Ione Mako: You’re listening to the Open Finance series on Lessons From History from the Open University Business School. My name is Ione Mako, and today we are taking a historical look at investors with Janette Rutterford, Professor of Financial Management at the Open University Business School. Hello, Janette.
Janette Rutterford: Hello.
Ione Mako: So okay, looking at investors in the past, we’re now living in a very volatile world and the banks have collapsed, shares have lost a third to half of their value in the past two years, some share prices down to levels not seen since the mid-to-late 1990s, and many people are feeling the pain directly or indirectly and I think, generally, we’re feeling quite sorry for ourselves at this point. It was never this hard for investors in the past was it?
Janette Rutterford: Well, it was much harder, actually, because, in the old days, a lot of people lived off the income that they got from shares, you know, they didn’t have pension schemes, they weren’t looked after by final salary benefits, they didn’t have a civil service pension and so on. They had quite a tough life and so they had to save and they had to make sure that the money they got from their investments would keep them.
So, when the dividend was cut, as it has been recently with a lot of companies, it was a nightmare for them. And it was particularly interesting because the England, or the Great Britain, of that time was very socially conscious and class conscious, you were defined by your income. I don’t know if you’ve ever read any Jane Austen?
Ione Mako: Yes.
Janette Rutterford: Mr Bingley was a five thousand a year man and Mr Darcey was a ten thousand a year man; you were defined by your income. And your income bought you servants and carriages and so on, and if you went down in the world you just couldn’t visit people that you used to visit because you didn’t have the right carriage to visit them in and you didn’t have the right dress to wear to see them in. And so it was absolutely disastrous if you lost money on the stock market.
Ione Mako: And those that you’re talking about, they’re fictional examples of women but they weren’t the actual investors of the day were they? Surely men did that, women were the beneficiaries or victims of it, weren’t they?
Janette Rutterford: Well, England has a very interesting history because spinsters – unmarried women – and widows had equal rights with men to do whatever they wanted; to buy and sell shares and so on. And that wasn’t the case in countries like France or Germany or Italy where women had to, even if they were single had to have a man write the cheque for them and so on.
So you actually had all these women, and in fact you had a lot of women in the 19th Century because there was what was called the "surplus" or "redundant woman" - there were too many to get married. And it stemmed from our legal system.
Our legal system had something called primogeniture, which was the eldest son got everything, basically. So you had all these younger sons who couldn’t afford to get married because they didn’t have a proper job and they didn’t have a house, and then yet you had these endless single daughters who couldn’t afford to get married because they didn’t have a dowry and their only choice was to go downmarket and to marry somebody beneath them - but if they did that then they wouldn’t be visited, they would be a social outcast. And Trollope novels have endless strings of four unmarried daughters, eight unmarried sisters of all the heroes and heroines, and it was a real problem.
So what parents tended to do was, they tended to give their daughters investments so that when they died - when the parents died - these daughters could live off the income of these dividends. And then you also had widows and orphans and they had to worry because they had to make sure they could put their children into schools to meet the right people, to get the right social connections and so you have lots and lots of stories of investment where widows speculated and widows invested in risky shares, trying to get their income up because the income they got from boring old government bonds wasn’t enough to pay the school fees and wasn’t enough to run the lifestyle.
Ione Mako: Right, so what sort of investments generally were investors looking for at this time?
Janette Rutterford: Well, what happened was, in the mid 19th Century you had something called the Limited Liabilities Acts, which is when limited liability companies were started. And so from then on you had waves of new issues of companies with beautiful prospectuses, sometimes they had maps attached, and so they were encouraged to buy shares in the Burma Ruby Mine Company, for example, in the late 19th Century.
You had queues of women and men down the streets of the city desperate to get their share of these supposedly fantastic ruby mines that were going to make them rich as they’d never thought before. As we’d had waves of issues in bicycle companies, car companies, rubber companies, gold mines, ruby mines, even patented lavatory seats, you know, people would be caught in this euphoria, just as we were in the dot com boom. But the consequences for them were probably much more serious because they didn’t have the salary and the final pension scheme to fall back on that we do.
Ione Mako: So how did they decide what to invest in? I mean obviously, you know, rubies in Burma sounds a very glamorous thing to invest in but where did they actually get their information from to make a decision?
