Proprietors and Managers: Structure and Technique in Large British Enterprise 1890 to 1939
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PROPRIETORS AND MANAGERS: STRUCTURE AND TECHNIQUE IN LARGE BRITISH ENTERPRISE 1890 TO 1939. JOHN MICHAEL QUAIL Submitted in accordance with the requirements for the degree of PhD, The University of Leeds School of Business and Economic Studies January 1996 The candidate confirms that the work submitted is his own and that appropriate credit has been given where reference has been made to the work of others Abstract. The model of the managerial modern business enterprise set out by A D Chandler defines a specific organisational structure and specific techniques of corporate control which are presented as the most effective form of governance for large enterprise. It is generally accepted, however, that this form of governance remained largely unadopted by large UK enterprise before World War Two. This thesis offers an explanation based on the particular role and function of directors in UK firms. Part One of the thesis examines the structure and control technique of large UK enterprise before World War One and the theory of the firm that underpinned them. It is shown that the favoured form of joint stock company structure, here called `proprietorial', was the consequence of the perceived role of company directors as shareholders' representatives rather than managers of the business. Much flowed from this. The legitimation of directors powers through property rights impelled them to retain centralised control despite their customary part-time status. This restricted the growth of top management, fragmented management and business professions into narrow departmental structures and restricted the development of control techniques. Under these circumstances the development of firms of the Chandler type was unlikely. Part Two of the thesis examines four case studies of large UK enterprise in the inter-war years: ICI, Unilever, the London Midland and Scottish Railway and Austin Motors. They have been selected because by sector, leadership or progressive repute they can be taken as representative of UK enterprises most likely to have evolved towards the Chandler model. It is shown, however, that the legacy of UK proprietorial governance was powerful enough to prevent all four case studies - and by implication all UK enterprise - establishing the Chandler structure before World War Two. CONTENTS Page Introduction 1) The Argument 1 2) The Chandler Thesis and its Critics 3 3) The Chandler Model 9 Part One Proprietors and Managers in Large UK Enterprise Before World War One Chapter One: British Enterprise and the Failure to Build Managerial Hierarchies 1) Managerial Hierarchies and British Firms 22 2) Explaining Failure 26 (Footnotes and References) 31 Chapter Two: Structure and Technique in Large British Enterprise before World War One. 1) The Nature of Large Enterprise, from the late Nineteenth Century to World War One. 34 2) Structure and Technique on UK Railways: Part A, Structure. 35 3) Structure and Technique on UK Railways: Part B, Control Technique. 43 4) Structure and Technique in Large UK Banks. 51 5) Structure and Technique in Large Amalgamated Manu- facturing Companies: Part A: the Steel, Shipbuilding,Armaments Conglomerates. 55 6) Part B: Textiles and Textile Finishing. 61 7) Part C: Miscellaneous. 68 8) Conclusion. 69 (Footnotes and References) 73 Chapter Three: The Proprietorial Theory of the Firm and its Consequences. 1) Introduction. 85 2) The Proprietorial Theory of UK Firm Structure. 86 3) Divide and Rule: Keeping the Experts Under Control. 95 4) Summary and Conclusions. 106 (Footnotes and References) 108 Part Two Structure and Technique in Large British Enterprise in the Interwar Years Chapter Four: Introduction to Part Two. 118 (Footnotes and References) 132 Chapter Five: Structure and Technique in the London Midland and Scottish Railway (LMS), 1923 - 1939. 1) Introduction. 139 2) Organisation. 142 3) Rationalisation and Mass Production. 153 4) Costing and Budgetary Control. 160 5) Summary and Conclusions. 170 ( Footnotes and References) 172 Chapter Six: Imperial Chemical Industries (ICI) 1) Introduction. 187 2) ICI: Structure and Consequences 188 3) Costing and Financial Control 201 4) Technical and Commercial Development. 208 5) Summary and Conclusions. 213 (Footnotes and References) 216 Chapter Seven: The Austin Motor Company. 1) Introduction. 226 2) Organisation. 228 3) Costing and Budgetary Control 234 4) Leadership, the Market and Commercial Success at Austin 241 (Footnotes and References) 246 Chapter Eight: Unilever with Special Reference to the Lever Soap Companies. 1) Introduction 257 2) The Organisational Framework. 258 3) Marketing, Rationalisation and the Organisation of the UK Soap Businesses. 