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The ‘Divorce’ of ownership from control from 1900 onwards: Re-calibrating imagined global trends

2007; Taylor & Francis; Volume: 49; Issue: 4 Linguagem: Inglês

10.1080/00076790701295821

1743-7938

Leslie Hannah,

Global Financial Crisis and Policies

Abstract In 1900 US business corporations were dominated by plutocratic family owners, while British and French quoted companies showed higher levels of divorce of shareholding owners from management controllers. Distinctive European 'democratic' corporate governance rules explain some of Europe's precocity and London's distinctive listing requirement of large 'free floats' was an important initial factor in manufacturing. Later in the twentieth century, the United States displaced France by further divorcing ownership from control. Business historians should direct their efforts to understanding why Britain was an early pioneer with persistent wide shareholding, why America took decades to catch up and why other countries did not build on their earlier lead (or even married ownership and control more closely). The pursuit of alternative (largely imagined) histories of national ownership differences could usefully be curtailed. Keywords: Ownership and ControlShare OwnershipFamily OwnershipManagerial CapitalismCorporate Governance Acknowledgements I am grateful for advice to commentators at Helsinki, Tokyo and Wharton workshops and to Youssef Cassis, Colleen Dunlavy, Edwin Green, Colin Mayer, Ranald Michie and Horst Wessel, without implicating them in the conclusions drawn. Notes 1 Crosland, Future; and Dahrendorf, Society, for the political response; Landes, "French Entrepreneurship"; Kindleberger, Economic Growth; and Chandler, Scale, for representative historians. 2 Currencies have been converted to 1900 $US at precise contemporary exchange rates, though the rounded $5 = £1 rate is later used as appropriate (for example, in describing £10 shares as worth 'around $50'). 3 Although they then had separate, different and changing technical meanings in various countries, I use the terms 'stocks' and 'shares' interchangeably in the modern mid-Atlantic sense, and use the term 'equity' as a shorthand for common stocks/ordinary shares alone (though preferred stocks – usually fixed interest and often non-voting – are technically also equity, not debt). 4 Davis and Cull, International Capital Markets, 38. 5 Goldsmith (Comparative National Balance Sheets, 326) estimates the total value of all US assets in 1900 at $150 billion. 6 Davis and Cull, International Capital Markets, 71; Anon, "Sociétés," 394–399. 7 The thousands of working men in England who owned shares in Lancashire textile mills were a rare exception and not paralleled in Fall River, Massachusetts, see Thomas, Provincial Stock Exchanges, 147; Yonekawa, "Comparative Business History," 79, 92. 8 Ingall and Withers, Stock Exchange, 58; Lowenfeld, Investment, 85. 9 Leroy-Beaulieu, L'Art, 56. 10 Greenwood, American and Foreign Stock Exchange Practice, 773. 11 Fear and Kobrak, "Diverging Paths," 16. 12 Even in the Illinois Central, which especially encouraged small shareholdings, the average American was higher than the average British holding, see Huebner, "Distribution," 65. 13 Veenendaal, Slow Train, 155–163; Burton and Corner, Investment and Unit Trusts; McKendrick and Newlands, "F & C." 14 Hannah, "Corporate Finance," suggests the United States had the least reliance on equity and the most on debt securities, followed by the UK, France, then Germany. 15 Jones, Evolution, 30. 16 Berle and Means, Modern Corporation, p. 17. 17 Board of Trade, Return. 18 Neymarck, "Statistique," 134. 19 Hawkins, "Development," 145. The higher figures sometimes quoted can usually be traced to Warshow, "Distribution," whose methodology is obviously flawed by double counting. 20 Huebner, "Distribution," 66–68, 77. 