All Good Governance Articles Start With Aristotle

In Politica Aristotle wrote that setting governance rules is the most important concern of a society. Quite correct – think of the folks who set the rules for your favourite sport and you’ll see how daily life is set by them. When it’s daily business life then the very prosperity of a nation is at stake and you’d think that folks would take care over those rules even more so than say the offside rule in football.

However we don’t just fail to learn from the past we don’t even know it… it’s nor so much that “those who don’t know history are likely to repeat it” as “those who don’t know history can’t learn from it”, or in the case of Cadbury perhaps “those that totally misunderstand governance history are likely to screw up governance?” Another tale for another day. Aristotle would not have been impressed – in Politika he and his students documented 158 constitutions before deriving any lessons. Modern Corporate Governance Codes – the business equivalent of Politika – document none before setting about changing the face of business.

If centuries ago English company governance was so good that others demanded that it be copied in their country we now do the opposite – recent corporate governance reports and pronouncements from the FCA (surely going well beyond their remit) focus on insisting upon American-wokist considerations of the “right” melanin and oestrogen levels on a Board. O tempora o mores.

But onto our tale…


English Two-Tier Boards And Their Demise

It is ironic – or perhaps merely ignorant – that what is today perceived as “uniquely Continental” – two-tier Boards – was an English invention. And this is no recent forgetfulness, in 1974 when there was EU pressure on the recently-joined UK to adopt two-tier Boards the FT wrote:

‘Probably no single issue has caused more worry than the prospect of being obliged to conform to the German or Dutch model of a two-tier board.” [1]

In How The First English Companies Were Governed we saw that from the 16thC-onwards English Chartered Companies had owner-centric governance with a two-tier Board:

“The totality of the Adventurers [shareholders] constituted a powerful “Court of Proprietors” or “General Court”. This functioned as a legislature, approving all major decisions, as well as an electorate which voted for Committees drawn from themselves to a “Court of Committees” (nearer to being an Executive Committee in our terms).”

The demise over the centuries of this two-tier Board is covered in [2] – essentially over time the General Court atrophied/was changed by law into the ever-weakening-in-powers AGM – the “General” word being the same but little else remains.

The Chartered Company’s owner-centric, two-tier governance contrasts markedly with the management-centric, nigh-on single-tier governance of the 19thC-onwards Company Law Company which in turn contrasts notably with the end-20thC-onwards state-centric, effectively single-tier governance of the Listed Company whose never-ending excursions off-piste have, as noted, gone as far as to mandate American college campus cultural values on the Boards of privately-owned UK-listed business entities.

But how, when and why did this two-tier Board model spread to Europe?


17thC Dutch Company Governance Challenges

The VOC – the Dutch United East India Company – was of monumental importance – some measures show it as having the largest inflation-adjusted capitalisation of all time [3]. Its physical scale was immense by the standards of the time – by 1650 the VOC owned a fleet of 100 ships and over the 17th & 18th centuries one million Europeans, mostly soldiers and sailors, made their way to Asia on VOC ships.

However if the VOC was monumentally successful and managed to displace the then century-old Portuguese sea-trade monopoly of trade with Asia its early decades were enmeshed in governance controversies. Naturally many of these themes of power and control continue to resonate today as power is always flowing from one body to another as we saw in the thumbnail sketch of centuries of governance developments in the UK above.

The VOC’s governance challenges from inception came from three principal factors: (1) heavy Dutch State involvement, (2) pre-existing Dutch 16thC business structures, and (3) the huge phase change from per-voyage funding to permanent capital.

Let’s look at these factors in turn.

1) Dutch State involvement

Initial Dutch explorations to the East Indies had been privately funded. After Cornelis de Houtman’s first voyage in 1595 a huge momentum was established – a further fifteen Dutch fleets set off for Asia before the founding of the VOC in 1602. The total of 65 ships over that period far surpassed the existing monopolist Portuguese who sent 46 ships over the same period [4].

