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Substitutes for Legal Protection: Corporate Governance and Dividends in Victorian Britain

Journal: Economic History Review

Date: 20110501

Author: Campbell, Gareth; Turner, John D.

Abstract:
Companies in Victorian Britain operated in a laissez-faire legal environment from the perspective of outside investors, implying that such investors were not protected by the legal system. This article seeks to identify the alternative mechanisms that outside shareholders used to protect themselves by examining the dividend policy and governance of over 800 publicly traded companies at the beginning of the 1880s. We assess the importance of these mechanisms by estimating their impact on Tobin's Q. Our evidence suggests that dividends and well-structured and incentivized boards of directors may have played a role in protecting the interests of outside investors.

Link: Google Scholar

Background and Context

Research Setting

Study examines over 800 publicly traded companies in Victorian Britain during 1883, when there was minimal legal protection for outside investors.

Research Question

How did outside shareholders protect themselves in an environment with limited legal safeguards against expropriation by corporate insiders?

Methodology

Analysis of corporate governance mechanisms, dividend policies, and their impact on company value (Tobin's Q) using data from financial and governance records.

High Dividend Payments Across Victorian Industries

  • Financial sector companies paid the highest dividends relative to their par value
  • Banks led with 11.6% dividend/par ratio, followed by insurance companies at 10.9%
  • High dividends served as a mechanism to protect outside investors by limiting insiders' ability to divert resources

Board Structure and Corporate Governance

  • Significant variation in board sizes across industries with docks having the largest boards (16.44 directors)
  • Industrial companies had the smallest boards with an average of 5.61 directors
  • Larger boards were associated with better corporate governance and higher company valuations

Prevalence of Ruling Class Directors

  • Telegraph companies had the highest proportion of ruling class directors at 33.13%
  • Industrial companies had the lowest proportion at 5%
  • Presence of ruling class directors was negatively correlated with company value

Local vs National Trading and Shareholder Protection

  • Shipping companies were most likely to be traded locally (56.41%)
  • Railways were least likely to be traded locally (33.33%)
  • Local trading was associated with better informal monitoring and higher company valuations

Directorial Share Qualifications Across Industries

  • Shipping companies required the highest director shareholding qualifications (0.72% of par value)
  • Railways required the lowest director shareholding qualifications (0.16% of par value)
  • Higher director shareholding requirements were associated with better company performance

Contribution and Implications

  • Demonstrates that Victorian companies developed effective substitutes for legal protection through dividend policies and governance structures
  • Challenges the view that weak legal protection necessarily led to poor investor protection in Victorian Britain
  • Shows that informal mechanisms like local trading and director share requirements helped protect outside investors

Data Sources

  • Dividend data visualization based on Table 7 showing dividend/par ratios across industries
  • Board structure visualization based on Table 6 showing average board sizes by industry
  • Ruling class directors visualization based on Table 6 showing percentage of ruling class directors
  • Local trading visualization based on Table 1 showing percentage of locally traded companies
  • Director qualifications visualization based on Table 6 showing qualification requirements as percentage of par value