The Rise and Fall of “Shareholder Supremacy”: A Business History Perspective
The Rise and Fall of “Shareholder Supremacy”: A Business History Perspective
- Steven TomsSteven TomsLeeds University Business School, University of Leeds
With shareholder supremacy, the board is accountable to all shareholders, including minorities, enforced by restrictions on managerial opportunism. The market for corporate control and scrutiny of diversified institutional investors provide the mechanisms for disciplining managers to act in shareholders’ interests. Along with legal protections for minorities, these mechanisms ensure the supremacy of shareholders as a stakeholder group. Shareholder value maximization, as a theory and a set of financial techniques, provides quantitative outputs that drive managerial behavior. From a historical perspective, shareholder supremacy is a late twentieth-century phenomenon according to these definitional characteristics. History also reveals that shareholders have exercised dominance in other ways and that their power as a stakeholder group has waxed and waned over time as the governance role of investors has changed. Shareholder supremacy can be asserted in a number of ways. Shareholder activism and transparent structures of accountability are sufficient conditions in some circumstances. The suitability of this model is dependent on market structure and favored where there are local monopolies or businesses that have a narrow scope of activities. Alternatively, shareholders as active institutional investors can play a dominant role utilizing the market for corporate control. Collaboration with board insiders committed to expansion by takeover and merger is crucial to the success of this model. Finally, and most recently, the complementary presence of the market for corporate control, diversified institutional investors, and minority protection underpins present-day shareholder supremacy. In this model, the use of a common valuation technique is crucial. History reveals differing routes to shareholder supremacy, which have followed from developments in the institutional structure of regulation and changes in shareholding patterns.
- Business Law
- Business Policy and Strategy
The shareholder supremacy perspective came to prominence in the corporate governance literature of the late twentieth and early twenty-first centuries. According to this view, the board is accountable to all shareholders, thus protecting them from managerial opportunism and preventing majority shareholders from exploiting minorities (Huse, 2007, pp. 20–21).1 The implications are that restrictions on managerial opportunism, exercised through the market for corporate control and diversified institutional investment, together with minority protections, are necessary conditions for shareholder supremacy. However, history shows that these conditions only apply in a narrow set of circumstances.
In the later twentieth century, the realization of these conditions has been associated with promoting shareholder value maximization, a mathematical modelling approach, designed to suit the decision needs of portfolio investors. According to one interpretation, the rise of shareholder value was a response to the separation of ownership and control, identified by Berle and Means in 1932, and the associated agency costs (Berle & Means, 1932; Jensen & Meckling, 1976). Such a story is consistent with a shift from managerial to shareholder dominance occurring in the second half of the twentieth century.
However, history reveals a more nuanced interpretation, which this article explains in detail. The article examines the origins of shareholder dominance, focusing primarily on the United Kingdom. A single country perspective is helpful because common law principles are constant over the long run. Although such a focus limits international comparability, using the most shareholder centric of all countries does allow an assessment of regulatory adjustments that enhance or diminish shareholder influence, facilitating an analysis of the rise and fall of shareholder supremacy. The article focuses on the presence or absence of three factors associated with shareholder supremacy in the late twentieth century: the market for corporate control, institutional investors, and minority protection. The impact of these factors features in debates on the relationship between law and financial development, and the article adds new perspectives. To do so, it identifies three shareholder supremacy models based on scrutiny, collaboration, and valuation, respectively, and notes the absence or presence of common factors likely to promote shareholder supremacy. Taking a 300-year perspective, it shows that under different guises, shareholder supremacy has been a feature of the British corporate economy and charts the reasons for its varying forms.
Models of Shareholder Supremacy
The Scrutiny Model of Shareholder Supremacy
The orgy of speculation of the South Sea Bubble led to the introduction of the Bubble Act in 1720, which banned the formation of joint-stock companies by private individuals (Harris, 1994). Naïve shareholders had suffered at the hands of company promoters, who had promised spectacular returns from investments in unlikely projects: wheels of perpetual motion, machine guns, and the untapped resources of distant lands (Anon, 1825). Regulation created impediments to incorporation, which was now achieved through parliamentary authorization, or increasingly, by establishing a deed of settlement, in which a trust held the firm’s assets on behalf of investors. Both routes were risky and involved significant transaction costs and legal uncertainties (Cheffins, 2008, pp. 148–149).
