey no meaningful information to shareholders:

The incorporation of a statement purporting to be the balance sheet of a holding company of the assets and liabilities of other legal entities, would not, in my opinion, be a true statement of the position of the holding company … It would be a conglomeration of figures, futile as an aid to any person desirous of understanding the true position, and, as far as it was taken seriously misleading’.21

There was some pressure within the accounting profession for companies to improve disclosure, because investor confidence was undermined by uninformative accounts,22 but representatives of major firms were prepared to support the status quo because uninformative accounts defended ‘the best interests of shareholders themselves’.23

A low level of financial disclosure raises the question why a historical study of corporate governance should engage with financial reporting. If reporting were fundamentally misleading, it could be argued that it should not be included in a historical study – this should be confined to information from other sources, about the management and shareholders, about the performance of the company’s products, the evidence of its investment in new plant and technology, its place in business networks and so on. The ‘insider’ shareholders who wanted information need not necessarily rely on the published accounts – they could use personal contacts with the board to find out what they wished to know in much more detail, and the modern historian should attempt to follow the same trails. These are r...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Contents
• List of Tables
• Acknowledgements
• General Editor’s Preface
• 1 Introduction: Corporate Governance, Personal Capitalism, and British Manufacturing in the First Half of the Twentieth Century
• 2 Raleigh and the Bowdens: Personal Capitalism and Business Performance, 1887–1939
• 3 Hadfields Ltd: Personal Capitalism, Boardroom Culture and Corporate Governance
• 4 Losing Trust: The BSA Board and Corporate Governance, 1900–1939
• 5 Alfred Herbert Ltd: The Individualistic Element in Corporate Governance and the Legacy of Personal Control
• 6 The Relationship between Companies and their Shareholders: Greenwood & Batley and Hadfields
• Bibliography
• Index