Corporate Governance in Nineteenth-Century Europe and the USA: The Case of Shareholder Voting Rights

Why did mergers -- the consolidation of firms into giant enterprises -- prove so much more attractive in the U.S. than in Britain and France or even Germany at the turn of the century? Conventional understanding points to the economic utility of the corporation and to the distinctive incentives to choose consolidation or cartellization that were created by the way that courts and legislatures treated inter-firm cooperation in each country. But this story leaves important questions unasked about the underlying capacity of American investors to engage in consolidation in the first place. Where did American firms, facing courts and legislatures hostile to cartels, get the organizational wherewithal to pursue mergers instead? What was it that enabled them to merge with such ease? Posing such questions about the American experience raises fresh ones in the European context as well. Cooperation in cartels or similar arrangements was certainly a safer strategy in Britain, France, and Germany by the turn of the century, but, if European courts or legislatures had proven as hostile to cooperation as their American counterparts, would European firms have been able to merge with comparable ease? And, conversely, did they turn more often to cartels, because they lacked the underlaying capacity to merge as readily? This research project, preliminary results of which are presented in this paper, tackles these questions from the vantage point of power namely, the power of large stockholders to determine the choice of corporate strategy at the turn of the century. In doing so, it: a) regards incorporation not only as a response to economic demand but also as the result of distinctive national political conditions and processes; b) conceives of the firm not merely as an economic institution but also as legally-constructed polity that is peopled by "citizens" (its investors); c) looks inside the "black box" of stockholders' and directors' meetings to understand the dynamics of power relations among investors; and d) explores the impact of distinctive configurations of power on the firm's choice of strategies of growth. In particular, the study traces changes in two measures of "democratic practice" in the firm: shareholder voting rights (especially the use of graduated voting scales to limit the power of large investors) and the constitutional structure of the firm (i.e., the distribution of power between the mass of stockholders and representative institutions such as the board of directors). The core question is how changes in corporate governance in particular, a shift from democratic to plutocratic forms of governance shaped the choice of corporate strategies during the first great wave of concentration at the turn of the century. Preliminary results of research on shareholder voting rights suggest that remarkably democratic styles of corporate governance prevailed in the U.S. and Europe (i.e., Britain, France, and Germany) ca. 1830. Indeed, Anglo-America common law marked out a "democratic" extreme: if a company's charter (or articles) specified nothing different, it regarded shareholders to have one vote per person. In this period, three basic variations from this common law standard were also widely known. Defining the "plutocratic" end of the spectrum was the modern practice of giving each share one vote. This was considered downright dangerous in the late eighteenth century, and it was still relatively uncommon in the 1830s, even in the USA. The other two forms of voting rights occupied the middle of the spectrum. One took the form of the graduated voting scale, which apportioned votes according to shares but systematically reduced the power of large shareholders. The other, which could be combined with a graduated scale, was an overall cap on voting rights; this limited the number of votes that a shareholder could cast to a specific number or to a specified proportion of the total number cast (one-tenth was a common limit). Over the middle decades of the nineteenth century, it seems, these more democratic forms of shareholder voting rights disappeared much faster in the U.S. than in Europe. By the 1880s a plutocratic style of governance, in which power was directly proportional to investment, had come to dominate in the U.S., while constraints on the power of large investors especially graduated voting scales and absolute or relative caps on total votes remained more commonplace in Europe. Even in Britain the common-law practice of voting initially by a show of hands reportedly persisted through the turn of the century; only if five or more shareholders requested a "poll" did shareholders actually vote according to the voting rights specified in their articles of association (and the default until 1906 was a graduated voting scale). This divergence, together with a greater incidence of incorporation in the U.S., set the stage at the turn of the century for the "great merger movement" in the U.S. and for cartel-building in Europe. Whether companies proved much easier to take over when more plutocratic forms of governance prevailed (because control could be gained more easily) remains to be seen. But if this were so, then more democratic forms would have posed serious obstacles to mergers in Europe and therefore would have created greater incentives to cooperate in cartels.