However, once registered, the typical company had appealing governance features based on effective shareholder scrutiny. Projects such as dock and canal infrastructure were attractive to locally-based investors, who purchased significant blocks of shares, generally without further diversification. Most importantly, shareholders enjoyed open access to accounting records. Using a large sample of constitutions and bylaws of companies incorporated between the Bubble Act of 1720 and the Companies Act of 1844, Freeman et al. show that over two-thirds (68.0%) “explicitly permitted shareholders to inspect the account books at all times” (Freeman et al., 2012, pp. 14, 215). A shareholder could simply turn up at the company’s office and ask to inspect ledgers and books of account. Audits were instigated and carried out by shareholders’ nominees, often shareholders themselves (Taylor, 2018). Where there was suspicion of managerial malpractice, such as embezzlement of funds, the shareholders would form an investigation committee. Where guilty of malpractice, directors faced criminal penalties (Freeman et al., 2012).
In many respects, the system fulfilled the objectives of modern corporate governance. Shareholders utilized their rights to access the accounts, while directors abandoned self-interest in the face of continual scrutiny and the threat of the criminal law. All led to the withering of moral hazard.
Yet, there was a contradiction that meant this early phase of shareholder supremacy was a temporary phenomenon. Direct shareholder scrutiny was effective in some cases, but there was also apathy, and an increasing tendency to rely on summary accounts and professional auditors. Moreover, a competitor could access accounts and other operating details through the simple act of becoming a shareholder. For this reason, firms in competitive markets, such as financial services and insurance, opted for private partnerships. (Cheffins, 2008, p. 2; Freeman et al., 2012).
In competitive markets, then, there can be too much information and too much accountability. Industrialization and the emergence of new sectors brought increased competition and ironically reduced accountability and dissipated shareholder power. The financial crisis of 1825 illustrated some limitations of a relatively narrow investment base and unlimited liability in the British country banking system, which worsened the liquidity crisis (Turner, 2014). The problem led to the reintroduction of limited liability joint-stock companies, first in banking and subsequently in all sectors in the 1850s. Preexisting charter and statute companies retained many of the governence features of the shareholder scrutiny model under the provisions of the Companies Clauses Consolidation Act (CCCA), 1845 (Foreman-Peck & Hannah, 2016; Freeman et al., 2012). The active shareholder model gradually broke down with significant financial development. More expansive pools of retail investors were drawn first into specific industries, most notably banks and railways and then the broader economy. At the same time, government budget surpluses around the middle of the nineteenth century created a surge in demand for private sector savings, assuaged in part by the establishment of regional stock exchanges.
As the shareholder scrutiny model broke down, the involvement of passive and sometimes naïve investors empowered directors, while the legal framework offered shareholders minimal protection, in newly formed businesses incorporated under the Companies Acts. Moreover, industrial expansion accentuated information asymmetry, mainly in industries at the early stages of their product life cycle and experiencing rapid technological innovation. Unscrupulous promoters, like the “railway king” George Hudson, took full advantage. Significant banking failures in the 1850s and 1860s resulted in substantial losses for shareholders. William Gladstone, then Chancellor of the Exchequer, refused to assist shareholders in the Overend Gurney banking collapse of 1866, arguing that they invested at their own risk (Toms, 2017). It was the height of laissez-faire economics, yet shareholders lacked reliable information to base investment decisions.
The Companies Act 1862, which consolidated the series of Acts enshrining limited liability following the repeal of the Bubble Act in 1825, offered little in terms of shareholder protection. There were no compulsory accounting disclosures, audit requirements, limitations on insider trading or specific rights for minority shareholders, restrictions on differential voting rights and no preemption rights for existing shareholders. Table A of the Companies Act 1862 retained substantial anti-director provisions from the CCCA, but these were nonmandatory (Foreman-Peck & Hannah, 2016). The collapse of the City of Glasgow Bank in 1878 once again revealed the exposure of unprotected shareholders and led to balance sheet publication and audit requirements for banks at least. These requirements aside, with so few anti-director provisions in place, boards could also promote passivity in Victorian shareholders by paying high and reliable dividends (Campbell & Turner, 2011; Cheffins, 2008, pp. 77–80, 108–115). In the space of 50 years, the rise of middle-class portfolio investment transformed the scrutiny-based model of shareholder activism into the passive receipt of dividends.
