Corporate Ownership and Control: British Business Transformed
Brian R. Cheffins
University of Cambridge - Faculty of Law; European Corporate Governance Institute (ECGI)
November 19, 2008
Oxford University Press, 2008
The typical British publicly traded company has widely dispersed share ownership and is run by professionally trained managers who collectively own an insufficiently large percentage of shares to dictate the outcome when shareholders vote. This separation of ownership and control has not only dictated the tenor of corporate governance debate in Britain but serves to distinguish the UK from most other countries. Existing theories fail to account adequately for arrangements in the UK. Corporate Ownership and Control: British Business Transformed accordingly seeks to explain why ownership became divorced from control in major British companies, examining how matters evolved from the 17th century through to today.
The opening four chapters of Corporate Ownership and Control: British Business Transformed provide the theoretical context for the historical analysis set out in the remaining chapters. As Chapter One indicates, ownership and control has attracted considerable attention in debates on comparative corporate governance but no single theory accounts satisfactorily for differences in ownership patterns across borders. Chapter One correspondingly argues that to understand what occurred in Britain the focus should be on three questions 1) Why might those owning large blocks of shares want to exit or accept dilution of their stake? 2) Will there be demand for shares available for sale? 3) Will the new investors be inclined to exercise control themselves? The book explains how ownership became divorced from control in large U.K. business enterprises by addressing each of these questions in historical terms.
Chapters Two to Four of Corporate Ownership and Control: British Business Transformed discuss in general terms the factors affecting the evolution of corporate ownership and control. Chapter Two outlines theories that have been advanced in the comparative corporate governance literature to explain why patterns of ownership and control differ across countries and indicate they do not account for what occurred in Britain. Chapter Three focuses on the first of the three questions that needs to be answered to explain why ownership might separate from control. Using the term the "sell side" as shorthand, the chapter surveys the factors that can prompt blockholders to dilute their ownership stake or sell their shares outright. Chapter Four, using the term "buy side" to encompass the other two questions that need to be answered to account for a separation of ownership and control, describes in general terms why UK investors bought shares in sufficient volume for control to unwind and explains why the new shareholders refrained from taking a "hands on" role.
Fully untangling the interrelationship of the determinants of ownership structure in the U.K. is intractable without some form of chronological sub-division. As a result, the remainder of Corporate Ownership and Control: British Business Transformed examines in detail for various periods particular trends that influenced patterns of ownership and control. As Chapter Five discusses, England experienced its first flurry of public offerings of company shares in the 1690s, followed by a series of promotion "waves" that caused corporate enterprise to grow in importance over time. Still, while by the mid-19th century large railway companies had emerged as pioneers of 20th century-style dispersed share ownership, progress overall was erratic, with periodic waves of enthusiasm for shares being followed by market reversals that swept away many of the new businesses.
As Chapter Six describes, during the late 19th and early 20th centuries there were various potential deterrents to buying shares in U.K. companies, such as companies legislation that offered little protection to outside investors, promising overseas investment options and company "promoters" of varying ethical standards. Nevertheless, the strong performance of shares relative to obvious investment alternatives, the inferences investors were able to draw from dividend policies companies adopted and periodic surges in investor optimism underpinned demand for shares. With the resistance of industrialists to unwinding control diminishing, numerous industrial and commercial companies made the move to the stock market. Still, while by the eve of World War I ownership had become separated from control in large banks as well as in railway companies, as Chapter Seven explains, a modern-style divorce of ownership and control otherwise remained the exception to the rule.
Chapter Eight of Corporate Ownership and Control: British Business Transformed indicates that during the interwar years changes to tax law provided fresh incentives for companies to carry out public offerings of shares and helped to foster significant growth in the number of people investing in shares. Regulatory and market factors deterring investment in foreign assets and improved quality control by intermediaries organizing public offerings of shares fortified demand for equity. In this milieu, the number of industrial and commercial companies quoted on the London Stock Exchange rose substantially and various contemporaries began referring to the widening divorce between ownership and management. Nevertheless, the available evidence suggests blockholding remained prevalent in large industrial and commercial enterprises on the eve of World War II.
In the decades following World War II, the U.K.'s ownership and control arrangements coalesced in accordance with the outsider/arm's-length pattern that currently predominates. As Chapter Nine discusses, on the sell side, tax, declining profits and tighter regulation of companies provided blockholders with incentives to exit. Chapter Ten shows that on the buy side the rise of institutional investors - particularly pension funds and insurance companies - was crucial. Personal investors, who dominated share registers prior to World War II, were net sellers of corporate equity thereafter. Robust institutional demand, fostered partly by the tax environment, filled the gap. This trend created an intriguing hypothetical opportunity for the re-concentration of share ownership around an institutional axis, but the potential for intervention went largely unfulfilled, meaning that corporate governance arrangements were firmly "outsider/arm's-length".
Various trends emerging over the past few years suggest the future of the U.K.'s outsider/arm's-length system of ownership and control is not guaranteed. These are: 1) unprecedented assertiveness by traditionally dominant institutional shareholders 2) the appearance of a new breed of intervention-minded shareholder, inclined to accumulate "offensively" sizeable stakes in publicly traded companies with the express intention of agitating for changes in corporate policy 3) high-profile private equity buyouts involving the acquisition and taking private of publicly traded enterprises. Chapter Eleven of Corporate Ownership and Control: British Business Transformed argues none of these trends is likely to disrupt existing arrangements fundamentally and maintains they may even fortify the status quo by helping to keep agency costs in check. Thus, for the foreseeable future a separation of ownership and control will remain a hallmark of U.K. corporate governance.
Keywords: ownership and control, stock markets, corporate law, investor protection, business history, blockholders, institutional shareholders, shareholder activism, private equity
JEL Classification: G23, G25, K22, K34, N23, N24, N83, N84Accepted Paper Series
Date posted: November 21, 2008
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