Corporate Governance and Corporate Governance and Listing Requirements: Listing Requirements: London at the Turn of the London at the Turn of the Twentieth CenturyTwentieth Century

Fabio Braggion

CentER & Tilburg University

Shleifer and Vishny (1997)”Corporate governance deals with the ways in which suppliers of finance to corporations assure themselves of getting a return on their investment”

How did people deal with this issue How did people deal with this issue a hundred years ago?a hundred years ago?

Agency Problems (Jensen, 1986)

Cash left in the hands of insiders (e.g. management team) may be used for personal use, or diverted into unprofitable projects

Temptation to waste cash (e.g. on takeovers) is likely to be greatest for mature companies

Plan of the Talk

What did the Rule say? Listing Requirements

What did company (and investors) do? Dividends Directors’ Borrowing Powers Size of the Boards Independent Directors (Absence of…) Company Promoters and Titled Directors Trust (Franks, Mayer and Rossi, 2007)

Conditions for an Application for Official Quotation On the Prospectus:

Shall have been publicly advertised; Agrees substantially with the Act of Parliament or

Articles of Association; Provides for the issue of not less than one-half of the

authorised capital and for the payment of 10% upon the amount subscribed.

If offering Debentures or Debenture Stock, states fully the terms of redemption.

Article of Associations

That none of the funds of the Company shall be employed in the purchase of, or in loans upon the security of its own shares;

That Directors must hold a share qualification; That the borrowing powers of the Board are limited; That the non-forfeiture of dividends is secured; That all Share and Stock Certificates shall be issued under the Common

Seal of the Company; That fully paid Shares shall be free from all lien; That the interest of a Director in any contract shall be disclosed before

execution, and that such Director shall not vote in respect thereof; That a printed copy of the report, accompanied by the Balance Sheet and

Statement of Accounts, shall, at least seven days previous to the General Meeting, be delivered to the registered address of every member and to the Stock Exchange

Article of Associations

That none of the funds of the Company shall be employed in That none of the funds of the Company shall be employed in the purchase of, or in loans upon the security of its own the purchase of, or in loans upon the security of its own shares;shares;

That Directors must hold a share qualification; That the borrowing powers of the Board are limited; That the non-forfeiture of dividends is secured; That all Share and Stock Certificates shall be issued under the Common

Seal of the Company; That fully paid Shares shall be free from all lien; That the interest of a Director in any contract shall be disclosed before

execution, and that such Director shall not vote in respect thereof; That a printed copy of the report, accompanied by the Balance Sheet and

Statement of Accounts, shall, at least seven days previous to the General Meeting, be delivered to the registered address of every member and to the Stock Exchange

Article of Associations

That none of the funds of the Company shall be employed in the purchase of, or in loans upon the security of its own shares;

That Directors must hold a share qualification;That Directors must hold a share qualification; That the borrowing powers of the Board are limited; That the non-forfeiture of dividends is secured; That all Share and Stock Certificates shall be issued under the Common

Seal of the Company; That fully paid Shares shall be free from all lien; That the interest of a Director in any contract shall be disclosed before

execution, and that such Director shall not vote in respect thereof; That a printed copy of the report, accompanied by the Balance Sheet and

Statement of Accounts, shall, at least seven days previous to the General Meeting, be delivered to the registered address of every member and to the Stock Exchange

Article of Associations

That none of the funds of the Company shall be employed in the purchase of, or in loans upon the security of its own shares;

That Directors must hold a share qualification; That the borrowing powers of the Board are limited;That the borrowing powers of the Board are limited; That the non-forfeiture of dividends is secured; That all Share and Stock Certificates shall be issued under the Common

Seal of the Company; That fully paid Shares shall be free from all lien; That the interest of a Director in any contract shall be disclosed before

execution, and that such Director shall not vote in respect thereof; That a printed copy of the report, accompanied by the Balance Sheet and

Statement of Accounts, shall, at least seven days previous to the General Meeting, be delivered to the registered address of every member and to the Stock Exchange

Article of Associations

That none of the funds of the Company shall be employed in the purchase of, or in loans upon the security of its own shares;

That Directors must hold a share qualification; That the borrowing powers of the Board are limited; That the non-forfeiture of dividends is secured; That all Share and Stock Certificates shall be issued under the Common

Seal of the Company; That fully paid Shares shall be free from all lien;That fully paid Shares shall be free from all lien; That the interest of a Director in any contract shall be disclosed before

execution, and that such Director shall not vote in respect thereof; That a printed copy of the report, accompanied by the Balance Sheet and

Statement of Accounts, shall, at least seven days previous to the General Meeting, be delivered to the registered address of every member and to the Stock Exchange

Article of Associations

That none of the funds of the Company shall be employed in the purchase of, or in loans upon the security of its own shares;

That Directors must hold a share qualification; That the borrowing powers of the Board are limited; That the non-forfeiture of dividends is secured; That all Share and Stock Certificates shall be issued under the Common