268 4) Financial Organisation and Budgetary Control. 279 5) Summary and Conclusions. 286 (Footnotes and References) 289 Summary and Conclusions 304 Appendix I: UK Large Enterprises in 1905 - 1907. 318 Appendix II: Organisation Charts for four pre-World War One railways. 326 Bibliography. 331 List of Abbreviations. 341 LIST OF FIGURES Page: Figure 1. The centralised, functionally departmentalised firm. 10 Figure 2. The divisionalised firm without line management. 11 Figure 3. The divisionalised firm with both functional and line management. 12 Figure 4. The extended divisionalised firm with top management functions grouped under Vice Presidents. 13 Figure 5. The structure of the London Midland and Scottish Rail- way (LMS) circa 1925. 144 Figure 6. The structure of the London and North Eastern Railway showing operating divisions. 146 Figure 7. The Vice Presidential structure of the LMS, 1927. 147 Figure 8.The Vice Presidential structure of the LMS,1931. 149 Figure 9. A suggested British version of a Vice Presidential system from the Railway Gazette, 12 August 1921. 174 Figure 10. Chart from the Economist 19 January 1935 showing ICI subsidiaries 191 Figure 11. ICI reorganisation 1927. 193 Figure 12. ICI reorganisation 1929. 196 Figure 13. ICI reorganisation 1931. 197 Figure 14. Key to subsidiaries chart at Figure 10. 217 Figure 15. Austin Motors production departments organisation chart, 1935. 232 Figure 16. Unilever financial and accounting organisation 1932. 262 Figure 17. Unilever Special Committee meeting schedule 1931. 264 INTRODUCTION The Argument In his book The Visible Hand - The Managerial Revolution in American Business, A D Chandler describes how US business in the later nineteenth and early twentieth century began to internalise transactions previously co-ordinated by the market. This process was a demonstrably profitable response to rising demand for goods and services. But the conversion of market transactions into administrative processes required crucially that a managerial hierarchy was established within the firm in a form and with the skills to fully exploit the potential of the emerging mass producing, mass transporting and mass retailing business enterprise. That British enterprise did not generally build managerial hierarchies until after World War Two now seems to be the concensus view among business historians. (See Chapter One.) But the explanations which have been offered for this failure to build managerial hierarchies have not been entirely convincing. This thesis intends to show that an alternative explanation can be given, namely that in British joint stock companies business structure was a consequence of the distinctive role, interests and powers of the board of directors. In UK joint stock companies, boards of directors were a representative committee of the owners and were seen as quite distinct from the managers whose job it was to carry out the directors' orders. In the US, as Chandler makes clear, any distinction between directors as owner's representatives and directors as the most senior tier of management seems to have been transcended without apparent struggle or difficulty. In the UK on the other hand the particular form adopted by the joint stock company institutionalised and built on the distinction between directors and managers. The evolved structure of the railways and the evolving structures of other large enterprise is described in Chapter Two for the period between 1890 and 1914. The explicit assumptions of that period on how a UK joint stock company should be organised, assumptions in many cases reflected in and reinforced by case law, are 2 considered in Chapter Three and the consequences of those assumptions for UK large business enterprise structure are explored. The significant factor that emerges from this study of UK joint stock companies is that as shareholdings became dispersed and the directors tended to be less and less the holders of controlling percentages of shares, the distinctive role and powers of the directors remained unchanged. Thus as the separation of ownership and control proceeded the power of the managers did not grow and the management structures that Chandler traces in the US did not emerge in the UK. This intermediate - but not necessarily transitional - position between the joint stock company as effectively a large partnership with limited liability and the joint stock company as managerialist modern business enterprise I have called, for want of a better word "proprietorial". "Proprietors" was the name given by the nineteenth century railway companies to their shareholders and the use of the word is designed to identify the legitimation of the directors' powers in their imputed role as representing the shareholders as shareholders themselves. In other words the directors were part owners supposedly representing all owners. In