Janette Rutterford: Well, the newspapers were absolutely full of copies of prospectuses, but also they used to report on the annual general meetings and they used to publish balance sheets and stuff. But a lot of people actually went to the annual general meetings of companies. Now in today’s thing, we go to Lloyds or the Royal Bank of Scotland because we’re worried what they’ve done with our money but these were actually social occasions.
And there was a hotel in London called the Cannon Street Hotel which had several rooms to hold annual general meetings - and one of them held two thousand people - and they were quite often full. And there was a particular euphoria with a company called the British South-Africa Company, of which Cecil Rhodes was a director.
And Cecil Rhodes was the guy they named Rhodesia after, and so basically he was plundering all the natural wealth and the resources of Rhodesia in South Africa and so people invested in this company. And they would go and hear Cecil Rhodes talking about “the native question” and all that kind of thing.
And at one point they actually said the only place they could go that would be big enough would be the Royal Albert Hall because people were just milling about outside and they had to get the police to keep them under control, because it was so exciting to go and listen to a director talking about his company and talking about what was happening in Rhodesia, these far away countries.
I mean, what’s interesting is that people invested in countries they had no concept of, they were never going to visit. And I have personal experience of that, because my great uncle who lived in Liverpool and was a cotton broker, I still have the share certificates of the Central African Mining Company which I’m absolutely positive never paid a single dividend but he was prepared to invest in it.
Ione Mako: And it sounds from what you’re saying as though they were really quite active, the shareholders, in getting their information. How does this compare with now, because I have a sense that, with the great sort of move towards "experts" that a lot of people now just think somebody in charge knows better than them.
Janette Rutterford: Well, I think there was definitely an impression in the old days that the directors knew better and one of the things that people did when they started companies was, they made sure that the directors included a load of lords and important people who had a good bedside manner and would reassure the troops. The problem I think that’s happened today is that we’ve moved from individual investors controlling the vast majority of shares, which is what it was like right up to the 1960s and 1970s, to a point where now it’s investing institutions which control the purse strings, so we have pension funds, life assurance companies and so on.
And I think there are two problems. One is that these institutions have failed to take on an active role because they’ve said they’re investors and they’re not going to meddle with management. I mean, sometimes they whinge about executive pay but that’s as far as they go. But the other thing is, you know, that they’re not asking the questions and they’re not as - they’re sort of in cahoots, as it were, with companies, there’s a sort of conflict of interest here because they all earn quite a lot of money and so do the people on company boards and so they’re all scratching each other's backs, and you don’t have this rabble, as it were, of individual investors who stand up in annual general meetings saying, you know, “You shouldn’t be doing that.”
And it wasn’t just the men who were active at annual general meetings; women actually stood up and asked quite pertinent questions or criticised management if they weren’t behaving properly. There was actually a Women’s Shareholders Association but that wasn’t until the 1960s. But before World War One there were actually examples of people standing up at the Joe Lyons annual general meeting, (Joe Lyons ran a chain of cafés, very genteel cafés) and they said things like, “Well you should change the managers, you should have women manageresses, they’d manage it much better, and you should change the menus because the people don’t like your food,” and the chairman would politely say “I’ll take these kinds of ideas on board.” It’s not clear whether they did or not but certainly women had a good time criticising about things they knew about.
There’s a very famous lady in American corporate governance history called Wilma Soss who sounds as if she was as mad as a fish but she actually stood up in a shareholders meeting and said to the Chairman of United States Steel, which had 500,000 shareholders, in the 50s and said, “you are my employee.” You know, there was this concept that actually management was there to serve the shareholders, and that’s been completely lost, you know, shareholders are sort of a passive lot that just take what they’re given and all these executive pay schemes and takeovers which are actually value-destroying, somehow these individual shareholders, it’s only when it’s too late that we get to make a fuss.
Ione Mako: So looking at this from an historical perspective, what should we be learning, what could we learn from it?
Janette Rutterford: Well, what we could learn is that we could start again actually being active as shareholders and starting shareholder associations, and going to shareholders’ meetings and actually standing up and saying what you think. Because actually, although you might not control the votes, by publicity and by pressure you can actually get companies to change their strategies.
Ione Mako: That’s a fascinating glimpse, thank you very much, Janette. You’ve been listening Open Finance on Lessons From History from the Open University’s Business School.