Corporate Governance Before There Was Corporate Law

Abstract

We study 79 sets of bylaw provisions adopted by Norwegian corporations in a free contracting environment before Norway got its first corporate law. The firms in our sample are publicly traded companies in the period 1900-1910. We document substantial protections to minority shareholders against expropriation by insiders and observe considerable heterogeneity in the investor protections stipulated in the contracts with regards to board structure, director responsibilities and remuneration, disclosure of company information, and shareholder voting rights, among others. We find that firms seem to self-select bylaw protections and show that firms with dispersed control structures tend to operate with protections reflecting collective action and free-rider problems, whereas tightly controlled firms have bylaws in place that reflect the relatively sophistication of investors. We also find evidence that dividends and investor protections are substitutes, and that firms in high growth industries and firms that issue equity disclose more information to investors. We conclude that effective governance systems may develop independently of statutory corporate law.