Ownership, financial strategy and performance: the Lancashire cotton textile industry, 1918–1938

Abstract

This article assesses the validity of John Maynard Keynes' claim that the Lancashire cotton industry failed to restructure because the banks as debt holders prevented firms exiting the industry, creating persistent over-capacity. Using case studies from a substantial sample of Lancashire firms, the article explores archival evidence to establish their financial characteristics, to examine their equity and debt finance and the governance roles of directors and outside ownerhip groups. On the basis of this review the article develops hypotheses to suggest alternatives to the view that bank debt was the dominant explantion of firm level behaviour and industry failure. Applying these to a statistical dataset, results show that syndicates of local shareholders, not banks, were an important impediment to the exit of firms. Moreover, syndicates milked firms of any profits through dividends, thereby limiting reinvestment and re-equipment possibilities. Our results show that where laissez-faire fails in response to a crisis, incumbent investors, particularly block-holders, can be an important impediment to corporate restructuring.

Keywords::

• Keynes
• cotton
• banks
• syndicates
• corporate restructuring

Notes

^1. The authors are grateful to participants at a seminar held at the ‘New Business History’ Conference, York (2012), for helpful comments on earlier versions of this article.

^2. See, for example, Barley, The Riddle; , “Rationalisation” and “Problems of Rationalisation”; Garside and Greaves, “Rationalisation”; Greaves, Industrial Reorganisation.

^3.Keynes, The Return to Gold, 46–47.

^4. Keynes, TheReturn to Gold, inaction of the banks, 605, cotton directors, 631, criticism of contemporary commentators, in Daniels and Jewkes, “The Post War Depression,” discussion, 199.

^5.De Jong, Higgins, and Van Driel, “New Business History?” 3–4, 7, 9.

^6. For example, block ownership in corporate restructuring in the 1980s (Bethel and Liebeskind, “The Effects of Ownership Structure’), which in cases of performance decline tends to increase the frequency of asset reduction and lay-offs (Kang and Shivdasani, “Corporate Restructuring”). In contrast ownership claims can be an exit barrier when predicated on previously overinflated asset values (Filatotchev and Toms, “Corporate Governance'), sunk costs (Clark and Wrigley “Exit, the Firm and Sunk Costs”), and insider ownership (Filatotchev and Toms, “Corporate Governance”).

^7.Aguilera, Filatotchev, Gospel, and Jackson, “An Organizational Approach.”

^8.Filatotchev, Toms, and Wright, “The Firm's Strategic Dynamics”; Toms and Filatotchev, “Corporate Governance and Financial Constraints.”

^9. Calculated from Mitchell, Abstract; Robson, The Cotton Industry, statistical appendices.

^10.Burnett-Hurst, “Lancashire and the Indian Market,” 398.

^11.Bowker, Lancashire Under the Hammer.

^12. Daniels and Jewkes, “The Post War Depression,” 182.

^13. Keynes, The Return to Gold, ‘rationalising process’, 584; short time and financial exhaustion, 582, 590, 597, 602; disastrous long term solution, 588, 598; actual practice, 596–597.

^14. Keynes, The Return to Gold, 598.

^15. Keynes, The Return to Gold, 605.

^16. Keynes, The Return to Gold, 603, 614.

^17. Keynes, The Return to Gold, 603–604.

^18. Keynes, The Return to Gold, 629–631.

^19. MacGregor, “Rationalisation,” 528.

^20. Ryan and MacGregor, “Problems of Rationalisation,” 359.

^21. Keynes, The Return to Gold; Porter, “The Commercial Banks”; Bamberg, “The Rationalisation of the British Cotton Industry”; Marchionatti, “Keynes and the Collapse”; Bowden and Higgins, ‘Short-time Working.”

^22. Keynes, The Return to Gold, 601; Bamberg, “The Rationalisation of the British Cotton Industry,” 26–30.

^23. Daniels and Jewkes, “The Post War Depression,” 179.

^24.Political and Economic Planning, Report on the British Cotton Industry, 59; Sayers, The Bank of England, 253.

^25.Bamberg, “The Government,” 308–309.

