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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

Historical Period

This article examines 300 years of corporate governance evolution in the United Kingdom from 1720 to present day.

Core Question

The study addresses Adam Smith's fundamental question: how to ensure company managers act in the interests of company owners?

Methodology

Analysis of historical data on ownership structures, governance mechanisms, and regulatory changes across three centuries of British corporate history.

Decline in Individual Ownership Over Time

  • Shows dramatic decline in individual share ownership from nearly 100% in 1860s to just 12% by 2016
  • Reflects shift from individual to institutional investors over time
  • Major transition occurred between 1957-1981 during rise of institutional investment

Rise in Average Number of Shareholders (1849-1869)

  • Railways had significantly more shareholders than banks in mid-19th century
  • Bank shareholder numbers grew steadily from 1849 to 1869
  • Demonstrates early development of diffuse ownership structure

Evolution of Director Ownership Over Time

  • Shows fluctuating but overall declining director ownership from 1855 to 2013
  • Significant drop from 13.6% in 1855-1902 to 3.9% in 2013
  • Reflects separation of ownership from control over time

Growth in Registered Companies After Limited Liability Introduction

  • Dramatic increase in company registrations after 1855 Limited Liability Act
  • Growth accelerated particularly in 1890s
  • By 1907, over 41,000 companies were registered

Changes in Corporate Governance Mechanisms Over Time

  • Evolution from informal to formal governance mechanisms
  • Shift from direct shareholder monitoring to institutional oversight
  • Modern era characterized by market-based control mechanisms

Contribution and Implications

  • Demonstrates that diffuse ownership emerged much earlier than previously thought in British corporate history
  • Shows evolution from shareholder-based monitoring to market-based governance mechanisms
  • Highlights importance of both formal and informal governance mechanisms in corporate development

Data Sources

  • Individual ownership trend chart based on Figure 1 from article
  • Shareholder numbers visualization based on Table 1
  • Director ownership chart based on Table 2
  • Company growth data compiled from various sections in article text
  • Governance mechanisms timeline based on article's chronological analysis