Yet in one industry, there was a significant renaissance of shareholder activism. A substantial section of the cotton industry took advantage of the permissive voting rules of the Companies Act 1862, which carried forward anti-director provisions of the CCCA on a voluntary basis, including the democratic system of one shareholder one vote. Firms in the cotton spinning districts of south-east Lancashire took advantage of these provisions to raise significant amounts of capital from millworkers and the local middle classes. The shareholder audit mechanism remained important, not least because operatives who were shareholders had the business-specific expertise to conduct them. Shareholders kept directors’ salaries to minimal levels and frequently removed them at quarterly meetings when unimpressed with the balance sheet. In general, such scrutiny achieved significant economic benefits if the financial performance of democratically controlled mills is compared with their conventional counterparts (Toms, 2012).
Notwithstanding the success of democratic governance mechanisms, shareholders nonetheless demanded high dividends. Unlike companies elsewhere with portfolio investors, dividends were not paid to reduce agency costs, already minimized through governance accountability structures, but instead reflected the demand for cash payouts from relatively poor and undiversified operative shareholders. Despite the appeal and success of this model, it was in decline by the end of the nineteenth century. A trade slump meant that shares could be purchased cheaply, such that groups of directors and financiers took control of the mills and quickly altered the governance rules. Financial secrecy now replaced financial transparency and scrutiny of balance sheets (Toms, 2001, 2005).
Lancashire is interesting for historical reasons as an experiment in industrial and shareholder democracy, but also worth noting for more generic reasons. In the rest of the economy, the introduction of limited liability did not diminish shareholder protection in and of itself. However, the financial development and broader share ownership that it facilitated came without associated minority protection. In the Oldham system, this was not a severe problem. Here, the scrutiny model was complemented by wider share ownership because it was not portfolio-based but instead focused on the specific cotton sector. It resembled the generic pre-1850 scrutiny model in this respect. Although not a local monopoly, the industry was nonetheless a form of monopolistic competition. Firms produced differentiated albeit closely related outputs, with common well understood and easily scrutinized production processes. In short, the scrutiny model could work and survive monopoly or undiversified businesses.
The Collaboration Model of Shareholder Supremacy
From 1900, cotton mills, along with the rest of British industry, were now subject to the rules of a new Companies Act, which made published audited balance sheets compulsory. Portfolio investors lacked the expertise for direct governance and relied on professional audits. A laissez-faire attitude prevailed and anti-director provisions, measured according to a scale developed by la Porta et al., remained minimal (Cheffins, 2001; Franks et al., 2008; la Porta et al., 1997). Shareholder protection was at the same time more problematic as companies became more complex in terms of scope, product, and process, and influential directors used their connections to create multiunit business empires. Manipulation of accounts at the expense of shareholders was facilitated, for example, by Gerard Lee Bevan in the City Equitable case of 1925 and Lord Kylsant in the Royal Mail scandal of 1931.2 Financial intermediaries, notably merchant banks, offered some shareholder protection but only for IPOs before 1945 (Cheffins, 2001).
In the three decades after the Second World War, these same intermediaries were crucial players in the collaboration model. The manufacturing industry became highly concentrated, and the financial sector even more so. On top of this, acquisitions created holding company structures with multiple subsidiaries corporations. Networks of interlocked directors thus consolidated their power through amalgamation, where interlocks frequently spanned manufacturing and finance (Useem, 1986, p. 35).3
The post-1945 period is commonly viewed as the age of managerial capitalism (Dore et al., 1999). During this time, governments restricted credit, international trade, and the banking sector, while relatively high inflation reduced the value and importance of debt and made equities attractive. These changes help explain why the United Kingdom overtook French civil law countries when it came to financial market development in the 1950s (Rajan & Zingales, 2003). However, it was not legal protection but trust and intermediation by financial institutions that accounted for Britain’s financial development (Cheffins, 2001; Franks et al., 2008). Moreover, restrictions on dividends led to surplus assets and relative undervaluation, particularly for firms with property assets. Finally, in the 1960s, in particular, governments encouraged mergers to promote concentration and economies of scale, while controlling blocks of shareholders became less prominent (Cheffins, 2008, p. 363; Stamp & Marley, 1970). Improved disclosure requirements in the Companies Act 1948 facilitated screening of potential targets, and a provision to allow shareholders to dismiss directors with a simple majority vote, created the opportunity for hostile takeovers (Cheffins, 2001). The takeover boom of the later 1960s was triggered by concerns over currency devaluation and a flight into equity. Such exogenous changes led to takeover pressures on all managers, whether inefficient or not. Managers in companies with property assets were particularly vulnerable, regardless of their efficiency or competence otherwise (Stamp & Marley, 1970).
