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Abstract
The relative efficiency of producer co-operatives is investigated through an examination of the financial performance of a group of cotton spinning firms that emerged from the spread of co-operative ideals after the mid-nineteenth century. Reflecting such influences these firms adopted two particularly important aspects of democratic governance: use of low denomination partly paid shares to encourage wide share ownership among local working class operatives, and the use of a one shareholder one vote rule at company meetings. Prior literature, much of which predicts the failure of producer co-operatives due to incentive problems, has not specifically examined these aspects of democratic control. Moreover because the case study utilises samples of stock market quoted companies, there is an opportunity to quantify the financial performance effects of these governance mechanisms. The case study therefore offers a unique insight and important contribution to the wider literature. The results show that both aspects of democratic governance contributed to the economic success of the companies that adopted them, enabling them to satisfy the high demand for cash dividends that characterised investor requirements. However, the cyclical nature of the cotton industry and the stock market booms and slumps that resulted led to redistributions of wealth through time that in the long run undermined the co-operative project.
Acknowledgements
I am grateful to Andrew Pendleton and the two anonymous reviewers for helpful comments on an earlier draft.
Notes
1. Jensen and Meckling, ‘Rights and Production Functions’, 481.
2. The ‘Oldham District’ comprised a large area of south-east Lancashire and included Rochdale to the north, Ashton to the south and Middleton to the west.
3. Ellison, The Cotton Trade, 138; ‘The Rise and Progress of the Rochdale Limiteds’, Rochdale Observer, May 10, 1890. See also Toms, ‘The Rise of Modern Accounting’ for an account of the demise of the co-operatives in the slump of the early 1890s.
4. For example, see Oldham Standard, July 10, 1875, 8c; Jones, Co-operative Production, 284–5.
5. Farnie, The English Cotton Industry.
6. See respectively, Toms, ‘Windows of Opportunity in the Textile Industry’; idem, ‘The Supply of and Demand for Accounting Information’; idem, ‘The Rise of Modern Accounting’; idem, ‘Information Content’.
7. On the success of retail in northern England, see Purvis, ‘Stocking the Store’.
8. Redfern, The Story of the CWS, 19–20. Producer co-operatives and limited liability dominated the agenda of this influential meeting on 12 August 1862, which was attended by ‘a few friends from Rochdale, Oldham, and Middleton’, including William Marcroft, the founder of Sun Mill Cotton Spinning Company.
9. The Oldham ‘limiteds’ constituted the most important group of joint-stock manufacturing corporations in Britain and were responsible for 12% of the world's cotton spinning capacity in 1890; Farnie, ‘The Emergence of Victorian Oldham’. The ‘Oldham District’ comprised a large area of south-east Lancashire (much of present day Greater Manchester) and included Rochdale to the north, Ashton to the south and Middleton to the west.
10. Industrial and Provident Societies Act 1862, 25 & 26, Vict., c. 87. Yonekawa, ‘Public Cotton Spinning Companies’, 64–5.
11. Gosden, Self-help, 194, 199–200.
12. Companies Act, 1862, Part III, s. 52 Vic. 25 & 26, Cap. 89.
13. Companies Act, 1862, Table A, first schedule, s. 44, Vic. 25 & 26, Cap. 89.
14. Companies Act, 1862, Table C, second schedule, s. 19, Vic. 25 & 26, Cap. 89.
15. Dunlavy, ‘Corporate Governance’, 32.
16. Ibid., 30–1.
17. For examples see Toms, ‘The Rise of Modern Accounting’, 68.
18. Toms, ‘The Supply of and Demand for Accounting Information’; idem, ‘The Rise of Modern Accounting’.
19. For example: Depression of Trade and Industry: Second Report of the Royal Commission Appointed to Inquire into the Depression of Trade and Industry, 1886 [C.4715].
20. Jensen and Meckling, ‘Rights and Production Functions’; Ben-Ner, ‘On the Stability of the Co-operative’.
21. Ibid., see particularly, 473, 477, 482–3.
22. See respectively, Dow, Governing the Firm; Pencavel, Pistaferri and Schivardi, ‘Wages, Employment, and Capital’; Estrin and Jones, ‘The Viability of Employee-owned Firms’.
23. Arando et al., ‘Assessing Mondragon’.
24. For example in the case of private clubs, see Jensen and Meckling, ‘Rights and Production Functions’, 500.
25. Ibid., 484, 500.
26. Dreze, ‘Some Theory of Labor Management’.
27. Jensen and Meckling, ‘Rights and Production Functions’, 487–8.
28. Dreze, ‘Some Theory of Labor Management’, 1134. The cotton spinning industry in the second half of the nineteenth century was characterised by increasing asset and product specialisation, see Kenney, ‘Sub Regional Specialization’.