^26.Bamberg, “The Government,” 310.

^27.Bamberg, “The Government,” 310–312.

^28.Saxonhouse and Wright, “Stubborn Mules,” 89.

^29.Lazonick, “The Cotton Industry,” 396; Keynes, The Return to Gold, 578–637; Skidelsky, John Maynard Keynes, 261–263.

^30.Dietrich, “The Plight”; Greaves, “Visible Hands.”

^31. Daniels and Jewkes, “The Post War Depression,” 180–181; Political and Economic Planning, Report on the British Cotton Industry, 60.

^32. Effect on prices, Daniels and Jewkes, “The Post War Depression,” 181 on amalgamation; Political and Economic Planning, Report on the British Cotton Industry, 60.

^33.Clay, Report on the Position, 64

^34. Precise details are limited about the formation of the Beecham Trust. With the support of Sir Thomas Beecham, the pill magnate, White established the Trust in 1917, to carry on the business of financiers and merchants, with a capital of £300,000 in preference shares and £100,000 in ordinary shares, all of the latter being held by White. The company was liquidated in 1927 with assets of £134,467 against unsecured liabilities of £1,098,850, of which over £450,000 was owed to the Westminster Bank. White drew heavily on the Trust's funds for personal purposes and, on its winding-up, owed the Trust over £450,000. White died in 1927. The Times, 13 October, 1927, 5; TheTimes, 1 July, 1927, 5; The Times, 21 March, 1927, 5.

^35.The Economist, 8 February, 1919, 188; The Economist, 29 March, 1919, 521. The Trust were also rumoured to be active purchasers of stock in De Beers. The Economist, 26 July, 1919, 140.

^36. ACMT was registered in 1918 as a private company and converted into a public company in 1919. ACMT was formed to acquire the share capital of a number of cotton spinning/ cotton weaving companies, including, inter alia: Robert Hyde Buckley & Sons, Ltd; John Ashworth (1902), Ltd; Mill Hill Spinning Co, Ltd, and Horrockses, Crewdson & Co, Ltd. The company also owned controlling interests in a number of mills. Stock Exchange Official Intelligence, 1930.

^37.The Times, 4 December, 1919, 24.

^38.Stock Exchange Official Intelligence, 1939.

^39.Stock Exchange Official Intelligence, 1930.

^40.Vallance, Very Private Enterprise, 88–89.

^41. For a review of White's business practices see Johnston, Financiers and the Nation, 94–96.

^42.Re Jubilee Cotton Mills Ltd, [1923] 1 Chancery. 1, 31.

^43. Johnston, Financiers and the Nation, 44.

^44. C&WCM, was formed in 1920 by the amalgamation of Crosses & Winkworth Ltd, and other textile firms, for example, Ward & Walker, Lord Hampson & Lord (1919), Ainsworth Bros., Ltd. Subsequently, in 1922, C&WCM, established Crosses & Heatons’ Associated Mills Ltd, an amalgamation of other Bolton-based spinning companies, including William Heaton & Sons, and the North End Spinning Co. Ltd (Stock Exchange Official Intelligence, 1930). Subsequently, it was reported that a group of London financiers had agreed terms with C&WCM to purchase the entire share capital of its subsidiary, John Bright & Brothers. The Times, 9 October, 1929, 21.

^45. Edgar was also involved with White in the £9 million promotion of British Controlled Oilfields, a speculative venture that accumulated major losses for investors, leading to White's suicide in 1927. Johnston, Financiers and the Nation, 96.

^46. Company Prospectus, The Times 16th March, 1920. From the information disclosed in the prospectus it is also possible to calculate that Sperling & Co. collected £300,000 in commission from the issue.

^47. Company Prospectus, Times 16th March, 1920.

^48.The Times, 26th May, 1920

^49.The Times, 15 March, 1920, 24; The Times, 6 September, 1922, 15; The Times, 25 May, 1928, 20; The Times, 5 September, 1928, 19.

^50.Stock Exchange Official Intelligence, 1931.

^51. Filatochev and Toms, “Corporate Governance.”

^52. But see Higgins and Toms, “Financial Distress.”