Following the Companies Act 1948, there were only modest improvements to shareholder protection; before 1980 (Cheffins, 2008, pp. 328–329),4 repression of the international financial sector highlighted the opportunities of domestic corporate restructuring available to British merchant banks. Conglomerate diversification, meanwhile, was seen as efficient in terms of managing risk and allocation through internal capital markets (Roe, 1996). Coalitions of insiders, either directors or blockholders, and institutional investors, typically merchant banks, were frequently at the center of deals that threatened the interests of minority or individual investors. The problem was not so much shareholder empowerment or disempowerment but rather the asymmetric power distribution between well-connected insiders and unsuspecting private investors.
Merchant banks were a crucial element of the collaboration model that emerged in the takeover battles of the 1960s. As noted earlier, interlocked directors enlisted merchant banks to access and mobilize shareholder votes in takeover battles. The contest for British Aluminium (B.A.) in 1958 shattered the illusion of gentlemanly capitalism and the informal codes of honor that traditionally characterized the City of London. When B.A. was targeted by a hostile bid from Tube Investments (T.I.) and Reynolds, backed by merchant bankers S.G. Warburg, Schroders and Helbert Wagg, its board invited a counter bid from Alcoa, proposing a perfectly legal variation in shareholders rights in the process. B.A. lined up a consortium of merchant banks, led by Lazards and Hambros, to support the rival offer. However, other institutional investors, the trusts and insurance companies, unloaded their shares in the open market, leaving the way clear for the Reynolds/T.I./Warburg bid (Stamp & Marley, 1970, pp. 4–6). The B.A. example shows how institutional investors were crucial as instigators and in determining the outcome of takeover bids, and the power of shareholders to act against incumbent directors using this mechanism (Littlewood, 1998).
Mergers and acquisitions provided the primary vehicle for entrepreneurship from the boom of the 1960s onward. Chief executive officers and senior directors, through connections with merchant banks, provoked a series of takeover battles reminiscent of B.A. Some, most notably Jim Slater of Slater Walker, arbitraged the gap between firms’ productive assets and property values. Others, like Frank Kearton of Courtaulds, the textile manufacturer, aimed to exploit economies of scale and scope through integration and vertical control (Toms, 2020; Toms et al., 2015). While these dealings were underpinned in some cases by market logic and may have disciplined some potential target company managers who were inefficient, the outcome of bids was often predicated on other factors. Whether B.A. would be more efficient if managed by Reynolds or Alcoa was subsumed by nationalist arguments about the foreignness of the predators. In many cases, there was nothing to say that predator firm managers would be any more efficient than target firm managers. When Charles Clore attempted to diversify into brewing by acquiring Watney’s, his experience as a shoe magnate was not an obvious substitute for the experience of the incumbent board of directors, and he, in any case, based his bid on a significant misalignment of property values (Sharpe, 2016).
A further determinant of the success or failure of a takeover bid was collaborating entrepreneurs and investment groups’ exploitation of the lack of regulation. Defenses were facilitated by differential classes of shares, the possibility of issuing new shares during bids to be given to a friendly block, like Alcoa in the B.A. battle (Cheffins, 2008, p. 368),5 and the rights of minorities to hold out against otherwise well-supported bids. Predatory raids, in most cases aimed for full control, facilitated by the 1929 provision to buy out minorities and encouraged by City codes of conduct (Cheffins, 2008, p. 43). In a minority of high-profile cases, raids were enabled by the possibility of acquiring control through partial offers, including offers limited to only specific buyers or differential offers to different shareholder groups. Shareholders were treated differentially in the Richard Thomas and Baldwins bid for Whitehead, losing out to institutional investors and resulting in a minor scandal (Stamp & Marley, 1970). This and similar cases challenged the City regulators to clarify the rules.