21 All nominal values. Ibid., 66–68; Neymarck, "Uhe Statistique Nouvelle Sur le Morcellement," 31. The British figure is for 1902, the French for 1895. 22 Huebner, "Distribution," 70–71; Neymarck, "Statistique." 23 Dunlavy, "Corporate Governance." Jordan and Gore-Brown (Handy Book, 25), say that it was possible to subvert such provisions by registering the additional shares in the name of nominees 'and this cannot be prevented'. I have not found significant examples of this happening in western Europe, though Singer Manufacturing did use nominees to subvert the intention of a similar Russian law and maintain voting control of its Russian subsidiary, and such tactics were occasionally used in Japan (Miwa and Ramseyer, "Corporate Governance," 199). 24 The main British exceptions are in small local lines, such as the Liverpool, Southport and Preston Junction Railway. 25 Author's calculations from the directors' qualifying stockholdings disclosed in annual reports, 1894–1906, with the largest disclosed at any date taken as the actual 1900 holding. 26 This was also the voting structure in the (optional) model clauses of the British Companies Acts, though most industrial companies struck them out and substituted a one-vote-per-share rule. 27 Caron, Histoire, 275–277. By 1911/1912, the largest 10 shareholders held less than 3 per cent of the shares. 28 Dunlavy, "Corporate Governance"; Lyon, Capitalization, 129–135. 29 In France this had already led to the creation of six geographical monopolies in the 1880s; in Britain the process ended with the enforced creation of four regional monopolies by 1921. 30 The main difference between the modern takeover bid and the turn-of-the-century US version was that there was no formal bid to all shareholders simultaneously and equally: the technique was to approach known large holders for their shares and/or to buy in the market. Stockholder inertia sometimes rendered the latter ineffective, making direct negotiations with the board the favoured recourse, see the details of the 1900/1901 takeover of the Burlington & Quincy in Meyer, History, 16–17. 31 Van Oss, American Railroads, 236. 32 Klein, Union Pacific, 87. 33 Dozier, History, 145–146. 34 Anon., Manual of Statistics 1901, 156; Ripley, Railroads, 523; Klein, Union Pacific, 88–89, 169. 35 Van Oss, American Railroads, 11. See also Morris, Railroad Administration, 123–124, where he substitutes 'aristocratic' for 'autocratic'. 36 Pyle, Life, 142–153; Meyer, History, 12; Hidy et al., Great Northern Railway, 135. Later before the Pujo Committeee (Report, 1993), Hill's disclosed holding was less than 2 per cent though he still expected his son to succeed him. 37 Cleveland and Powell, Railroad Finance, 272–321, is a clear discussion of corporate control and consolidation in pre-war US railroads. 38 Leonard, "Decline," 2. 39 Hayes, Iron Road, 151–152. 40 It is sometimes said that a market for corporate control did not develop until after World War II. There were occasional cases in many countries at this time, but the clearest exception is US railways, see, for example, the contest for control of the Louisville & Nashville in Meade, Corporation Finance, 278. 41 Mott, Between the Ocean, 201. In his evidence to the Pujo Committee, Morgan explicitly likened the effect of the voting trust to that of European voting structures. 42 Lowenfeld, Investment, 35–36; Barker and Robbins, London Transport, 60. 43 Baruch, My Own Story, 166. 44 E.g. Crédit Lyonnais, the Commercial Bank of Scotland, and the Union of London & Smith's Bank. 45 Clapham, Bank, 273, 279, 283. 46 Stockholders' registers for 1892–1902; supplementary registers for 1899–1902 (Bank of England archives, Acc 27/553–556); Anon, List. 47 Neymarck, "Statistique," 138; Bulletin de Statistique, 1902, 374. 48 Jefferys, Business Organisation, 387; Cassis, Banquiers, 87–91. 