29. Jensen and Meckling, ‘Rights and Production Functions’, 500.
30. Other voting systems, including dual class rights and cumulative voting for directors, have disappeared altogether from some states of the USA and are found infrequently elsewhere. The egalitarian decision rule of one shareholder one vote was sometimes used in corporate decision making in the early nineteenth century, but has subsequently disappeared. Dunlavy, ‘Corporate Governance’.
31. Marx, Capital III, 440; Engels, Anti-Duhring, 284–98.
32. Clark, ‘Authority and Efficiency’; Bowles and Gintis, Schooling in Capitalist America.
33. Wood, ‘The Statistics of Wages’, 612–13; Tyson, ‘The Cotton Industry’, 123.
34. In the regular boom/recession cycle of the period 1870–90, there were mill promotion booms in 1873–75, 1883–84 and 1889–90. Farnie, The English Cotton Industry, 250–1.
35. Marglin, ‘Knowledge and Power’.
36. Clark, ‘Authority and Efficiency’, 1079. See also Potter, The Co-operative Movement in Great Britain; Jones, Co-operative Production, 288.
37. Gurney, ‘The Middle-class Embrace’, 260.
38. Putterman, ‘Some Behavioural Perspectives’, 157.
39. Lazonick, ‘Industrial Relations and Technical Change’.
40. Clark, ‘Authority and Efficiency’, 1072, 1077, 1082–3.
41. An exception is Jones, ‘British Producer Co-operatives’, which shows that survival rates for co-ops are better than private sector equivalents.
42. Cf. Clark, ‘Authority and Efficiency’, 1079 and Ellison, The Cotton Trade, 138.
43. ‘The Rise and Progress of the Rochdale Limiteds’, Rochdale Observer May 10, 1890.
44. ‘The Co-operator’, Quarterly Review 114, no. 228 (October 1863): 432–3.
45. William Cooper, The Co-operator 31 (September 1862): 70.
46. ‘Old Pioneer’, The Co-operator 32 (October 1862): 84–5; F. Wilson, The Co-operator 18 (15 October 1861): 86.
47. William Cooper, The Co-operator 31 (September 1862): 70.
48. Marcroft, The Companies Circular (self-published pamphlet, Oldham, 1879). Marcroft was also an advocate of maximising dividend payments. Redfern, The Story of the CWS, 20.
49. Sun Mill Archive, John Rylands Library, Minutes of Directors Meetings, SM/1/1, 10 September 1861 and passim, e.g. 3 May 1864.
50. Belgian, Shiloh and Thornham were typical companies with large numbers of working class shareholders. Respectively these companies had 639, 295 and 406 shareholders and average shareholdings of 22, 17 and 18 (PRO BT31/14469/7869, 14486/8310 and 14494/8449). Oldham Equitable Co-operative Society took up 200 shares the Equitable Spinning Company and 100 in the Glodwick and Thornham Spinning Companies, while placing £3000, £3000 and £1000 respectively on deposit with the loan accounts of each company. Toms, ‘The Rise of Modern Accounting’, 67–8 and ; Taylor, The Jubilee History of the Oldham Industrial Co-operative, 75.
51. SM/1/1, 6 January 1863.
52. ‘Diviborough’, see Farnie, The English Cotton Industry, 263, and for comparisons of dividend rates of Oldham companies see Toms, ‘Financial Constraints on Economic Growth’ and idem, ‘Finance and Growth’.
53. SM/1/1, 7 August 1869 and 10 July 1871.
54. Calculated as a percentage of called up share capital from the table in Co-operative News, ‘The Sun Mill’, November 23, 1872.
55. Jones, Co-operative Production, 289–91.
56. ‘Croft Bank Spinning Company Limited’, Oldham Standard, April 17, 1875. See also ‘Northmoor Spinning Company’, Oldham Standard, December 23, 1876.
57. ‘The Shaw Spinning Company’, Oldham Standard, January 4, 1879. See also, ‘Commercial Mills Spinning Company Limited’, Oldham Standard, December 18, 1880.
58. The ‘Rochdale plan’ of the original pioneers of the 1840s advocated quarterly meetings and barred proxy representation; Jones, Co-operative Production, 23. For details of financial disclosures, see Toms, ‘The Rise of Modern Accounting’.
59. ‘Higginshaw Mills and Spinning Company’, Oldham Standard, December 25, 1875.
60. ‘Commercial Mills Spinning Company Limited’, Oldham Standard, December 15, 1877.
61. ‘Higginshaw Spinning Company’, Oldham Standard, March 18, 1893.