Seal of the Company; That fully paid Shares shall be free from all lien; That the interest of a Director in any contract shall be disclosed That the interest of a Director in any contract shall be disclosed

before execution, and that such Director shall not vote in before execution, and that such Director shall not vote in respect thereof;respect thereof;

That a printed copy of the report, accompanied by the Balance Sheet and Statement of Accounts, shall, at least seven days previous to the General Meeting, be delivered to the registered address of every member and to the Stock Exchange

Article of Associations

That none of the funds of the Company shall be employed in the purchase of, or in loans upon the security of its own shares;

That Directors must hold a share qualification; That the borrowing powers of the Board are limited; That the non-forfeiture of dividends is secured; That all Share and Stock Certificates shall be issued under the Common

Seal of the Company; That fully paid Shares shall be free from all lien; That the interest of a Director in any contract shall be disclosed before

execution, and that such Director shall not vote in respect thereof; That a printed copy of the report, accompanied by the Balance That a printed copy of the report, accompanied by the Balance

Sheet and Statement of Accounts, shall, at least seven days Sheet and Statement of Accounts, shall, at least seven days previous to the General Meeting, be delivered to the registered previous to the General Meeting, be delivered to the registered address of every member and to the Stock Exchangeaddress of every member and to the Stock Exchange

Trust Deeds

The Trust Deed must provide that should the Company go into voluntary liquidation for the purpose of amalgamation or reconstruction the security shall not be repayable at a lower price

What did company do?What did company do?

Dividend Payout RatioDividend Payout Ratio

Institutional Details:

Very Low Taxation on Dividends (≈5%)

Share repurchases forbidden(Trevor v. Whitworth (1887))

Agency and Dividends

Dividends are a way to return cash to shareholders (i.e. cash is not wasted by managers but goes back to shareholders)

If Dividends are a way to resolve an agency problem, dividend payments should be higher in companies where agency problems are more severe

Market may not like dividend cuts for mature, cash-rich companies because managers may waste the retained cash

The Data 469 British firms

134 listed officially on the LSE 335 not listed on LSE

Observe these companies every year between 1895-1905

Information on:

Earnings Dividends Other firm characteristics Share Prices Date of Dividend Announcements

Some Results: Dividends Increases of Commencements: 1.4%

excess of returns in the week of the announcement(1.34% in recent times)

Dividends Cuts or Omissions: -2% excess of returns in the week of the announcement(-3.71% in recent times)

Few differences in impact of dividend Few differences in impact of dividend cuts/increases based on proxy of companies’ cuts/increases based on proxy of companies’ maturity:maturity: Tobin’s Q, Age, Earned to Total EquityTobin’s Q, Age, Earned to Total Equity

Some Results:

Management were far more likely to change a firm's dividend, and in particular to cut the dividend

Of the dividend announcements we study: we find 27.5% that were decreases or omissions

(compared to 2.5%) 28.5% that were increases or commencements

(compared to 36.9%) 44.1% that were no change (compared to 60.5%).

• Profitability is the main determinant of Profitability is the main determinant of dividend paymentsdividend payments

• Again, measures related to companies’ Again, measures related to companies’ maturity are at beast a weak determinant of maturity are at beast a weak determinant of dividend payoutsdividend payouts

• one s.d. increase in age (17 years) leads to one s.d. increase in age (17 years) leads to 5% point increase in the ordinary payout 5% point increase in the ordinary payout ratioratio

Who paid the most?

What about firms not listed on What about firms not listed on LSE?LSE?

• 335 firms335 firms

• These were either traded unofficially These were either traded unofficially in London, or listed officially in in London, or listed officially in provincial markets (e.g. Glasgow, provincial markets (e.g. Glasgow, Manchester)Manchester)

•Generally small shareholder Generally small shareholder based/Family Firmsbased/Family Firms

•Agency problems between managers Agency problems between managers and shareholders should be less and shareholders should be less severesevere

What about firms not listed on What about firms not listed on LSE?LSE?

•If Agency Theories are true:If Agency Theories are true:

-Managers of listed companies Managers of listed companies should more keen to disburse should more keen to disburse excess of cash in the form of excess of cash in the form of dividend dividend

-Especially managers of older, more Especially managers of older, more mature companies…mature companies…Agency problems between managers and Agency problems between managers and shareholders are more severe in listed shareholders are more severe in listed companiescompanies

• Payout ratio is similar to listed firmsPayout ratio is similar to listed firms • No relevant difference in the payouts No relevant difference in the payouts determinants for listed and unlisted determinants for listed and unlisted companiescompanies

Results Unlisted:

We don’t find strong evidence of Dividends resolving Agency problems

Why?Managers did not care. Investors’ protection

was too low… (outcome model of dividends)

Absence of Taxes (Allen et al. 2000). Tax differences among investors are a tool to attract investors with better monitoring capabilities