49 Holmes and Green, Midland, 101, 118; Midland Bank archives, Acc 0591 031–044; letter from Edwin Green, HSBC Group Archivist, 21 February 2006. Felix Schuster, of the National Provincial, also resisted large stockholdings. 50 Neymarck, "Statistique," 138. 51 For these and other US banks see Pujo Committee, Report, 1888–1894, 2897. 52 Cleveland and Huertas, Citibank, 90–104; Vanderlip, From Farm Boy, 263–266, 302–303. 53 Lamoreaux, Insider Lending, 135–150. 54 Augustine, Patricians, 30; Fohlin, Finance Capitalism, 84; Ziegler, "Strukturwandel." 55 Passow, Die wirtscaftliche Bedeutung, 199. 56 On trust companies, see e.g. Carosso, Morgans, 620. The 1905 Armstrong investigation showed extensive plutocratic influence over this and other closely controlled insurance companies and insider lending abuses. 57 North, "Life Insurance," 216, n.32. 58 Boyce, Information, 226, 232. 59 Carosso, The Morgans, 483. 60 Jordan and Gore-Brown, Handy Book, 229–234, 272–274. 61 London's settlement system was also said to be more discouraging of corners. The system of special settlement of new and as yet unlisted shares (a function provided by the curb in New York) also took place under stock exchange supervision in London. 62 Thomas, Western Capitalism, 74. 63 Bernheim and Schneider, Security Markets, 256; Goyens, Opérations, 9. 64 Huebner, Stock Market, 135, 138. 65 Dorian, Du Ponts, 169; Chandler and Salsbury, Pierre S. Du Pont, 53, 211–213, 252–254, 294–295. 66 Unless, of course, one is of the opinion that majority family ownership dominance was, as Sellars and Yeatman would have put it, a very bad thing. 67 Guildhall Library, London, manuscripts section MS 18000. I searched the 1890–1910 files randomly, and targeting known 'family' firms, but found only one exception (of 39.5 per cent vendor retention) in file 30B/86 (Bechuanaland Exploration, 1892); no reason is given in that file. 68 Listing file 29B/147. 69 Listing file 73B/69, for the example of Waygood, the lift manufacturer; see also Investors Review (1 December 1900, 682) for the level of Chamberlain family ownership of the munitions company, Kynoch. The UAC file was temporarily unavailable for this research. 70 Lazonick, "Controlling the Market," 449–451; Farrell, Elite Families, 155; Passer, Electrical Manufacturers, 323. Charles Coffin, the president of GE, alone held 25 per cent of the stock, by virtue of his ownership of the Thomson-Houston half of the 1892 GE merger, and other directors were also substantial stockholders. GE had only 2,900 stockholders in 1900 and did not match the shareholder numbers of widely-held 1900 British industrial companies until the 1920s. 71 Listing file 125B/821. 72 In Payne's list of 17 large breweries ("Emergence," 542), only five issued ordinaries to the public. The British figures in Table 1 include only firms whose ordinary shares were listed, not the firms with other listed securities. 73 Gourvish and Wilson, British Brewing Industry, 263. 74 The exceptions in 1905 among the 37 non-brewery, quoted companies in the extended Payne list were Imperial Tobacco, Lever Brothers, British Westinghouse (George Westinghouse retained voting control, while raising fixed interest capital in London), Waring & Gillow (furniture) and Maple & Co (another furniture company, which, unusually, issued 200 management shares with controlling votes). 75 Dennison and MacDonagh, Guinness, 16–23, 30, 201. It was also permitted to board members to subscribe cash in the two-thirds public subscription. 76 Franks et al., "Spending." An example of board ownership rising above the threshold by this method was Coats' 1896 payment in shares for acquiring Clarks, some of whose directors joined the board. Acquisitions of listed companies by unlisted ones could also permit partial quotations without their board giving up majority ownership, as in the 1902 case of Barclays' acquisition of York Union (however, trading rights were not extended to the Barclays families' shares, until they later reduced their holdings). 