Development of Corporate Governance in Toulouse from 1372 to 1946

Sébastien Pouget is Professor of Finance at Toulouse School of Economics. This post is based on an article authored by Professor Pouget; David Le Bris, Assistant Professor of Finance at KEDGE Business School; and William Goetzmann, Professor of Finance at Yale University.

In our recent paper, The Development of Corporate Governance in Toulouse 1372-1946, we study the birth and evolution of the oldest shareholding companies in the world: the grain-milling companies of Toulouse. Shareholding companies that began in the 11th century formally incorporated themselves into two large-scale, widely held firms: the Bazacle Company (1372) and the Castel Company (1373). In the years that followed, they experienced the economic challenges and conflicts we now recognize as inherent in the separation of ownership and control.

The historian of law, Germain Sicard, in his 1953 landmark study of the Toulouse companies in the Middle Ages that has recently been translated in English by the Yale University Press, shows that they resembled modern corporations in many respects. We build upon the archival research by Sicard and extend the analysis of the archives of these early firms from the 16th through the 19th centuries in order to trace the evolution of corporate governance mechanisms over the “longue durée.”

We show how the Toulouse firms developed institutional solutions including tradable shares, limited liability, governing boards, cash payout policies, accounts audits, shareholder meetings and mechanisms for re-capitalization to solve fundamental economic problems. These governance features survived over the long run. The Bazacle Company never disappeared: it switched to hydroelectric power generation in 1888, and was then listed on the Paris bourse up to its nationalization and inclusion into the French national electricity company EDF in 1946. The Castel Company survived up to 1910, at which date it went bankrupt.

The Toulouse companies preceded the birth of the Dutch and English East India companies by centuries. Many of the elements of the corporate form initially attributed to the peculiarities of long-distance maritime trade in the seventeenth century appeared earlier in a quite different economic context. The Toulouse companies were grain-milling enterprises whose profits were volatile but relatively predictable, except in case of disasters such as floods or fires. But a common economic feature of both the East India companies and the Toulouse companies was the huge capital expenditures required to set up a long-distance maritime expedition for the former and to set up and rebuild the watermills and the river dam for the latter.

The Toulouse companies shed light on the necessary and sufficient conditions for the development of the corporate form. We show that the constellation of features associated with the corporation appeared in the context of the medieval civil code that contrasts with the Dutch-English 17th century circumstances. In contrast with the other early examples of corporations, the Toulouse mills emerged without any government’s grant, approval, or patent. The Toulouse firms are a unique case in which the corporation appears as a nexus of private contracts.

Our paper presents several findings. Three of them shed light on pro-business virtues of the institutional context. First, property rights were well established in Toulouse since the 12th century onward. Shareholders in the Toulouse milling companies resisted state expropriation several times over their history. Their rights, derived from feudal concessions at the turn of the first millennium, were successfully defended up into the 20th century. Second, shareholders, including religious institutions and the king of France, were treated the same as other shareholders. In the Bazacle charter of 1372 and in the Castel corporate statute of 1417, shareholders committed to not exercising any special right based on their personal or social status. Third, the institutional form was flexible enough to allow innovation in corporate governance at times of crisis. Ad hoc solutions such as special share provisions in 1597, dual shares in 1644, and a corporate takeover by a shareholder in 1714, accompanied by special governance provisions, were invented in order to recapitalize the companies in periods of large capital needs.

Other findings demonstrate the emergence of sophisticated corporate governance. Fourth, improving the governance of the business activities is explicitly invoked in the great Bazacle charter of 1372 as the motivation for creating the company, reflecting recognition of the conflicts inherent in joint enterprise. Fifth, the corporate statutes of 1417 at the Castel and 1587 at the Bazacle demonstrate a clear delegation of business operations to special agents. A CEO called a Conterolle had the effective control of management, requirements for financial accounting were detailed, and a dedicated financial officer was part of the corporate organization. Sixth, moral hazard issues due to delegation from shareholders to managers were identified and addressed by a strict “no free cash flow” policy that could only be bypassed in exceptional need of cash. Seventh, both explicit and implicit incentives were provided to agents of the mills: they received a fraction of the profits generated by the Mills and also had to swear that they would respect the corporate statutes.

A final stream of results shows that shareholders exercised extensive monitoring of management. A one shareholder-one vote rule ensured diffuse control. Annual shareholder meetings were held. As early as 1390, a board of directors was in place with rules for annual turnover in a staggered manner. As early as 1381 some shareholders were designated to audit the accounts on a yearly basis. Finally, institutional investors formalized their asset management policy to include engagement. The College of Mirepoix for example indicates in its statutes of 1433 how its chaplain was obliged to take part in shareholder meetings, to visit the mills twice per month and to present each year the accounting of the companies. Another institutional investor, the Chapitre Saint Etienne was, for centuries, one of the largest shareholders of the two companies and actively monitored its investments. In particular, it fought against the company and its fellow shareholders, during general assemblies and even in court, and obtained in 1664 a permanent seat on the board of directors.

Our findings challenge some long-held hypotheses from the institutional economics literature that was developed in the context of the traditional Northian “genealogy” of the corporation in northern Europe (North and Weingast, 1989). Our analysis of the case of the Toulouse companies shows that a number of the basic principles of institutional law and economics hold true, but that the mechanisms by which (and the context in which) they were implemented can vary greatly.

First, it suggests that the property rights in some places were efficiently protected as early as the 12th century, reducing the power of this characteristic to explain the economic takeoff observed later in Northern Europe.

Second, it suggests that the corporate form, as a solution to a set of economic problems, is quite robust to initial conditions—especially institutional framework—since it has been invented at least twice. Grain milling and the Indies spice trade are two radically different businesses and yet they both gave rise to the corporate form. In addition, medieval Toulouse and 17th century northern Europe differed in their political governance. Nevertheless, the corporate form emerged in both contexts.

Finally, the development of the Toulouse companies challenges Northian accounts of the institutional evolution of modern economic institutions (North, 1994, Williamson, 2000). Corporations developed in Toulouse to exquisite perfection and yet they did not reproduce themselves as in England on the eve of the Industrial Revolution. What strikes us now in hindsight as a dramatic institutional innovation was not a watershed in the way business was conducted. The invention of the corporation was not a sufficient development to stimulate the emergence of modern enterprise and the economic takeoff.

The full paper is available for download here.

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