^53.Frank and Goyal, “Testing the Pecking Order.”

^54. Filatotchev and Toms, “Corporate Governance.”

^55.Aghion and Bolton, “The Financial Structure.”

^56. Keynes, The Return to Gold, 631.

^57. Director interlocks were extensive before 1914 and in the 1950s For pre-1914 evidence, see Toms, “The Rise of Modern Accounting” and “The English Cotton Industry”; for 1950s see Filatotchev and Toms, “Corporate Governance”; Toms and Filatotchev, “Corporate Governance.”

^58. Bolton was the centre of the fine section of the industry and was relatively untroubled by the problems of over-capacity prevalent in the Oldham-centred coarse sector. Contemporary observers recognised that during the 1920s, the depression that affected the Lancashire spinning industry was much more pronounced in Oldham compared to Bolton. An important reason for this was that foreign competition was most serious in the course-medium count trade in which Oldham traditionally specialised, compared to the fine and super-fine counts in which Bolton was pre-eminent. Clay, Report on the Position, 8–9; Political and Economic Planning, Report on the British Cotton Industry, 55–56, 58.

^59. For example E.H. Stockton, the Chairman of the Manchester Chamber of Commerce pointed out that mills passing into the hands of any ‘syndicate who have no knowledge of the conditions of an intricate industry is certain to lead to disaster’. Oldham Chronicle, 25th November, 1919. Keynes, The Return to Gold.

^60.Hoskisson, Hitt, Johnson, and Grossman, “Conflicting Voices.”

^61. If the Braddocks are treated as outsiders in Arrow, this proportion falls to six out of 12.

^62. Calculated from Brunswick Spinning Company Ltd., The National Archives (TNA) BT/31/32378/163957; Argyll Cotton Spinning Company Ltd., TNA, BT 31/36914/165226; BT 31/36915/165226; Avon Mill (1919), Ltd., TNA, BT 31/38811/159919; BT 31/38812/159919; Belgrave Ltd., TNA, BT 31/25035/158943; Century Ring Spinning Company Ltd, TNA, BT 31/32338/161017; Clover Mill (Rochdale) Ltd., TNA, BT 31/36912/164330; Delta Mill Ltd., BT/31/36385/161972; BT 31/36386/161972; Fern Cotton Spinning Company (1920) Ltd., TNA BT/31/32371/163516;

^63. The Lancashire Cotton Syndicate Ltd, had a registered address in London, but was organised at least in part by local cotton mill managers. Alfred Holt was the Managing Director of the Syndicate and mill manager of Bolton Union Spinning Company. Bolton Union Spinning Company (1920) Ltd., TNA, BT/31/32419/166839.

^64. Bottomley invested £26,000 (Share registers, Bolton Union Spinning Co, TNA, BT 31/32419/166839). For details of Bottomley's financial manipulations see Johnston, Financiers and the Nation, Ch.XI.

^65. Beehive re-floated with a nominal share capital of 2 million two-shilling shares (£200,000). The annual return for this company in 1938 indicates that 23% of this stock was owned by the following London-based accounts: Midland Bank Nominees; Morrison Nominees; Barclays Bank Nominees; Branch Nominees; Control Nominees; Roycan Nominees, and one London based group not specified. Beehive Spinning Company Ltd., TNA, BT 31/42620/328092; BT 31/42621/328092.

^66. Elder, TNA, BT 31/32392/164696; Fern, TNA, BT 31/32371/163516; Textile, TNA, BT 31/32270/153035; Asia Mill (Holdings) Ltd., TNA, BT 31/37696/167111;

^67. John Bunting, of the same occupation was a director of about 20 mills (Farnie, “John Bunting,” 506–509).

^68.Hammersley, “Rationalisation: The Cotton Trade.”

^69.Higgins and Toms, “Financial Distress.” As far as we can tell, the only contemporary economist who advocated a comparable scheme was Allen, who proposed that, in a scheme of rationalisation, the surviving firms should make a debenture issue and use the proceeds to acquire the capital of firms which were to close down. In these schemes, Allen proposed that the owners of the closed plants would receive a cash payment representing the pre-rationalisation value of their interest plus an additional sum equivalent to their capitalised share of the additional profit which the industry was expected to earn as a result of the scheme. Of course, as with the Hammersely scheme, Allen recognised that his proposal would only work with government intervention (Allen, “An Aspect of Industrial Reorganisation,” 189).