The case was critical because it created the principle, violated in B.A., that all shareholders should receive the same offer. The City of London, which had been ahead of company legislation mandating disclosure and transparency likely to benefit retail and minority investors, developed a self-regulatory code of practice. The City Code on takeovers and mergers offered significant minority protection, such that all shareholders were treated equally in bids. Protection was underpinned further by the provisions of the Companies Act 1980 (Cheffins, 2008, pp. 329–330). By forcing directors to adopt a neutral position once a takeover bid was tabled, the Code enhanced the power of shareholders (Deakin, 2005).
However, the regulatory structure took time to evolve. In early test cases, the newly formed Panel applied the Code leniently to merchant banks, and they escaped significant sanction, notwithstanding clear violations (Stamp & Marley, 1970, pp. 25–34). Fortunately for the City, which wanted to avoid formal regulation without impeding the activities of its constituents, the merger wave dried up in 1972, following a series of exogenous shocks: the spike in oil prices in 1973 and the sharp recession that followed, the end of the Bretton Woods system and a secondary banking crisis. Company profits, already in decline, were squeezed further (Useem, 1986), and an inflationary spiral created additional pressures. Overdiversification led to poor investment decisions, and the end of managed trade under the Bretton Woods system led to growth in international competition. The takeover boom was over by 1972, and firms were increasingly considered to be overdiversified and experiencing diseconomies of scale and scope (Lazonick & O’Sullivan, 2000).
Even so, the collaboration model persisted for another decade or more. Block shareholdings, including family groups, were in decline but remained significant until well into the 1980s. Self-regulation by the London Stock Exchange also persisted (Cheffins, 2001). These factors explain the relatively slow diffusion of the shareholder value model in the United Kingdom compared to the United States.
The Valuation Model of Shareholder Supremacy
In the United States, the retain and reinvest strategy of the 1950s and 1960s conglomerates was now replaced by a recognition that takeovers would reduce managerial access to free cash flow and return value to shareholders through increased dividends and share buybacks (Jensen, 1989; Lazonick & O’Sullivan, 2000). The dominance of conglomerates led to accusations of managers destroying shareholder value. Declining profit rates into the 1970s provided the impetus for reform in terms of checks on executive power and unlocking the conglomerate discount (Toms & Wright, 2002). Institutional portfolio investors were a crucial factor in the rise of the valuation model of shareholder supremacy. A valuation technique based on the capital asset pricing model and economic profit provided otherwise passive investors with a common decision-making rule (Aglietta, 2000). However, these changes were not sufficient as incentives for corporate managers to move shareholders up their list of priorities. The merger wave of the 1980s created a “fear quotient” for managers of undervalued companies. Institutional investors, where they did intervene in corporate affairs, pushed for executive pay to be linked to stock price performance (Cheffins, 2019, pp. 195, 245). These changes, rather than legal and regulatory developments, were therefore crucial in the development of the new valuation model of corporate governance in the Anglosphere.
However, there were essential differences between the United Kingdom and the United States. Lazonick and O’Sullivan argue that between 1980–2000, the ideology of shareholder value became “entrenched as a principle of corporate governance among companies based in the United States and Britain. However, there is scant evidence offered on Britain, only that the shift to shareholder value resulted from the Reagan and Thatcher revolutions” (Lazonick & O’Sullivan, 2000, pp. 13–14).
In reality, the United Kingdom lagged the United States significantly in adopting the valuation model of shareholder supremacy. What were the reasons for the lag? In the United Kingdom, institutional ownership had been rising, albeit slowly, as noted earlier, increasing significantly after 1980. The rate at which institutional investors voted rose to 50% in 1999 from 20% in 1990. The Big Bang reforms of 1986 had a significant impact, allowing the takeover of British stock market firms by U.S.-dominated integrated investment banks (Toms & Wright, 2005). As an intellectual and conceptual device that impacted practice, shareholder value was developed in the United States by an expanding management consultant sector. Using accounting numbers as inputs to mathematical models, it built upon the Boston Consulting Group and Profit Impact of Market Strategy approaches to managing multiunit businesses (Berry & Lorenz, 1983; Kullberg, 1983). Early adopters were U.S. oil companies like Gulf Oil and Phillips Petroleum, typically as rationales for takeover defenses or restructuring. As the principle of shareholder value creation gained ground in the mid-1980s, in the United States at least, the primary justification was corporate restructuring and divestment, for example, by Union Carbide, Westinghouse, and Borg-Warner (Financial Times, 1983, 1985a, 1985b; Hall, 1985; Oram, 1986). Corporate boards enlisted merchant banks and leveraged buyout funds to advise how to release shareholder value through restructuring.
