easier for bankrupts to get their second chance. However, the coverage of the law was still limited until 1849, when it became applicable to anyone who earned their living by ‘the workmanship of goods or commodities’,[73] In the USA, early bankruptcy laws were modelled on the early (procreditor) English law and administered at the state level. However, until the late nineteenth century, only a few states had bankruptcy laws Institutions and Economic Development 89 at all, and these varied from one state to another. A number of federal bankruptcy laws were introduced during the nineteenth century (1800, 1841 and 1867), but they were all short-lived due to their defective nature, and were repealed in 1803, 1841 and 1878 respectively. For example, the 1800 law discharged many from their just debts incurred in the turnpike and land speculation of late 1790s, and the relief it gave only led to further speculation. The 1841 law was censured for giving creditors just ten per cent of the estate, most of which was absorbed by legal and administrative costs. It was also criticized for the rule that property had to be sold immediately for cash, thus financially disadvantaging creditors. Moreover, courts could not cope with the heavy caseload; during the first four years after the 1867 law was passed, there were 25,000 cases per annum. Another point of contention surrounding the law was the relaxation of the requirement that bankrupts should repay at least half of their debts incurred before the Civil War, which attracted criticisms from creditors that the concession protected irresponsibility.[74]
It was not until 1898 that Congress was able to adopt a lasting federal bankruptcy law. The provisions in this law included relief of all debts, not just those after 1898; permission of involuntary and voluntary bankruptcies; exemption of farmers and wage-earners from involuntary bankruptcy; protection of all properties exempted from attachment under state law; and the granting of a grace period for insolvents to reorganize their affairs or reach compromises with creditors.
D. Audit, Financial Reporting and Information Disclosure
The importance of financial auditing and disclosure has attracted great attention since the recent crisis in the Asian economies. Many foreign lenders blame the opacity of company accounts, lax regulations about auditing and disclosure in the crisis countries for their bad loan decisions. One obvious counter to this argument is that, even before the crisis, it was widely accepted that company-level information in these countries had these problems; in such situations, the natural course of action for a prudent lender would have been not to lend to these companies. In this context, the ‘lack of information’ argument made by international lenders seems largely self- serving.[75]
Having said that, there seems to be little dispute that institutions which improve the quality and disclosure of corporate information are desirable. Even then, however, we need to set the human and financial resource costs of developing these institutions against their benefits, especially in developing countries which lack such resources.
Looking at the history of NDCs, we are struck by the fact that, even in these countries, institutions regulating company financial reporting and disclosure requirements were of still very poor quality well into the twentieth century.
The UK made external audit of companies a requirement through the 1844 Company Act, but this was made optional again by the Joint Stock Company Act of 1856 against the recommendation of critics such as John Stuart Mill.[76] Given that limited liability companies require more transparency to control opportunistic behaviour by their dominant shareholders and hired managers, this was a significant step backward.
With the introduction of the 1900 Company Act, external audit was again made compulsory for British companies. However, there was still no direct requirement for firms to prepare and publish annual accounts for shareholders, although this was required implicitly as the auditor had a duty to report to shareholders. Not until the 1907 Company Act was the publication of a balance sheet made compulsory. Even then, many companies exploited a loophole in the act, which did not specify a time period for this reporting, and filed the same balance sheet year after year. This loophole was only closed by an Act of 1928, by which companies were made to file and circulate ahead of annual general meetings up-to-date balance sheets and disclose more detailed information, such as the composition of assets.[77]
However, until the Companies Act of 1948, disclosure rules were still poor, turning the late Victorian market into a ‘market for lemons’.[78] Crafts concludes that ‘the development capital markets based on extensive shareholder rights and the threat of hostile takeover is a relatively recent phenomenon in the UK even though the British were pioneers of modern financial reporting and had the Common Law tradition’.[79]
In Germany, it was only through the company law of 1884 that regulations regarding the listing of companies in the stock markets were implemented. In Norway, legislation passed as late as 1910 forced companies to report their budgets and earnings twice a year to allow its shareholders, and the state, greater knowledge about the state of the business. The USA made the full disclosure of company information to investors in relation to public stock offerings compulsory only after the 1933 Federal Securities Act. In Spain, scrutiny of accounts by independent auditors was not made mandatory until as late as 1988.[80]
E. Competition law
Contrary to what is assumed in much current literature on the subject, corporate governance is not simply a matter internal to the corporation in question. Actions by very large firms with significant market power can have consequences for the whole economy (e.g., their bankruptcy can create financial panic) or undermine the basis of the market economy itself (for example, through the socially harmful exploitation of a monopoly position). In this context, corporate governance becomes a matter for society as a whole, not just for the particular company’s shareholders.
Corporate governance in this sense does not simply involve company-level laws, for example, those specifying the duties of the board of directors to the shareholders. It also involves a wide range of other regulations – for instance sectoral regulations, regulations on foreign trade and investment – and informal norms that govern business practices, such as conventions regarding the treatment of subcontractors.
In this section, we review the evolution of the most easily identifiable institution of ‘societal’ corporate governance, namely, competition law (anti-monopoly and/or anti-trust legislation) in a number of NDCs. It should be emphasized that my discussion does not share the current orthodoxy, which assumes that the developing countries of today need . a US-style anti-trust policy.[81]
As early as 1810, France adopted Article 419 of the Penal Code, which outlawed coalitions of sellers. These affiliations had resulted in the raising or lowering of prices above or below those of ‘natural and free competition’. However, the law was unevenly implemented and by 1880 had fallen into disuse. From the 1890s, the French courts began to accept ‘defensive’ combinations (cartels) and to uphold their agreements. It was not until 1986 that France repealed Article 419 and adopted a ‘modern’ and more comprehensive anti-trust law.[82]
The USA was the pioneer in ‘modern’ competition law. The country introduced the Sherman Antitrust Act in 1890, although five years later the act was crippled by the Supreme Court in the notorious Sugar Trust case. Until 1902, when President Theodore Roosevelt used it against J P Morgan’s railways holding company, the Northern Securities Company, It was in fact mainly used against labour unions rather than against large corporations. Roosevelt set up the Bureau of Corporations in 1905 to investigate corporate malpractice; the bureau was upgraded into the Federal Trade Commission with the Clayton Antitrust Act of 1914, which also banned the use of the antitrust legislation against the unions.[83]
During the nineteenth century, the British state neither supported nor condemned trusts and other anti competitive arrangements. However, until the First World War, the courts were quite willing to uphold the validity of restrictive trade agreements. The first anti-trust initiative to be taken was the short-lived Profiteering Act (1919, discontinued in 1921), created to cope with postwar shortages. During the Depression of the 1930s, the state endorsed rationalization and cartelization. It was only with the 1948 Monopolies and Restrictive Practices Act that serious antimonopoly/antitrust legislation was attempted, but this remained largely ineffective. The Restrictive Practices Act of 1956 was the first true antitrust legislation, in the sense that it assumed – for the first time – that restrictive practices were against the public interest unless industrialists could prove otherwise. The 1956 Act effectively countered cartels, but was less successful against monopolization through mergers.[84]
As already mentioned in Chapter 2 (section 2.2.3), the German state initially strongly supported cartels,