Importantly the backdrop for these developments was the Eighty Years War (1568-1648) in which the Seventeen Provinces (modern Netherlands, Belgium and Luxembourg) attempted to free themselves of Spanish Hapsburg rule. At the trade level the Dutch simply wanted to free themselves from dependence on Portuguese spice imports. At the State level they were waging war with the then united Spain and Portugal.

It is thus that the early private ventures took a dramatic turn away from the nascent purely private enterprise model which was to continue in England whose own East India Company (EIC) “created itself” rather than “was created by the State”. Although successive monarchs and later Prime Ministers caused the EIC a never-ending series of headaches they had no formal role in the governance other than in Charter renewal (charters were for finite periods of time and needed renewing which gave the State great leverage (cf the BBC today) although back in the day a large payment would generally smooth out any challenges). The EIC thus became the first of the European powers to develop private free trade in contrast to Spanish/Portuguese State-centrism and the VOC’s semi-State semi-private nature, a model which continued with the Dutch West India Company (West India = “West of the Atlantic”).

1602 saw the culmination of a whole series of mergers of the prior Dutch East India trading companies [5] and the Dutch State granting a Charter to the VOC to hold a monopoly of Dutch trade east of the Cape. This was done for the purpose of pooling risk and resource, controlling prices and margins by reducing inter-company competition and to create a powerful State arm in the battle against the dominant Spanish/Portuguese.

“In 1600 the Amsterdam companies amalgamated into one … (Unified Amsterdam East India Company), which was granted a monopoly on the trade from Amsterdam to Asia by the Amsterdam burgomasters … Under the charter the voorcompagnieën [pre-VOC-companies] became departments or kamers (chambers) in the united Company. There were six of them: Amsterdam, Zeeland (which had its seat in Middelburg), Delft, Rotterdam, Hoorn and Enkhuizen. …a board which was to consist of seventeen members. On it, Amsterdam would be represented by eight directors, Zeeland by four and the smaller chambers would have one each, while the seventeenth member would be appointed in turn by one of the chambers other than Amsterdam.” [6]

This 17th member was to ensure that Amsterdam did not have a majority. However in practice this was not that effective in preventing Amsterdam’s domination as, then as now, to oppose a dominant sharehholder/voting-block requires the smaller shareholders/voting blocks to act in unity – generally of course easier said than done.

State influence was enshrined in the governance rules outlined in the 1602 charter. The VOC was managed by a Board – “the Lords XVII” . If the VOC Lords XVII could not agree on a substantive matter they kicked it upstairs to the Dutch State. The State itself had no reason to give capital providers more power as one of the key aims of the VOC right from the start was “foreign policy objectives” which clearly could, and did, conflict with commercial objectives:

“…a lot of funds were not used for commerce, but in the battle against the Portuguese in Mozambique, Goa, the Moluccas and Ambon.” [7]

This militarism spilled over into the VOC’s conduct of “business”. For a century it knocked the socks off the EIC – and worse than sock-removal captured and tortured to death EIC sailors on Amboyna in the infamous massacre of 1623, which in itself was a trifle compared to massacring almost the entire the population of the Banda Islands (~12,000 of the 13,000 inhabitants). Spanish rule had clearly passed on some of the less desirable Spanish approaches to meeting the far-aay locals. Conversely when faced with superior forces as the VOC was with for example the Moghul Empire, the Japanese and the Chinese they kowtowed. The influence of “relative might” in determining outcomes was as true in the 17thC as it is now. And sad to say way way more die of State-organised wars/brutality in modern times than back then so that’s another unfinished State Governance item unless one is in one of the 22 countries that don’t have an army.

2) 16thC Dutch business structures

The antecedent companies were incorporated for one voyage (of a few ships) only and naturally once the ships were out of sight they were well beyond any kind of control. Companies were liquidated after every voyage, and a return of funds to investors took place at that point.