77 Michie, London and New York Stock Exchanges, 121, and compare p. 408 above. 78 Warshow, "Distribution," 24. Other figures above 5,000 for 1900 are AT&T (7,535, a company in which large holdings were relatively low), Western Union (9,134, though despite this large number, the Goulds had board control), American Car & Foundry (7,747); and several railroad companies. National Biscuit had 7,000 stockholders in 1906, Pullman 7,744 in 1901. Federal Steel, US Leather and other companies probably would also qualify, though precise data is lacking. Quite small UK companies – like the Illustrated London News, with 9,000 in 1900 – could have shareholder numbers equivalent to these (Economist, 17 Feb. 1900, 237). 79 Eichner, Emergence, 266. 80 George Pullman had owned only 16 per cent of the shares when he died in 1894 and they were then dispersed among his heirs (Buder, Pullman, 210). However, the company was later spoken of as under Vanderbilt control: they acquired large share interests and board positions on selling Wagner Palace Car to Pullman in 1899. 81 Letter to shareholders, 17 July 1901, bound with company reports in Guildhall Library. 82 Dreier, Power, 51–52; Warshow, "Distribution," 24. 83 Listing file, 161B/150; Bureau of Corporations, Report, 119, 202. 84 Moody, Manual. There were some large individual holdings – the six Carnegie partners alone had 17.7 per cent of the common, 19.9 per cent of the preferred and 100 per cent of the bonds – but only two of them were on the board. 85 Schisgall, Eyes, 51–57. 86 Hannah, "Hollywood History." 87 Davies, "International Operations," 62–63; Davies, Peacefully Working, 95. 88 15 December 1900, as quoted in Davies, Peacefully Working, 108. 89 Hidy and Hidy, Pioneering, 310, 313, 322, 628, 756 n.14, 757 n.23. Shareholder numbers increased from 3,500 in 1899 to 6,078 by 1911, but ownership remained concentrated for some time longer: the 91 represented at the 1899 meeting held 68 per cent of the shares and in 1911 the 110 largest holders held 75 per cent. 90 McCormick, Century, 118; Bureau of Corporations, International Harvester, 5–9, 19–20, 82, 86–87, 158, 162; listing file 125B/821; International Harvester, Annual Report, 1908, 20; Commercial and Financial Chronicle, 13 June 1908, 1470. 91 Marcosson, Anaconda, 90–93. 92 Hoyt, Guggenheims, 193–194, 207–209. 93 Baruch, My Own Story, 196–199. 94 Cleland, History, 12, 151, 155, 275. 95 Brown, Baldwin Locomotive Works, 97, 123, 216. 96 Lex, in Financial Times, 22 December 2006, 12. 97 Goldsmith, Study, 501. In this quiet period for mergers, probably most of the residual here is retained by vendors and promoters rather than issued for acquired shares in mergers. 98 Lévy-Leboyer, "Large Family Firm," 215, 231 n.5; idem, "Hierarchical Structures," 453. 99 For example, roughly equivalent US chemical/glass firms – Procter & Gamble, Du Pont and Pittsburgh Plate Glass – are dominated by one or two families. 100 Freedeman, Triumph, 95; Bouvier et al., Mouvement, 273. 101 Bonin, Suez, 76. 102 Franck, "La Politique." 103 Leroy-Beaulieu, L'Art, 295. 104 See Perrot's analysis of 153 bourgeois families' investment income (Le Mode, 245–246). 105 The classic tale is Landes, "French Entrepreneurship." Kinghorn and Nye ("Scale") and Smith (Emergence) suggest a reassessment. 106 Augustine, Patricians, 32. 107 Siemens, History, 192–197, 329–330; Joly, "Ende." 108 Manchester, Arms, 207. 109 Franks et al., "Origins," 38. See also Fohlin, Finance Capitalism, 122–124. 110 James, Family Capitalism, 119–135; see also Wellhőner, Grossbanken. 111 Information from Prof Horst Wessel, Mannesmann Archive. 112 Abelshauser et al., German Industry, 34, 118–119. 113 Phillips, Railway Autocracy. 114 Grinling, "Position," 60; see also Van Oss, "The 'Limited Company' Craze." Compare Jensen, "Eclipse." 