Transparency and accountability in the governance of British stock companies, 1740-1845

"The current debates surrounding the governance of large enterprises have their echoes in the eighteenth and early nineteenth centuries, when both the incorporated and unincorporated joint-stock company became an increasingly widespread feature of the British economic landscape. One of the key elements of corporate governance is the extent of information available to shareholders: transparency of governance and access to information can become critical issues in the relations between company proprietors and directors. Historians have pointed to the importance of the development of permanent auditing arrangements, and to the increasing tendency in the second half of the nineteenth century for companies to withhold from their shareholders the right to inspect the company accounts. Most of the existing literature, however, relates to the period after the legislation of 1844-5 and 1855-6. This paper is concerned with the period prior to 1844, long before arrangements for permanent audit had become common in British joint-stock companies, and before they received legislative sanction and encouragement in the consolidating legislation of 1845. Our paper is based on the constitutions of a sample of 90 companies established in the period 1739-1844 - 30 canal and dock companies, 30 railways and 30 banks - which is part of a larger, ongoing project on the governance of joint-stock companies in Britain in the period. The canals, docks and railways in the sample were all incorporated, the banks all unincorporated. Their constitutions made various provisions for the auditing of accounts, and they granted shareholders differing degrees of access to company books. Through detailed typologies of audit provisions, procedures for presentation of balance sheets, and shareholders’ rights to inspect documents, we compare the three sectors, and consider differences between companies of different sizes, and changes over time. We show that, whereas in many incorporated companies the books of account were, in theory, open for inspection by shareholders ‘at all seasonable times’, in the banking sector a culture of secrecy operated to the extent that shareholders were often not even permitted to inspect the company deed of settlement. This calls into question Pratt and Storrar’s recent generalisation that ‘[u]ntil at least the middle of the 19th century, shareholders were considered to have an inherent right to inspect their companies’ books of account’. In the banking sector, it was standard procedure to provide for an ad hoc internal audit by a shareholders’ committee of inspection if required. By the 1840s railway companies were beginning to provide for permanent audit, and were moving away from the universal right of access that had characterised earlier incorporated companies. This reflects the tendency, identified by Timothy L. Alborn, for joint-stock companies to become less ‘democratic’ in this period."