^70. Anchor, TNA, BT 31/32438/168982; Asia, TNA, BT 31/37696/167111.

^71. Earl Mill, TNA, BT 31/32361/162607.

^72. Asia Mill, TNA, BT 31/37696/167111.

^73. These stockbrokers were sometimes responsible for substantial short-term sales of stock. Thus, for example Hood and Tweedale between them sold 30.3% of Century stock between December 1919 and August 1920. Century Ring Spinning Company (1919) Ltd, TNA, BT 31/32338/161017;

^74. Calculated from Gorse Mill, TNA, BT 31/32349/161673.

^75.McKeown, Oldham Stock Exchange, 40–41.

^76. McKeown, Oldham Stock Exchange, 29, 32.

^77.Maug, “Large Shareholders.”

^78. Coppull Ring Spinning Company Ltd., TNA, BT 31/35255/168122. In Bolton, a prominent example of family control was provided by the reflotation of the Sir John Holden Mill Co. The Holden family owned 58.1% of the ordinary shares. This mill was liquidated in 1929 and became one of the founding mills in the Combined Egyptian (English) Mills Co. TNA, BT 31/32448/170236, Sir John Holden & Sons Ltd; Longworth, The Cotton Mills, 95–96.

^79. Avon Mill (1919) Ltd., TNA, BT 31/38811/159919; BT 31/38812/159919.

^80. Because these figures refer to family holdings, they will be smaller than the figures reported in Table 1 which refer to total blockholders. Anchor Spinning Company (1920) Ltd, TNA, BT 31/32438/168982.

^81. Hartford Mill (1920) Ltd, TNA, BT 31/32314/158753.

^82.Farnie and Gurr, “Design and Construction of Mills,” 10.

^83. For a biographical discussion of the activities of three generations of the Stott family, 1862–1937, see Farnie and Gurr, “Design and Construction of Mills,” 15–18.

^84. Tattersall's Cotton Trade Review

^85. These were: Burns (1891); Fox (1911); Glen (1912), Goyt (1905); Laurel (1905); Magnet (1912); Majestic (1913); Park Road (1891), and Reyners (1912). We are grateful to a referee for indicating the caveats which are discussed in this section.

^86. To develop a proxy for age a cut-off date of 1891 was used. This was the last mill building boom year of the nineteenth century and the next wave did not gain significant momentum until the period 1904–1907 (Toms, ‘Finance and Growth’). Because almost all pre-1891 mills were still in operation in 1918 and there were relatively few mills built between 1891 and 1904, 1891 marks a useful watershed between the nineteenth century and twentieth century cotton mill. The age based dummy was marginally (p < 0.1) and positively related to financial performance in model 2 and insignificant in the other models.

^87.Macrosty, The Trust Movement.

^88. Sayers, The Bank of England, 319–320.

^89.Bamberg, “The Government,” 64–125; Hannah, The Rise of the Corporate Economy, 65; Political and Economic Planning, Reporton the British Cotton Industry, 108–109.

^90.Armstrong, “The Rise and Fall,” 128–129.

^91. De Jong, Higgins, and Van Driel, “New Business History,” 4.

Additional information

Notes on contributors

David Higgins

David Higgins is Professor of Economics at Newcastle University Business School, University of Newcastle. His previous research has been on the Lancashire textile industry, economic performance and market structure.

Steven Toms

Steven Toms is Professor of Accounting at Leeds University Business School, University of Leeds. His research has focused on the history of the Lancashire textile industry, business performance and accountability.

Igor Filatotchev

Igor Filatotchev is Professor of Corporate Governance and Strategy at Cass Business School, City University London, and Visiting Professor at Vienna University of Economics and Business. His research has focused on corporate governance effects on entrepreneurship and strategic decisions and the sociology of capital markets.