Shareholder Democracies?: Corporate Governance in Britain and Ireland before 1850 addresses a central issue. Current governance structures often allow managers to pursue their own interests. According to some, a dissemblance of democracy has led to “elitism and self-interest in the boardroom,” resulting in higher monitoring and bonding costs, as well as residual losses caused by a divergence of interests.
Freeman, Pearson and Taylor explore the evolution of corporate governance from a time when most shareowners were not only interested in making a profit but also in the wider benefits their enterprises would bring to the economy where they lived. This public interest, as opposed to a strict maximization of private profit, was also a shared concern as corporations were established in the United States.
The authors focus on the shift from participatory democracy to “virtual” representation of shareowners by managers and directors. Legal developments weighed one-person-one-vote systems against one-share-one-vote, tried to address corruption, amateur administration, nepotism, etc. without burdensome state regulations. Mechanisms of the state were used to ensure against speculation, monopoly and fraud, but also against universal suffrage, progressive taxation and social welfare. Familiar themes resound corporate governance shifts from “voluntarism” and participation to executive powers claiming virtual representation of passive investors.
It is interesting to witness how subcommittees were established to essentially run companies, how the terms of directors began to stretch out, how security posted by managers moved to bonding, how authority moved to one-party rule and self-electing boards. Complaints of the time lend color to the evolution of corporate governance, such as those of Herbert Spencer:
Retiring directors are so habitually re-elected without opposition, and have so great a power of insuring their own election when opposed, that the board becomes practically a close body.
Just as public offices were limited to men of property, so were directorships in corporations. The notion that substantial character equated with good character led to a situation where higher and higher property qualifications were demanded until increasing “fraud by undeniably affluent directors had led to much skepticism about the automatic right of the wealthy to rule and to the floating of meritocratic ideas.” It reminds me of arguments today that CEOs or former CEOs make the best directors.
Even back in 1825 we can see cries against conflicts of interest, multiple directorships, nepotism, etc. on boards. We also see controversy over how directors were paid – too little resulted on poorly attended board meetings – too much and they were accused of corruption. General meetings became less important over this period as more and more powers were vested in the CEO.
We can also see the historic shift from early economic investment in strategic businesses that created enabling infrastructure to speculative investment and the rise of a rentier class… especially after railroading and banking drew investments from wider geographic areas, creating growing secondary markets. Directors increasingly saw the benefit of attracting speculators as shareholders, rather than investors with interests in the business that extended beyond maximizing profits.
Between 1720 and 1844, requirements such as connections with the company, place of domicile, approval by other shareowners etc., declined from conditions of ownership at 53% of companies studied to 12%. Limited liability, of course, accelerated the emasculation of shareowner rights. Diminished obligations led directly to diminished rights as even such rights as the ability to declare dividends and audit the books moved from the general meeting (GM) to the board. In general, it appears that most shareowners were happy to renounce various powers, as long as they also lost obligations.
Large companies became more “professional,” less participatory, with less accountability of directors. They also pioneered use of the ballot, “a privatized voting process,” “in an attempt to control the GM as a forum of political debate.”
The authors argue convincingly that corporations began the late 18th century as much political entities as municipal corporations or voluntary societies. However, while the state increasingly came under democratic reforms, corporations were largely reconceptualized as private institutions, cleansed of participation by their shareowners.
In this thoughtful study of a decisive period in history, we see the beginning of legal theories that have led us to the Citizens United decision. While in the political sphere, we gradually moved from systems that included slavery – where people were considered property – to a situation where property, in the form of corporations, now has the rights of people.
In such a world the increasing power of corporations and their ability to externalize costs has catastrophic consequences, such as those inherent in global climate change. With shareowners no longer able to regulate their own companies, increased government intervention becomes a necessity – moving us directly into today’s debates about the role of government – nanny state or everyone on their own? Private ordering or regulation on a global scale?
Most of us are trying to avoid either extreme. That might be easier if corporations were more directly accountable to their shareowners. Unfortunately, most institutional players are so conflicted their incentives are to keep the current system going, no matter how dysfunctional. I keep coming back to the need to engage individual investors through organizations such as the United States Proxy Exchange.