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ABSTRACT
The Kingston Cotton Mill Company (KCM) was one of the first companies to be formed under the Joint Stock Companies Act 1844. This Act led to an explosion in company formations, as it was intended to do. The provisions of the Act anticipated a number of the concerns about what would now be called ‘corporate governance’, caused by the divorce between ownership and management. The KCM provides an interesting case study on the effectiveness of the early governance provisions. The extent of the agency problem at the KCM was especially acute because of the relatively large body of shareholders (just over 400) starting a large-scale project from scratch with no knowledge of the cotton industry. Particular attention is paid to the accountability and audit provisions introduced into the KCM's constitution. Evidence of the weaknesses in these provisions is derived from the legal proceedings which followed the company's collapse in 1894. The purpose of this study is to provide a basis for better understanding some key issues in corporate governance in mid- to late-Victorian Britain through the examination of the background to a company whose name has been familiar to generations of accounting students and practitioners.
Disclosure statement
No potential conflict of interest was reported by the author.
Notes
1. Ingle (Citation1997) is a rare example of an examination into the Yorkshire cotton industry, although he only covers the period up to 1835, before the widespread use of the joint stock company as a corporate structure. For a refutation of the conventional explanation for the siting of the cotton industry on the west coast, see Crafts and Wolf (Citation2014). Bellamy (Citation1962) reviewed the history of the two main cotton spinning mills in Hull but was mainly concerned with the Hull Flax and Cotton Mill.
2. Recent citations include in Singapore, JSI Shipping (S) Pte Ltd v Teofoongwonglcloong (2007 4 SLR(R) 460; 2007 4 SLR 460) and PlanAssure PAC v Gaelic Inns Pte Ltd (2007 4 SLR 513; 2007 SGCA 41) and in the UK, Moore Stephens v Stone Rolls Limited (2009 UKHL 39).
3. Plus one shilling for every £1000 of capital sought to be raised (s. XXI).
4. ‘Mercer’ was a term to describe a merchant who sells cloth.
5. The KCM's ownership structure described here relates to the position when the company was launched. Obviously, shares would change hands as time went on, facilitated by the fact that the KCM was quoted on the local stock exchange (though it was never quoted on the London exchange).
6. The qualification was raised to 10 shares in 1867.
7. The provisions contained in the KCM's articles 75 and 100 correspond closely to the content of the Joint Stock Companies Act 1844 (7 & 8 Vict., c.110), sections 35 and 40. The Joint Stock Companies Act 1844 was silent on the issue of who might be eligible to serve as company auditor and neither was any share qualification specified.
8. The KCM's article 149 closely resembled the restriction on divisible profits contained in the Company Clauses Consolidation Act 1845 (8 & 9 Vict., c.16), cl. 12, which entered the statute books in the same month that the KCM was registered, while the requirement (Article 85) that dividends should not exceed profits featured, subsequently, in the Joint Stock Companies Act 1856 (7 & 8 Vict., c.110), Table B, art. 64.
9. Pickering's co-auditor was Mr J. J. Midgley who had first been appointed in 1872. The pair continued in post until 1878.
10. The maximum fee payable was reduced to £50 in 1867.
11. The systematic depreciation of fixed assets did not become widespread practice until well into the twentieth century (Edwards Citation2019, ch. 14).
12. Note that the type of fraud committed here is manipulation of the financial statements in order to portray a better picture of the company's health than was the reality. Apart from prolonged employment, Jackson did not gain from his manipulation despite the impression conveyed in Toms (Citation1998, 219, fn 3).
13. Such reticence may be contrasted with the questioning of the auditor of the Royal British Bank regarding his close association with the bank's directors (Taylor Citation2005, 240).
14. The dangers for auditors of not framing their reports as they were required to do under the articles of association had been clearly illustrated in the widely reported case of Leeds Estate, Building and Investment Co. v. Shepherd, Chancery Division 1887, 787.