For almost the whole of the 1980s, U.K. boards lacked any similar focus on shareholder value. Where used at all, the term reflected the transatlantic nature of the deals on offer. Reliance set up a U.K.-based Leveraged Buy Out fund in 1986 to release shareholder value. In another early U.K. example, Cadbury adopted a shareholder value mantra to convince investors of the advantages of a strategic alliance with Coca-Cola (Financial Times, 1988; Hall & Lascelles, 1986). Even so, writing in 1988, one financial commentator noted U.K. companies’ reluctance to gear up their balance sheets or buy back their shares. Their laxity was despite “promptings” from the Bank of England and showed that “maximizing shareholder value [was] not the top priority of most companies,” unlike in the United States (Lex, 1988). A year later, a financial columnist at The Times noted that the United Kingdom had to thank Sir James Goldsmith for finally waking up U.K. boards to shareholder value. By leading a record leveraged bid from U.S. firm Hoylake Investments, a Bermuda-based vehicle, for B.A.T., Goldsmith had prompted the B.A.T. board in their defense to adopt the slogan “building shareholder value” (The Times, 1988a, 1988b).
The adoption of the shareholder model gathered pace and reached its peak with the bull market of the 1990s. With rising share prices and remuneration linked to stock options, adopting the model was an easy win for senior managers (Aglietta, 2000). Implementing the U.S. model of shareholder-based governance offered a new route to shareholder supremacy in the United Kingdom, at least, if not in the rest of Europe and Japan.
The valuation model of shareholder supremacy has been successful, if only according to its own standards. There is substantial quantitative evidence that resulting developments in corporate governance have increased firm value relative to underlying assets and mergers and acquisitions (Cremers & Nair, 2005; Daines, 2001). Such benefits arise from monitoring by the board of directors, institutional investors, and the market for corporate control (Huson et al., 2001; Li et al., 2006; Masulis et al., 2012). Nonetheless, the evidence is ambivalent, and the model has faced increasing criticism. For example, it has been accused, among other things, of promoting earnings manipulation, lack of engagement and monitoring by passive institutional investors, short-termism, and fraud (Charreaux & Desbrières, 2001; Deakin, 2003; Kury, 2007).
These limitations, in the wake of the financial crisis led to efforts to refine the stewardship approach to shareholder engagement. In practice, this meant neutralizing investors’ focus on share price as a substitute for more meaningful longer-term engagement (Chiu, 2021). More recently exogenous developments associated with climate change and social pressures have promoted the stakeholder model as an alternative. The U.K. Stewardship Code 2020 sets high stewardship standards for those investing money on behalf of U.K. savers and pensioners and those that support them. Stewardship is the responsible allocation, management, and oversight of capital to create long-term value for clients and beneficiaries, leading to sustainable benefits for the economy, the environment, and society (Financial Reporting Council, 2020).
Whether the stewardship model replaces the shareholder model fully or partially depends on the extent to which valuation models can incorporate externalities associated with environmental degradation in the face of the climate change threat.
The Determinants of Shareholder Supremacy
In sum, the evidence shows that shareholder supremacy can be achieved even if institutional preconditions highlighted in the article are absent to some degree or even totally absent. These are the development of the market for corporate control, diversified institutional investors, and minority shareholder protection. Their effects on each model of shareholder supremacy are summarized in Table 1.
Table 1. Determinants of Shareholder Supremacy
Shareholder Supremacy Model
Market for corporate control
Dominant institutional investors
ca. 1720–ca. 1850
ca.1850–1900 (cotton subsector only)
* Note: Periods are approximate. 1970–1990 was a transitional phase between the collaboration and valuation models, during which time institutional investors broadened their focus from mergers and acquisitions (M & A) to portfolio investing, and minority protections were improved by the City Code and the Companies Act 1980.
