Corporate Ownership and Control: British Business Transformed.
Book Review by: Leslie Hannah
For Citation: Business History Review 83 (Winter 2009): 877-879.
Our understanding of the history of corporate governance and financial markets is being transformed by a new generation of scholars for whom interdisciplinary research is second nature, leading to important contributions from economists, lawyers, historians, political scientists, geographers, and sociologists. International symposia (such as the one reported in A History of Corporate Governance around the World [2005], edited by Randall K. Morck) suggest an emerging consensus that legal traditions (common or Roman) do not explain differential levels of financial development, and that hindsight-driven conventional wisdom about historical differences among stock markets is seriously deficient.
In that tradition, Brian Cheffins (a Canadian law professor in Cambridge, England) presents a new and impressive analysis of the development of British corporations, from their early origins as organizations dominated by “insider” block-holders to their present widely dispersed share ownership (largely by institutional investors), overseen by boards that now have only modest holdings. Britain’s strong contemporary commitment to the separation of ownership from control, he notes, is both highly unusual (it is matched only in the United States; even Canada and Australia lag in this dimension, while most of the world retains extensive block-holding) and not clearly desirable (he robustly asserts his objective as explaining what happened and when; not as deciding whether or not this outcome was a good thing, on which he simply notes the evidence is mixed).
Four initial chapters review the theoretical and empirical literature, focusing on the “buy” side (Who were the investors and what motivated them to invest?) and the “sell” side (Why were block-holders willing to give up their apparently advantageous position?). The subsequent chapters apply this framework to analyzing change over a period of more than a century, which he divides into time spans as follows: the pre- 1880 period, 1880–1914, 1914–1939, and 1940–1990. The result is a comprehensive and balanced account of the relevant developments in British corporate and tax law, stock-exchange listing rules, savings behavior, investment-banking practice, accounting norms, alternative investments, and business performance. (Any researcher of these topics should turn to the excellent index and also peruse the footnotes, which form a helpful, critical guide to this, now extensive, literature.) Among other conclusions, Cheffins finds tax laws important in dispersing stock holdings, while viewing investor-protection laws as less so. His systematic and chronologically consistent treatment has real merits. At times, the argument may seem unnecessarily complex, but the reader experiencing impatience should keep in mind that ensuring that companies are governed by wise, honest, trustworthy, reputable, transparent, professional, informed, shrewd, and correctly motivated directors is not a simple problem to which we know the answer. (If we did, the world would not be as mired as it currently is.)
Chapter seven explicitly extends my own analysis of the divorce of ownership from control (in Business History, July 2007), in which I argued that the separation had, in 1900, advanced furthest in Britain and France, while both U.S. and German companies remained more personally managed. Cheffins greatly expands my points, strengthening them in parts, and qualifying them constructively in others by, for example, pointing to the less dispersed ownership of the thousands of firms whose ordinary shares, though not officially listed, were traded. He accepts that railway and bank shares had become widely dispersed in nineteenth-century Britain (and then accounted for the bulk of the listed equity capitalization of most stock exchanges), but takes particular exception to my conclusion on the industrial sector (where listings were everywhere a more recent development, and personal ownership was accordingly everywhere more common). He undertakes a detailed and convincing analysis of shareholdings in Britain’s fifteen largest quoted industrials of 1912, from which he triumphantly concludes that dominant board block-holdings remained ubiquitous before 1914. Since our samples considerably overlap, it would be extremely fishy if his results differed as markedly from mine as his presentation implies. In fact, they do not. By my reckoning, the cases he presents reveal a median board shareholding of 33 percent of corporate equity. This figure, and my own self-confessed “guesstimate” for 1,900 listed industrials of 33 percent, do not present a gap that I would call wide! The difference between us on industrials, it turns out, is mainly in presentational rhetoric: is 33 percent large or small? My cross-section focus led me to observe that board ownership in 1,900 British industrials was “modestly below” that in equivalent U.S. and German firms (where the available data for the largest firms suggest board block-holdings of around 50 percent). On the other hand, given his central theme, he understandably emphasizes the point that board block-holdings in British industrials were much larger before 1914 than in later decades (when they fell to 10 percent and below). Whether our views are correct must be left to others to judge, but they are perfectly mutually consistent.
In his last chapter, Cheffins discusses whether recent developments, such as the growth of private equity, will reverse the trend toward increased separation, concluding that they will not. This fine survey is a definitive contribution to British business and legal history, but it can also be enthusiastically recommended to anyone trying to understand long-run developments in financial markets and corporate governance elsewhere.