115 Neymarck, Finances Contemporaines, and regular articles in Le Rentier. 116 Berle and Means, Modern Corporation, 309; Keynes, End, 42–45; see also Liefmann, Unternehmungsformen, 52, 87–88. 117 Chandler (in Scale and Scope) asserts the relative national incidence of 'personal capitalism' on the basis of liberal – and apparently quite arbitrary – sprinkling of adjectives like 'personal', 'family', and 'professional' about his narrative. The nearest Chandler came to (seriously comparative) quantification of board membership/shareholding was in Chandler and Daems, eds., Managerial Hierarchies. It is revealing that the British contributor to that volume (who should have known better) actually measured the proportion of boardrooms with at least one personal owner or family director among the top 200 British companies at 55 per cent, while others simply asserted that this was rare in Germany and the USA. A check of their published lists against the Handbuch der deutschen Aktiengesellschaften and Moody's Manual suggests that their assertions would not survive the same quantitative test. An excellent, critical discussion of some of the issues is Crouzet, "Business Dynasties." Unfortunately, Chandler's deserved prestige has led many economists and legal scholars to assume that he was right, on this as on many earlier issues, and that his findings apply across stock markets rather than to the quoted industrial sector to which his erroneous claims were confined. De Long ("Did J. P. Morgan's Men") and Cheffins ("Mergers") are egregious examples of attempts to explain why what did not happen on London and New York must have happened. Such exercises, necessarily, involve impressive ingenuity. 118 Clarke and Trebilcock, Understanding Decline. 119 Hannah, "Marshall's Trees"; Lamoreaux et al., "Against Whig History." 120 Wellhoff, Etude, 95–96. 121 März, Austrian Banking, 87. 122 Miwa and Ramseyer, "Corporate Governance," 180; Miwa and Ramseyer, "Banks,"143. 123 Hallberg, Suez Canal, 140–142, 403 n.1; Lesage, L'Achat, 201–208; Bonin, Suez, 55–56, 64, 176. 124 Hongkong & Shanghai Banking Corporation, Report for the Half Year to 31 December 1899; Jones, British Multinational Banking, 41. 125 Listing file 18000/30B/87. This was a substantial (£1 million) new venture. Unlike modern markets, London (and Paris, Brussels and Berlin) in the nineteenth century were also venture capital and start-up markets, at least for large overseas mining and public utility ventures. 126 Davis and Huttenback, Mammon, 196, 202–203. 127 Henriques, Marcus Samuel; Jones, Banking, 26–31. 128 Holderness et al., "Were the Good Old Days," 441–442. 129 La Porta et al., "Corporate Ownership," 492–495. See also Faccio and Lang, "The Ultimate Ownership." 130 Holderness et al., "Were the Good Old Days"; Berle and Means, Modern Corporation, 357–359; Herman, Corporate Control, 66; Burch, Managerial Capitalism. 131 Many of the studies of long-term trends exclude the transport and finance sectors, which dominate the 1900 stock exchange picture. 132 As, of course, did Berle and Means. Other countries, including the UK, also further divorced industrial ownership from control in the twentieth century. 133 Holderness et al., "Were the Good Old Days." 134 Desai et al., "Taxation"; Hawkins, "Development," 145. 135 Smith and Sylla, "Transformation," 16. 136 Unless state-owned enterprises are considered to be owned by citizens/taxpayers, in which case AT&T was the least widely held of the major world telecoms operators. 137 Rajan and Zingales, "The Great Reversals"; Gueslin, "Banks," 68–73. 138 La Porta et al., "Law and Finance." 139 Albert, Capitalisme. 140 Colli, History. 141 For a balanced assessment, see Iwai, "Nature." Additional informationNotes on contributorsLeslie Hannah Leslie Hannah is professor of Economics at the University of Tokyo and Directeur d'Etudes Associé at the Ecole des Hautes Etudes en Sciences Sociales, Paris.