The voorcompagnieën utilised commenda-like structures which dated back to Old Assyria and were super popular earlier in millennium in the Italian City States that monopolised much of Mediterranean trading. The commenda structure created and maintained a concept of an arms-length investor who would not be responsible for debts beyond his investment. This ancient concept continues to this day in the form of limited partners versus general partners in, say, venture capital funds. Indeed with the voorcompagnieën there was even one more level of indirection, “limited partners” (to use the modern term) did not invest in the voorcompagnieën directly but through the voorcompagnieën individual Directors who alone knew who had invested through them.

VOC investors could get returns in three ways. Firstly through dividends. Secondly under the 1602 charter they could withdraw their funds from the company after ten or twenty years. Thirdly the shares would be “listed” – ie saleable on the newly created Amsterdam Stock Exchange although as the VOC never published any accounts the idea of a meaningful shareprice was a tad unrealistic.

When it came to – to use a modern phrase – “shareholders rights” the VOC maintained the earlier sense of being structured much more like an arms-length investment vehicle – there was no concept of a shareholders meeting and the shareholders continued to have no control and no voting rights.

3) The switch from per-voyage funding to permanent capital

If at first this lack of control/representation appeared not to have changed the implications of the huge phase change from temporary per voyage funding to permanent company funding (ie equity) took some time to make themselves clear and were underestimated at the outset by both the VOC and the EIC.

Incidentally before we fall into thinking that this is ancient stuff we are seeing history repeat itself in the 21stC with Venture Capital funds getting listed in order to create permanent capital (see for example the current London Fintech Podcast Forward explain their IPOing). In doing so they avoid the time and resources spent having to keep raising funds – which can only subtract from the businesses economic returns – as well as offering more flexibility in funding their fleets (aka VC Funds – but just in the same way as not all ships in a fleet made it back in the 17thC not all investments in the VC fund make it back either).

Whilst the VOC structure abandoned the earlier per-voyage financing model the EIC continued to use it but this also led to problems. In essence in the early 17thC the interaction between business structures, funding and governance was being worked out as they went along and there was no simple answer. If for the VOC the challenges they would face turned out to be governance ones, for the EIC it was accounting headaches that, inter alia, eventually led to the phase change in funding and introduction of permanent equity in 1657. The EIC’s difficulties arose when it became necessary to create permanent logistics and infrastructure – warehouses, trading posts et al – to support global trade routes. The EIC naturally struggled with allocating these fixed/sunk costs fairly across separate voyages over many decades – this in turn was made all the more complicated in that different subsets of EIC members would invest in different voyages.

Conversely the VOC had a substantial advantage due to its ab initio permanent capital which led to a massive competitive advantage compared to the EIC. Not only did they not keep having to raise funds – a time-consuming process to this day – but in total the VOC had ten times the capital of the EIC.

However the VOC 1602 charter writers didn’t really “get” the difference between “one-off” and longer-lasting corporate vehicles in terms of attractiveness to investors – they saw it at heart as a tidying-up exercise, rather than a complete phase change. One important nuance was that the voorcompagnieën management, like modern venture capitalists, had to attempt to keep their investors sweet in order to succeed with the inevitable next raise which imposed some discipline on voyage/company management and their attitude towards and treatment of investors. Over time the removal of this discipline, multiplied by a bizarre need only to conduct audits once a decade (!) and minor matters like the shareprice being driven down artificially and the Charter being ignored led to considerable turmoil amongst investors.


18thC Dutch Governance Wars – Shareholders vs Management and the State

The shareholders’ principal demand, like many an activist shareholder today, was based on what they perceived as inadequate returns from the VOC. Although these averaged a compound rate of 7.5% p.a. over the first 20yrs these dividends came only after much pressure and were below those of the voorcompagnieën due to diversions into the State’s battles as well as the infrastructure build.