62. ‘The Central Mill Company and the Master Cotton Spinners Association’, Oldham Standard, October 9, 1875. Marcroft described the directors as servants of the shareholders who could ‘bag’ them if they do not do as they ought to. Thomason (in the chair) replied, ‘we are your servants; but for that man (Marcroft) I would not work a minute; he is a tyrant. (Sensation).’
63. See respectively for examples: ‘The Shaw Spinning Company’, Oldham Standard, January 4, 1879, ‘Manchester Trade Report’, Oldham Standard, May 30, 1891, ‘Oldham Share Market’, Oldham Standard, February 14, 1891.
64. Gurney, ‘The Middle-class Embrace’, 259–60.
65. For example the Briggs colliery scheme, ibid., 259.
66. Bonner, British Co-operation, 106–7; Cole, A Century of Co-operation, 164–5; Redfern, The Story of the CWS, 104–5.
67. Bonner, British Co-operation, 107.
68. W. Cooper, The Co-operator, October 15, 1861.
69. E.V. Neale, ‘The Division of Profits’, The Co-operator, October 1861, 86–7. See also W.R. Lemon, The Co-operator, October 1862, 86.
70. Bonner, British Co-operation, 113.
71. Ibid., 114.
72. ‘Joint Stockism at Oldham’, Co-operative News, February 20, 1875.
73. ‘Co-operative Manufacture’, Economist, May 6, 1871. See also criticism of excess profits at Sun Mill and implied labour exploitation in the Preston Guardian, cited in Co-operative News, July 18, 1874.
74. R. Kyle, ‘Hindrances to Co-operative Production’, Co-operative News, May 6, 1876.
75. M. Ross, ‘The Capital and Labour Question’, The Co-operator, October 1862, 69–70.
76. Oldham Standard, July 10, 1875, 8. Call risk was problematic for investors of all classes, and there is evidence that in some districts of Lancashire, shares were deliberately sold by third parties to minors who were not liable for calls, thereby precipitating bankruptcy. See Bennett's account of the Whittlefield and Calder Vale Self-Help co-operatives, History of Burnley, Vol. 4, 100–1.
77. W. Nuttall, Co-operative News, November 23, 1872, 598.
78. For example at the Thornham shareholders’ meeting, held at Royton Temperance Seminary, two shareholders (Whitehead and Clegg) questioned the board’s cotton buying, and received the riposte from Tetlow, a director, that they represented ‘some taproom party’; ‘Thornham Cotton Spinning Company’, Oldham Standard, June 21, 1884; ‘The Shaw Spinning Company’, Oldham Standard, January 4, 1879. A shareholder shouting: ‘All the board should be reduced 10 per cent. The Chairman: No one ought to come to the meeting unless he is sober (Hear hear, throw him out &c.)’. See also Gosden, Self-help, 206, on the positive stance of the co-operative movement on the temperance issue.
79. W. Nuttall, ‘The Sun Mill’, Co-operative News, November 23, 1872.
80. W. Bunton, ‘On Some Co-operative Speeches’, Co-operative News, November 23, 1872.
81. ‘More Echoes from the Mississippi Valley’ and ‘Joint Stockism at Oldham’, Co-operative News, February 20, 1875.
82. Under the operation of the Gold Standard demand for Lancashire goods in silver using markets was linked with the gold/silver price relationship. For example see the press commentary on role of these factors in the slump of 1891–92: Oldham Standard, February 7, February 14, February 28, May 23, 1891, March 12, 1892.
83. For example at the Thornham Cotton Spinning Company shareholders’ meeting, held at Royton Temperance Seminary, two shareholders (Whitehead and Clegg) questioned such interference, and received the riposte from Tetlow, a director, that they represented ‘some taproom party’, Oldham Standard, June 21, 1884. According to one concerned shareholder of Albany Cotton Spinning Company, rumour had it that representatives of the limited companies did their Liverpool business in minutes and spent the rest of the time having picnic parties at New Brighton; Oldham Standard, December 26, 1891.
84. Thomas, The Provincial Stock Exchanges, 149–51.
85. In 1877, 59 companies had shares of £5 each and a further 11 had shares of =>£10, Co-operative News, April 7, 1877.
86. Royal Commission on the Depression of Trade and Industry, minutes of evidence, 4336 and 4586, CWS Annual1884, quoted in Ellison, The Cotton Trade, 138.
87. Smith, ‘An Oldham Limited Liability Company’.
88. For example in 1874, 772 shareholders held an average of 18 (£4) shares each in the Moorfield Spinning Company (calculated from Smith, ‘A History of the Lancashire Cotton Industry’, 188). When the Dowry Spinning Company was floated 10 years later, 127 shareholders held an average of 94 (£2 10s) shares each (calculated from form E Summary of Capital and Shares 1884, Dowry Spinning Company, PRO BT31/37928/16753).
