The best type of firm ownership is now a subject of fierce debate – family firms versus stock market dispersed ownership. In the late 20th Century, the received wisdom was that US firms were quicker than British firms to separate ownership from control; that is, to switch from family-controlled firms to firms run by professional managers. Berle and Means’ argument, outlined in their famous book The Modern Corporation and Private Property first published in 1932, was that professional management was better than management by owner family members and that this, indeed, explained the relative failure of British firms to flourish in the 20th Century (1). The lack of professionalism and enthusiasm of the second and third generations of firm founders could, they argued, be behind a failure to innovate, with managers preferring to take dividends out of the firm in the short term, rather than using the money to invest for the long term. This argument, until recently unchallenged, suggested that family ownership was a recipe for disaster – certainly in the longer term, regardless of the size of the firm.
First of all, was this true for Britain? Were British firms more family-oriented than comparable US firms? After the limited liability acts of the 1850s, firm incorporation took off with thousands of new companies in existing and new industries flooding the stock market. By 1900, the London Stock Exchange was the largest stock market in the world. So, how does this compute with an image of inward-looking family firms when companies could not be listed on the stock exchange without two thirds of the share capital being in the hands of outside – not family – investors?
The business historian Les Hannah has argued that Berle and Means were simply wrong (2). He says that board ownership in the average British company was as low as 13% by 1900, a figure not achieved by the Americans till 30 years later. And he cites numbers of shareholders in major British companies to support his case. By 1902, there were four major banks with over 5,000 shareholders each, rising to more than 15,000 each by 1915. Lipton’s tea company, listed in 1888, announced at its first annual general meeting that it had 74,000 shareholders. And railway companies, the dominant sector in 1900, had tens of thousands of shareholders.
But it isn’t as clear cut as all that. Many small companies, which thrived as private firms but then chose to raise some capital by floating on the stock exchange, could get round the two-thirds share capital rule quite easily. They could either issue types of securities which had limited voting powers (such as debentures or preference shares), or issue themselves with special shares which had increased voting rights (such as founders shares or ‘A’ shares) (3). Brewery companies were particularly good at this kind of thing, with brewery debentures as popular as government bonds in the 1890s despite having no voting rights. Companies such as Marks & Spencer and Rank Organisation had non-voting shares well into the 20th Century. And the Savoy Hotel fought off bids by Trust House Forte (THF) in the 1980s by issuing lots of voting shares to the family owners. Despite holding a majority of shares, THF could not get a majority of voting shares.
But most family firms, including Marks & Spencer, eventually diluted control as they equalised share voting rights and returned time and again to the stock market for new injections of capital. Family members often don’t have the funds to take up rights issue after rights issue. And loss of control makes the firm vulnerable to takeover.
So, it’s often easier to just stay small. For example, attention has been given to the German small and medium firm sector, the family-controlled Mittelstand, which appear to have suffered less in the latest recession than US stock-market funded companies. Another type of ownership which looks promising is that of the long-standing cooperative firms in the Basque region of Spain, often linked through family connections and protected from takeovers. By working together, they have managed to get access to funds without having recourse to the stock market.
- (1) A.A. Berle and G.C. Means ( 1968), The Modern Corporation and Private Property (revIsion of original 1932 edition), Harcourt, Brace & World.
- (2) L. Hannah (2007) “The 'divorce' of ownership from control from 1900 onwards: re-calibrating imagined global trends.” Business History, Vol. 49, No. 4, pp. 404-38.
- (3) B. R. Cheffins, D. K. Koustas and D.C. Chambers (2012) “Ownership dispersion and the London Stock Exchange's 'two-thirds rule': an empirical test.” Business History, Vol. 55, No. 4, pp. 667-690.