STOCKHOLDER REVIEW COMMITTEE OF THE CHESAPEAKE AND OHIO CANAL COMPANY, 1828-1857: EVIDENCE OF CHANGES IN FINANCIAL REPORTING AND CORPORATE GOVERNANCE, THE

Accounting Historians Journal, The, Jun 2006 by Russ, Robert W, Previts, Gary J, Coffman, Edward N

Abstract: Canal companies were among the first enterprises to be organized in the corporate form and to require large amounts of capital. This paper examines the stockholder review committee of a 19th century corporation, the Chesapeake and Ohio Canal Company (C&O), and discusses how the C&O used this corporate governance structure to monitor and improve financial management and operations. A major strength was the concern and dedication of the stockholders to the company, while a major weakness was the political control exerted by the State of Maryland. The paper provides an historical perspective on corporate governance in the 19th century. This research contributes to the literature by providing detailed workings and practices of a stockholder review committee. The paper documents corporate governance efforts in archival sources that provide an early example of accountability required in a corporate charter and the manner in which the stockholders carried out this responsibility.

INTRODUCTION

Canal companies were among the earliest enterprises to be organized in a corporation form, and they were also among the first to require large amounts of capital. Raising the needed capital resulted in absentee owners who required financial information. The purpose of this paper is to contribute to a better understanding of the origins of corporate governance and financial management in the U.S. by examining activities of a 19th century canal corporations stockholder review committee, specifically that of the Chesapeake and Ohio Canal Company (C&O). While other studies have discussed accounting practices and procedures of companies in different industries during this time [Kistler, 1980; McKinstry, 1996; Michael, 1996; Previts and Samson, 2000], there is limited discussion in the literature of corporate governance during the canal era. The C&O broke ground in 1828, and construction was completed to Cumberland, Maryland in 1850.1 The company continued operations until 1889.

A review of the accounting literature reveals that little has been written about the corporate governance and financial management practices of canals. Kistler [1980] presented an analysis of the accounting practices and management of the Middlesex Canal, which was built from 1793 to 1804 and operated until 1850. As part of its corporate governance, the Middlesex Canal Company used a stockholder review committee to audit the company financial records. Stockholder review committees have also been found in early railroad companies (e.g., the Baltimore & Ohio Railroad [Previts and Samson, 2000]). While these studies present evidence of the existence of stockholder review committees, they do not provide details of their workings or findings although some limited evidence of the operations of a review committee is presented by McKee [1979]. Our study of the stockholder review committee of the C&O contributes to the literature by providing evidence of the workings and practices of a canal company that operated independently between 1828 and 1889. It identifies an early example of accountability required by a corporate charter.

At the time of the C&O s founding in 1828, there were very few corporations. There were no known established corporate governance or financial reporting practices in the U.S. In his discussion of the Forth and Clyde Navigation Company of Scotland, Forrester [1978] noted many innovative business practices. Boockholdt [1983], in describing early railroad accounting, observed that prior to these early corporations, there were no precedents for disclosure or accounting methods to be used. Previts and Samson [2000], in their study of the Baltimore & Ohio Railroad (B&O), provided evidence that the financial reporting of early corporations evolved over time. They observed that the B&O served as a school for railroad companies by providing an example of company management that other companies could emulate. Claire [1945] provided further evidence by describing the evolution of financial reporting at U.S. Steel around the turn of the century and noting that a measure of reporting progress was to chart the changes in the annual reporting style of a single company.

The research of the current study takes the evolution in financial reporting a step further by examining the catalyst for evolutionary change. It is hypothesized in this paper that one catalyst for change resulted from the accountability demands of stockholders. In the case of the C&O, the stockholders used the stockholder review committee to effect this evolutionary change not only in financial reporting but also corporate governance.

The following section provides a brief discussion of the canal era in the U.S. Information regarding the origins of corporate governance at the C&O is then presented, followed by a discussion of the stockholder review committee and the financial management of the company. The final section provides some concluding comments.

THE CANAL ERA IN THE U.S.

As a young man, George Washington had surveyed land and rivers throughout Virginia into the Ohio Valley. In 1772, Washington proposed the establishment of a company to make improvements on the Potomac River. In that year, Washington obtained a charter from the House of Burgesses in Williamsburg, Virginia; however, the charter was not ratified by the Maryland legislature.2 The start of the Revolutionary War ended all consideration of the project.