This well researched and substantial volume describes and analyses the evolution of the corporation in nineteenth century America. Drawing on a wealth of new material, Robert E. Wright not only shows that corporations were, during the first two thirds of the century, much more numerous and widespread than previously assumed, but also argues that antebellum corporations were by and large well governed and efficient – so much so, in fact, that present-day managers and investors would be well advised to follow their example.

By 1860, Americans had founded more than 22,000 corporations, a number that no other country even came close to matching. As Wright reminds us, in the early decades of the nineteenth century, anticorporate sentiment had still been strong. Echoing Adam Smith, early critics of the corporate form argued that salaried managers who had no personal financial stake in the enterprise they oversaw had little incentive to do more than absolutely necessary to promote its interests. These critics also believed that corporations enjoyed monopoly power, that they fostered speculation and corruption, and – especially where railroads were concerned – engaged in rent-seeking. But, as Wright convincingly argues, although such sentiments may have slowed the rate of incorporation, they were probably not as widespread and as representative of public opinion as many historians think. After all, if the public had wanted to do away with corporations altogether, legislators could and would have done so. Instead, policy makers came to believe that competition was the most effective remedy to any problems, and that the proliferation of corporations was therefore to be encouraged.

And proliferate they did, as Wright shows. While previous statistical studies restricted themselves to a selected number of states1, Wright has compiled an impressively comprehensive database consisting of the special charters granted to businesses each year throughout the United States between 1790 and 1860 as well as their minimum authorized capitalization. Based on this wealth of data, Wright notes a number of trends and developments. Some, such as the fact that “new corporate chartering was sensitive to the business cycle” (p. 52), are hardly surprising; others, however, seem rather more intriguing – who would have guessed, for instance, that Nebraska had a higher number of corporations per resident than New York did?

Clearly, corporations could not have multiplied at the rate they did if capital owners had not considered their shares an attractive investment. Wright maintains that this was not only true of the “überwealthy urban elite” (p. 85), as historians tend to assume, but also applied to people of more moderate means, including “women, public institutions, and thrifty mechanics”, according to one contemporary observer (p. 90). Wright points to stockholder lists, broker’s records and probate records that suggest a similar conclusion, and while the data is not sufficiently representative to allow him to put an exact number on this phenomenon, his point is nevertheless convincing. Historians have, in the past, perhaps too easily dismissed evidence to this effect, often pointing to the restrictively high minimum transaction value on the New York Stock Exchange while ignoring the fact that the vast majority of shares did not trade there.

Investing in corporate shares was promising because, as Wright argues, corporations were governed through an effective system of checks and balances which mostly served stakeholders well. This, in fact, may have been one reason why America became the “Corporation Nation” in the first place – its political system of governance was very similar to the system which proved most congenial to the corporate form. Both corporate and political governance, Wright claims, were “essentially Lockean” in spirit: “if leadership/management did not benefit the citizen/stockholders, the government/management could – indeed, should be – ousted” (pp. 116f.). Managers of corporations were, therefore, not only restricted in their activity through corporate charters but were also held accountable by shareholders who throughout the antebellum period remained “residual decision makers” (p. 119). They exercised this capacity at shareholder meetings where important decisions regarding the management of the company were decided by majority vote. The right to vote was combined with other checks on managers’ powers such as the right to call meetings and the right to obtain relevant information about the company’s affairs. The nineteenth century market for equities has often been depicted as one plagued by problems of asymmetric information, in which only investors living in close proximity to the company whose shares they owned could hope to obtain sufficient knowledge about its affairs.2 Wright by contrast claims that most corporations generally provided shareholders with adequate information in the form of “selective disclosure”, communicated through circular letters or annual reports (he does not explicitly address the question of whether these circulated widely enough to have been read not just by local but also by distant investors). While acknowledging that not all information provided by a corporation’s management was accurate and that its methods of accounting were “biased towards the sanguine” (p. 146), Wright maintains that overall, these and other principles of governance proved effective and worked in the best interest of shareholders.

This, he goes on to show, changed following the Civil War. Governance failures became more frequent as voting rights were undermined through the abuse of proxy voting (stockholders who could not attend meetings authorized others to vote on their behalf). Legislators responded by imposing ever more stringent regulations to protect the interests of shareholders. In this they were sometimes successful; in the long run, however, Wright argues, they turned out to be “more costly and less responsive than stockholder governance” (p. 173). But why did earlier principles of self-governance by corporations cease to be effective in the first place? Wright does not provide a clear answer to this question but seems to suggest that the two main factors were the sheer size of new corporations as well as the fact that shareholders became ever more dispersed over large areas, making collaboration costs prohibitively high.

Wright ends his book on a somber note: unless we return to the principles of corporate self-governance that proved so successful in the nineteenth century, he warns, we may experience a crisis of confidence among investors that could result in a large-scale capital strike and a mass-selling of shares, triggering a crisis of epic proportions. This surely seems alarmist given the fact that in the present age of austerity, investors have few alternatives to corporate securities, and today’s financial markets are already characterized by an oversupply of capital. Wright’s call for a strengthening of shareholder rights and an improvement of corporate governance is justified nevertheless, and his wide-ranging and detailed account should provide potential reformers with much food for thought.

Notes:
1 George Heberton Evans, Jr., Business Incorporations in the United States. 1871–1920, New York 1948; William C. Kessler, Incorporation in New England: A Statistical Study, 1800–1875, in: Journal of Economic History 8 (1948), pp. 43–62; John William Cadman, The Corporation in New Jersey. Business and Politics, Cambridge/Mass. 1949.
2 Jonathan Barron Baskin, The Development of Corporate Financial Markets in Britain and the United States, 1600–1914: Overcoming Asymmetric Information, in: Business History Review 62 (1988), pp. 199–237.