The shareholders in their 1622 complaint quoted that well-known business governance text – the Bible – stating “Redde Rationem Villicationis Tuae!” – “Give an account of your stewardship!”. In this they were at a considerable disadvantage to the business-owner whose governance issues were more easily addressed (Luke 16:1-2):

“There was a rich man whose steward was accused of wasting his possessions. So he called him in and asked him, “What is this that I hear about you? Give an account of your stewardship, because you cannot be manager any longer.”

The long-running feud over the VOC’s governance lasted pretty much from inception until it came to a head in the early 1620s. Those decades include as many shenanigans as any modern American “Barbarians at the Gate” tale – there is little new under the sun. Directors allegedly negotiating on the side to create parallel companies, or allegedly being stitched up and forced out, secret talks with the French King, the VOC outright ignoring the requirement to conduct a 10 year audit (on the grounds that it would help their Spanish and English competitors (?!)), not allowing investors to cash-out after a decade as was the shareholders right, key sacked Director Le Mairie along with a few other members incorporating a company which engaged in massive shorting of VOC stock (no sooner stock exchanges than shorting (which was (ineffectively) outlawed after the VOC shareprice had fallen from 212% in 1607 to 126% in 1609 [6])), false rumours, fake transactions. Anyway you get the picture. Gloves off stuff.

“Dissenting participants” – angry shareholders who together owned some 40% of the equity – engaged, just as they might today, in an activist-shareholder campaign, a PR battle using the technology of the time, pamphlets. They were even angrier in 1622 when the second decades audit was not conducted. The VOC Directors certainly showed some pretty impressive nose-thumbing chops – having ignored by now the legal requirement to conduct two once-a-decade audits they even requested that the State extend the existing Charter by 50yrs. The dissenters were unimpressed:

“There has been no audit. Everything has remained obscure and they haven‟t come up with anything but procrastination and excuses instead of the accounts book, which, as we suspect, they had smeared with bacon and which was eaten by the dogs… they did not allow the Participants to attend the annual audit, so they would not be able to solve the mystery how the directors had suddenly become so wealthy (…). They even requested to have the Charter extended by 50 years, so they could hold their well-paid jobs longer and only conduct a general audit for the participants‟ grandchildren in the next world” [7]

Technology has improved over the centuries and whilst the essence of naughty Directors/Companies smearing their accounts with bacon and having them eaten by dogs continues to pose many a headache for Chairs of Board Audit Subcommittees today and play a key role in many a modern megaco collapse, the actual techniques used have moved on – hence no actual need for bacon and dogs.

“They accused the directors of abuse of power and short-selling. These short positions were seen as resulting in the directors having a personal interest in a decline in VOC share prices. VOC directors were accused of spreading negative rumors about the VOC. The shareholders also accused VOC managers of enriching themselves by selling goods to the VOC at a high price and buying them back at much lower prices.” [8]

The whole situation is super-instructive in terms of modern Boardroom battles. Being right does not always win the day – might trumps right. However even when you don’t, on paper, have the might to carry the day there is often some jui-jitsu, some other leverage you can use to succeed…

The dissenters spent quite some time enmeshed in an apparently no-win situation. The State showed no interest in ensuring that the VOC complied with its Charter, which in passing had established Directors for life with no direct means of their removal. The dissenters eventually found their jiu-jitsu leverage in discouraging other merchants from investing in the West Indies Company which had been Chartered in 1621 and was attempting to raise funds from investors at he time of the second skipped VOC audit. The furore around the VOC hardly encouraged investment in the WIC and hence finally shareholders made progress.