89. Farnie, The English Cotton Industry, 266.
90. For example the losses at the New Earth and Boundary Spinning Companies, Oldham Standard, July 17, 1891, August 22, 1891.
91. Ellison, The Cotton Trade, 138.
92. Royal Commission on the Depression of Trade and Industry, q. 5275.
93. Jones, Co-operative Production, 284–5.
94. Textile Manufacturer, February 1877, 62.
95. Ellison, The Cotton Trade, 138, emphasis added.
96. Oldham Standard, January 17, 1885.
97. See Oldham Standard, and Oldham Chronicle, all Saturday issues, c.1875–1900; for a specific example see the report on the Stock Lane Spinning Company, Oldham Chronicle, December 25, 1897.
98. Grossman, ‘New Indices of British Equity Prices’, Table 5.
99. Ibid.
100. For example Mitchell Hey, Sun Mill, Central, Oldham Twist, Green Lane, Royton.
101. Co-operative News, January 13, 1872.
102. Jones, Co-operative Production, 292–3. Green Lane shares were called up at their £50 nominal values and Oldham Twist used £20 shares; Oldham share list, Oldham Standard, various issues.
103. Respectively, National Archives Form E Summary of Capital and Shares, PRO BT31, 14485/8274 and 14486/8310.
104. Mill building companies typically used OSOV, whereas ‘turnover’ companies tended to use one share one vote, reflecting their conversion from previously private companies, most commonly in 1873; Yonekawa, ‘Public Cotton Spinning Companies’, 67. Some companies, for example Grimshaw Lane Cotton Spinning Company, used a show of hands, and for this reason was classified as OSOV but members could under certain conditions force a ballot in which case a one share one vote ballot was used; National Archives, Articles of Association s. 74, BT31/14485/8274. In 1874, the company had 28 shareholders with an average holding of 16 shares with the largest shareholding of 40 shares (8.8% of the total), so ballots would have made little practical difference.
105. LD standard deviation = 3.05%; HD = 2.81%; pre-1886, LD = 3.26%, HD = 2.32%.
106. At the inauguration of the new Industry mill in 1875, the mill engine was christened the ‘Oldham’, as a tribute to the 3.375 million spindles now controlled by the working class of Oldham; Textile Manufacturer, June 1877, 180.
107. Toms ‘The Rise of Modern Accounting’; idem, ‘Information Content’.
108. Industry agreed wage lists negotiated by industry federation and trade unions became the norm from the mid-1880s onwards; Huberman, Escape from the Market, 136–9.
109. Royal Commission on Labour, Group C, Textiles (1892) qq. 190–3. Trade union leaders argued against the appropriation of profits by operatives, partly because it encouraged competition on the shop floor and created jealously and monitoring difficulties (evidence of William Mullin). See also evidence cited by Gurney, ‘The Middle-class Embrace’, 262, on trade union antagonism towards profit sharing and co-operators.
110. ‘Is the Cotton Trade Leaving the Country?’, Textile Mercury, January 21, 1893, 43. See also .
111. A survey in the Oldham Standard, December 29, 1894 showed that the Belgian, Gladstone, Hope and Werneth Cotton Spinning Companies had adverse balances greater than £20,000 (the average subscribed equity capital per company in 1885 was £38,200 (calculated from the appendix data in Smith, ‘An Oldham Limited Liability Company’, 52–3). From a list of average profits per company for the last 10 years (Oldham Standard, ibid.), the average profit per company per year was £993 (based on 980 company/years).
112. Toms ‘The Rise of Modern Accounting’; idem, ‘Information Content’.
113. Royal Commission on the Depression of Trade and Industry, qq. 5041, 5117.
114. One firm of accountants promoted 12 mills in the period 1899–1914; Jones, ‘The Cotton Spinning Industry’, 13.
115. For examples, inter alia, see Oldham Standard, November 27, 1897, October 1, October 8, November 5, 1898.
116. S. 60. Order of the Board of Trade, substituting a new Table A for that contained in the first schedule to the Companies Act 1862, s. r. & o. 1906 no. 596l.15; July 30, 1906; http://www.companieshouse.gov.uk/about/tableA/comm1Oct06orderoftheboardoftrade30July1906_P1.pdf.
117. Toms, ‘Windows of Opportunity in the Textile Industry’; idem, ‘The Supply of and Demand for Accounting Information’. In the longer run, these changes caused a mis-allocation of capital that undermined the international competitiveness of the industry from 1914 onwards; Toms, ‘Growth, Profits and Technological Choice’; idem, ‘The English Cotton Industry’, 70–3; Higgins and Toms, ‘Firm Structure and Financial Performance’.
118. Gosden, Self-help, 197–8; Bonner, British Co-operation, 106.