CONTROL, CONFLICT AND CONCESSION: CORPORATE GOVERNANCE, ACCOUNTING AND ACCOUNTABILITY AT BIRMINGHAM SMALL ARMS, 1906-1933

Accounting Historians Journal, The, Jun 2005 by Lloyd-Jones, Roger, Lewis, Myrddin J, Matthews, Mark D, Maltby, Josephine

Abstract: This paper takes as its starting point the relevance of a historical perspective to the study of corporate governance. Corporate governance is concerned with the institutions that influence how business corporations allocate resources and returns, and with the exercise of accountability to investors and other stakeholders. The historical model adopted is that of personal capitalism which is informed by scholars such as Chandler, and in the British context, Quail. Birmingham Small Arms, a quoted and diversified engineering company, was selected for analysis because although it was relatively large and adopted a holding company format, it retained many of the characteristics of a personal capitalist firm. Our longitudinal study of 1906 to 1933 shows that what emerged at BSA was a dominant group of directors who were eventually impelled to concede change by a sustained shareholder critique and an altered legal and business environment.

INTRODUCTION

Research on the historical evolution of corporate governance in the UK is still at an early stage [Toms and Wilson, 2003, pp.3-4]. While there is a growing literature on this topic [Keasey et al, 1997; Hopt et al., 1998; Cheffins, 2001; Toms and Wright, 2002] it is generally the case that such discussions are not informed by detailed empirical evidence.1 There are, however, some exceptions. An appreciation of the significance of governance to industrial administration, within a French context, was demonstrated in 1916 by Henri Fayol [ 1949] though it has been argued that subsequent (English) writers blurred the distinction between management and governance [Tricker, 1984, p.280] and thus the subject remained obscure in the English speaking world of business. Writing in 1984, Tricker argued that in Britain interest in the issue of corporate governance appeared to be of recent origin: "In the past there seemed little challenge to management's prerogative to run the company unimpeded, no demand for independent supervision or disclosure, no intervention in matters of accountability, no questioning of corporate power and legitimacy, little interest in involvement or participation in management decisions" [1984, p.5]. More recently, Sheikh and Chatterjee have argued that despite corporate governance being a well recognized concept in Australia, New Zealand, the USA and some European countries, "it has received hardly any attention in the UK, primarily because of the traditional view maintained by the (corporate governance) system that directors are to maximise profits for their shareholders, as the interests of the latter are paramount to directors" [1995, p. 1].

Maclean [1999] has suggested that business historians are well placed to contribute to the contemporary debate on corporate governance. The long-standing concerns of business historians implicitly if not explicitly pertain to such issues. Indeed, issues such as board selection, board performance, family control, shareholder maneuvering, and the influence and regenerative potential of business elites, are all topics which might profit from systematic, closely documented, historical enquiry. Yet, Maclean argues, few of the voluminous company histories one might consult in expectation take up such themes. Nor are the pages of business/accountancy history journals replete with articles which inform the heated debate on corporate governance currently raging across the world [Maclean, 1999, p. 109]. An important exception has been the work of John Quail who has argued that in the British case the "separate roles and prerogatives of the directors . . . led to a fixity of structure" which acted to limit the evolution of "managerial hierarchies beyond the departmental or functional level" and also restricted the growth of firms "beyond a certain size or complexity of operation" [Quail, 2000, p.2]. While there has been some recent response to this call for further research, as O'Sullivan has argued, "more empirical research is required to understand the institutions of corporate governance as they have emerged in different countries and as they have evolved and continue to change over time" [2000, p. 295]. Further, O'Sullivan argues that in the literature on corporate governance, the treatment of these issues has been too superficial, partly because much of the empirical analysis of systems of corporate governance has not been sufficiently historical or comparative. A central aim of this paper is to begin to address this shortcoming by reporting the results of an historical investigation of the governance system of an important, internationally recognized British engineering firm, Birmingham Small Arms.

DEFINING CORPORATE GOVERNANCE: THEORY AND METHODOLOGY

The empirical work of accounting and business historians is not conducted in a vacuum, and the approach in this paper is informed by a theoretical framework that is embedded in the institutional arrangements of corporate governance. Corporate governance is taken to mean a concern "with the institutions that influence how business corporations allocate resources and returns. Specifically a system of corporate governance shapes who makes investment decisions in a corporation, what type of decision they make, and how returns from investments are distributed" [O'Sullivan, 2000, p. 1]. In addition corporate governance is concerned with the form, extent and quality of disclosure of 'relevant' business and financial information and the means by which directors project, articulate and justify the corporation's role as a socio-business organization. Defined in this way corporate governance is facilitated by the establishment of a system whereby directors are entrusted with responsibilities and duties in relation to the stewardship of a company's affairs. Based on a system of accountability an effective corporate governance system should provide mechanisms for regulating directors' duties in order to restrain them from abusing their powers and to ensure that they act in the best interests of the company in its broadest sense [Sheikh and Chatterjee, 1995, p.5].