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Response to Review of Shareholder Democracies? Corporate Governance in Britain and Ireland before 1850

We would like to thank James McSwain for his generous review of our book. He has summarised well the contents and argument about the trends in joint-stock politics in Britain and Ireland during the 18th and 19th centuries. He describes the institutions of corporate governance as part of a ‘panoply of risk management tools’ (pp. 1-2), which aimed to install confidence in the investor-owners of early joint-stock companies operating in an uncertain political, legal and economic environment. We would accept this description, although we were unable to pursue this idea of risk management very far. It may be that this is best examined at the level of micro-studies of individual companies, for which we had only a limited amount of space in our book.

McSwain makes another interesting remark in his review, which we would like to comment briefly upon. He describes the long-run transfer of power from the general meeting of shareholders towards the boardroom as a shift from a ‘moral economy’ of trust between owners and directors in 18th-century companies towards a governance system of ‘professional’ management that was emerging by the middle of the 19th century (p. 4). Drawing on the work of Tim Alborn, we call the latter a system of ‘indirect’ or ‘virtual’ representation of shareholders by managing directors, with checks and balances increasingly provided by external mediating agencies such as auditors and the financial press.(1) To describe the corporate governance of 18th-century joint-stock companies as a ‘moral economy of trust’ suggests a reciprocity of relations, duties and obligations between shareholders and directors. As McSwain states (pp. 4–5), these 'little republics' – a term used by contemporaries – were situated in [or were part of] a 'moral and enlightened' society, characterised by … economic progress, and thus they required rules and a free flow … and mutual accountability.

The results of recent empirical work on human behaviour across a variety of disciplines – cognitive science, experimental economics, social anthropology, neurobiology, psychology – summarised by Bowles and Gintis (2)  – indicate that human beings are strong reciprocators, who will sacrifice their own payoffs in order to cooperate with others. Preferences for reciprocity, it is argued, neither equate to unconditional altruism nor to simple self-interest. Strong reciprocity is conditional on the behaviour of others and free riding is punished. Indeed free riders or non-contributors are punished even when enforcement involves a cost to the reciprocators. These results should be of great interest to historians for two reasons. First, the presence or absence of preferences for strong reciprocity may have affected the performance of groups, institutions and societies in the past, and thus influenced, perhaps decisively, the direction of development. Second, the question of why, in different places and at different times, strong reciprocity existed or was absent, is one that historians should be well placed to (try to) answer. It is suggested in the behavioural literature – evidently influenced by Darwinian selection – that preferences for strong reciprocity, and other forms of ‘social’ or non self-interested preferences, are connected to competition between groups. Groups comprising a majority with strong reciprocal preferences have a competitive advantage over groups comprising the purely self-interested. Within groups, however, it may often be possible for the self-interested to outdo the cooperators. Whether selfish or reciprocal behaviour predominates at the level of the group, will depend on the relative strength of  these two preferences within the group, and this balance of power can fluctuate over time according to internal and external forces and mediating institutions.

This takes us back to McSwain’s opening gambit: that human association involves managing risk. Our data on British joint stock companies suggest that at some point during the early 19th century – perhaps related to the new scale and complexity of the industrial economy and its institutions – the management of investor risk, trust and confidence came to depend less on reciprocal forms of governance, and more on releasing the self-interest of  ‘passive’ investors from the dominance of the ‘reciprocators’, those interested in maintaining their companies as a community of co-partners bound by unmediated mutual obligations. The struggle between the two preferences was, as we show, not completed by the middle of the 19th century, but the path towards our modern corporate economy of self-gratifying managerial elites, powerless individual shareholders and disembodied corporations was already set.


  1. Timothy L. Alborn, Conceiving Companies: Joint-Stock Politics in Victorian England (London, 1998).Back to (1)
  2. Samuel Bowles and Herbert Gintis, A Cooperative Species: Human Reciprocity and its Evolution (Princeton, NJ, 2011).Back to (2)