The historical analysis in Table 1 contextualizes the institutional preconditions for shareholder development. The scrutiny model emerged in a period of regulated and underdeveloped financial markets. For example, there were only a handful of companies with traded shares, and restrictions on cross directorships and short selling, after Barnard’s Act of 1734 (Dickson, 1967, p. 116; Poitras, 2002, pp. 31–32). Investors were typically local, institutional investors were insignificant, and there was little legal protection for minority shareholders. Active shareholder scrutiny underpinned this dominance, assisted by the criminal law. In the century after 1850, investor protections evolved slowly, and shareholders responded by demanding high dividends. In some sectors, most notably the cotton textile industry, early models of shareholder protection were successfully adapted, for a time at least. In other sectors, new regulations on audit and accounting disclosure improved shareholder protection, and the new accountancy profession mitigated some problems associated with the separation of ownership and control.
In the 1920s and 1930s, investors remained vulnerable to the schemes of unscrupulous promoters, powerful insiders, and empire-building directors. Usually, these were coalitions of insiders and financial institutions, paving the way for the collaborative model of shareholder supremacy. Although commentators often refer to the post-1945 period as the age of managerial capitalism, equity finance nevertheless dominated. In the 1950s, in more developed financial markets, the collaboration model emerged. Tax and restrictions on dividends encouraged firms to reinvest and provided corporate managers with war chests to launch hostile takeovers. Such bids could only be successful in collaboration with financial institutions, particularly merchant banks, which could buy large blocks of shares in the open market. The partnership of corporate insiders and financial institutions was crucial in securing successful takeover bids, empowering institutional investors.
As these corporations overdiversified and markets became saturated, value creation opportunities dried up. Economic restructuring in the 1970s and 1980s created a deeper capital market dominated by diversified institutional investors. The shareholder value model empowered these otherwise passive investors through collective market valuations of portfolio companies. Takeovers, and the threat of divestment, were increasingly influential as a tool to discipline managers. Although prevalent, the valuation model of shareholder supremacy is not without challenges, including the notion of “enlightened shareholders” and pressures to recognize other stakeholder interests.
Minority protection became a matter of more significant concern after a series of takeover scandals in the late 1960s. Even then it was not enshrined in official regulation or strongly enforced by the City of London. For these reasons, the valuation model of shareholder supremacy did not prevail until the late 1980s. By this time, crucially, minorities had formal legal protection, and institutional investors consolidated their influence, but as portfolio investors as much as active participants in corporate mergers and restructuring transactions.
The historical evidence shows a more nuanced interpretation of critical events and periods. Although shareholder supremacy is a term that arose in the circumstances of the late twentieth century, historical analysis shows that there are other ways in which shareholders can exercise significant control over the corporation, not necessarily reflected in the contemporary governance debate. Thus, shareholder power may not necessarily rely on the conditions identified in the article: the market for corporate control, dispersed institutional investors, or minority protection. Open structures of accountability would seem sufficient conditions for shareholders to function as a dominant stakeholder group, based on pre-1850 evidence and the experiment in democratic systems conducted in the cotton industry. Shareholders were probably at their weakest in the century following the introduction of limited liability. They enjoyed relatively little protection from the law and relied on regular dividends in place of direct scrutiny. Viewing the post-1945 period as one of managerial capitalism seems an oversimplification. Managerial insiders needed alliances with merchant banks to leverage the markets, significantly empowering institutional shareholders. The adoption of the shareholder value model of supremacy was a 1990s phenomenon in the United Kingdom at least and had little impact in the 1970s and 1980s. The collaboration model still prevailed but shifted its focus from expansionary takeovers to restructuring and downsizing. In the twenty-first century, the shareholder supremacy based on value maximization is increasingly called into question and faces calls for adaptation factoring in the needs of other stakeholder groups. Increasing accountability in this respect creates opportunities to learn from earlier successful experiments in effective corporate governance.
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1. Company law provides formal and stronger protection for minorities, since directors do not owe any duties to minority shareholders, only to the company.
2. Re City Equitable Fire Insurance Co  Ch. 407. R v Kylsant  1 KB 442.
3. In 1909, the 100 largest British manufacturers accounted for only 15% of the net output of all such companies, but the proportion steadily climbed to 23% by 1939, 33% by 1958, and 45% by 1970.
4. For example, the Companies Act 1967 did not improve the UK’s anti-director index score.
5. Such tactics were regarded as a breach of duty and attracted censure from the courts.