Other ways to resolve it…

Directors Borrowing Powers More mature companies had stricter rules on

Directors Borrowing Powers Borrowing Powers were reduced of 20% in mature

companies

Banks Monitoring More mature companies were more likely to have

business relationships with more than one bank (results a bit controversial, but it could stand for additional external monitoring)

Companies Promoters

Acted as underwriters Borrowed money to buy stakes in private

companies “Reconstruct” Private companies Made them public Profits made on capital gains

Companies Promoters

They worked out the bureaucracy for newly quoted companies

They marketed the securities of newly quoted companies

It was practice to appoint title directors (Lords, Sirs, MPs) on the board of companies

Sounds like a “typical” Social Networks Story: Useful tools when markets do not process

information effectively Social Interactions in the network are a cheap

opportunity to gather information Solve problems of contract enforceability

Peer pressure may induce borrowers to pay back their loans

However, there are risk of collusion and inefficiency

(1) (2) (3) (4)Long Term Debt Total Debt Long Term Debt Total Debt

log (Size) 0.039*** 0.018*** 0.039*** 0.018***(0.008) (0.006) (0.008) (0.006)

Company's Age -0.003*** 0 -0.003*** 0(0.001) (0.001) (0.001) (0.001)

Tangibility 0.184*** 0.092*** 0.155*** 0.059*(0.035) (0.031) (0.037) (0.033)

Current Profitability -0.074 -0.050** -0.087 -0.058**(0.066) (0.022) (0.070) (0.023)

Past Growth -0.131** -0.011 -0.144** -0.024(0.057) (0.041) (0.056) (0.042)

Share of Lords and MPs in the Board -0.04 -0.054 -0.006 -0.041(0.073) (0.057) (0.084) (0.065)

New Technology*Share of Lords 0.167* 0.144* 0.343** 0.256**(0.098) (0.079) (0.141) (0.116)

New Technology*London*Share of Lords -0.293* -0.18(0.184) (0.144)

R-squared 0.16 0.18LR Chi-Squared 170.65 182.51

Observations 591 591 591 591

Some empirical evidence

(1) (2) (3) (4)Long Term Debt Total Debt Long Term Debt Total Debt

log (Size) 0.039*** 0.018*** 0.039*** 0.018***(0.008) (0.006) (0.008) (0.006)

Company's Age -0.003*** 0 -0.003*** 0(0.001) (0.001) (0.001) (0.001)

Tangibility 0.184*** 0.092*** 0.155*** 0.059*(0.035) (0.031) (0.037) (0.033)

Current Profitability -0.074 -0.050** -0.087 -0.058**(0.066) (0.022) (0.070) (0.023)

Past Growth -0.131** -0.011 -0.144** -0.024(0.057) (0.041) (0.056) (0.042)

Share of Lords and MPs in the Board -0.04 -0.054 -0.006 -0.041(0.073) (0.057) (0.084) (0.065)

New Technology*Share of Lords 0.167* 0.144* 0.343** 0.256**(0.098) (0.079) (0.141) (0.116)

New Technology*London*Share of Lords -0.293* -0.18(0.184) (0.144)

R-squared 0.16 0.18LR Chi-Squared 170.65 182.51

Observations 591 591 591 591

Some empirical evidence

(1) (2)ROE Tobin's Q

log (Size) 0 -0.024(0.003) (0.030)

Company's Age 0.001*** 0.004(0.000) (0.003)

Share of Lords and MPs in the Board -0.02 -0.260*(0.039) (0.156)

log (Size of the Board) 0.005 0.249**(0.012) (0.106)

Past Profitability 0.361*(0.200)

New Technology*Share of Lords -0.002 0.495*(0.043) (0.279)

R-squared 0.07 0.18Observations 606 251

(1) (2)ROE Tobin's Q

log (Size) 0 -0.024(0.003) (0.030)

Company's Age 0.001*** 0.004(0.000) (0.003)

Share of Lords and MPs in the Board -0.02 -0.260*(0.039) (0.156)

log (Size of the Board) 0.005 0.249**(0.012) (0.106)

Past Profitability 0.361*(0.200)

New Technology*Share of Lords -0.002 0.495*(0.043) (0.279)

R-squared 0.07 0.18Observations 606 251

(1) (2)ROE Tobin's Q

log (Size) 0 -0.024(0.003) (0.030)

Company's Age 0.001*** 0.004(0.000) (0.003)

Share of Lords and MPs in the Board -0.02 -0.260*(0.039) (0.156)

log (Size of the Board) 0.005 0.249**(0.012) (0.106)

Past Profitability 0.361*(0.200)

New Technology*Share of Lords -0.002 0.495*(0.043) (0.279)

R-squared 0.07 0.18Observations 606 251

On Boards…

Boards were relatively smaller when compared to present days: In 1900 about 5 members In 2000 (UK) between 8.5 and 9 members In 2000 (US) about 12 members

Boards were all composed by insiders Companies could set up the necessary

conditions to be directors

Other Questions

Dual Class of Shares Preference Shares carrying voting rights… Managers Compensation