Shareholders’ aims were to stop being mere financiers and gain some measure of control over the business that their funds had created. In terms of remedy they gave the example of the well-ordered EIC governance structure as their desired template, although they were asking for far less control than EIC owners had – mentalities/contexts/structures were very different between English business cultures based on Guilds and Dutch based on ~commenda:

“The dissenting participants are not slaves, but free people in free countries. They only ask to be allowed to appoint administrators of their goods themselves, to whom they entrust such administration. That this request is not unfair is evident from the fact that even the King of Spain gives merchants who sail to the East Indies and Spanish merchants who trade with the West Indies the opportunity to appoint the agents or bookkeepers of their goods to whom they themselves entrust such management. In England as well, one sees that the participants in the EIC have the most to say: they remain masters of their own goods and each year appoint and dismiss from their midst as they see fit a Governor, his deputy and the Court of 24 Committees, as well as an auditor. And each shareholder is entitled to inspect the books and merchandise and see how the goods are converted to cash. This is evident from a certificate from the English East Indies Board, of which the dissenting participants have obtained an authentic copy. Does this not turn you pale, oh shameless directors! Or does no red blood flow through your veins? But neither law nor reason can make you change your minds. Other countries set the standard and you remain stuck in your old ways. You do not follow any good examples. It appears that although greed has not blinded you, it has indeed made you insensitive and leprous.” [7]

In this regard they were eventually slightly-to-somewhat successful:

“The 1623 Charter granted certain rights to large investors, including the right to nominate new candidates for appointment as director. The 1623 Charter further regulated insider trading by the directors and encouraged the directors to pay a yearly dividend to the shareholders. In addition, a committee of nine shareholders was entrusted with the supervision of the VOC directors. This corporate body was known as the “Lords IX” (Heren IX).” [8]

This still well-short of the EIC full monty. In terms of posterity the most consequential amendation of the EIC’s two-tier structure being that the highest level VOC forum was comprised of a subset of rather than the more democratic entirety of the shareholders. Furthermore only key shareholders were eligible to be on the Heren IX so it was a subset not of shareholders but of elite shareholders. The Heren IX role was very much – to use the modern term – as a supervisory Board rather than the EIC General Court’s total control.

Once the VOC (and WIC) had imported the basic two-tier governance schema of the EIC and other English Chartered Companies given their huge lead in business development on the Continent the two-tiered Board proved seminal and eventually spread across Europe, where today we see that:

“In the European Union, 10 countries require the two-tier approach, 8 countries require the single tier board approach, and 9 countries allow the use of either.” [Wiki “Dual Boards”]


What’s Dutch for “Plus ça Change, Plus c’est la Même Chose”?

And so we arrive at the irony-fest to end all irony-fests.

First, less than two hundred years later the EIC would be captured by the British State and turned into what the VOC had been – a vehicle of State imperialism with a trading company attached, conflicted between war and trade with shareholders being over-ruled by an imperialist State.

Second, in the UK (and hence the US) the two-tiered Boards structure degenerated to the stage that no-one today would imagine the UK (and US) has, or ever had, two-tiered boards.

Third, which may have come as a surprise to many of you raised on narratives of “continental” two-tier boards reflecting a “non-Anglo-Saxon” attitude to the company”, au contraire, the European two-tiered model is a far better preservation of the English Board approach of the early Chartered Companies. One that worked well for centuries – including as Wright has elaborated in “Corporation Nation” (2013) in the ante-bellum US where governance standards were way better than what they subsequently became.

Fourth, fast forwarding four hundred years from early 17thC Dutch concerns to the present, we should note that Dutch (as well as everywhere else) governance concerns remain the same. Today many a shareholder gripe is centred on, to use the dissenters phrase, Directors wealth appearing like “mushrooms overnight” whilst their dividends had been poor. Other matters remain without final resolution:

“If you compare the Code Tabaksblat [the 2003 Dutch Corporate Governance Code] with the ‘Tweede Nootwendiger Discours,’ a famous pamphlet in which in 1622 angry VOC shareholders for the first time publicly called the Heren XVII to account, one thing becomes clear. Corporate governance is a never-ending debate. As far back as 1622, the same discussions on remuneration, the quality of supervision, and influence of shareholders were prevalent.” [9]

Early 21stC Dutch shareholders have de minimis control over the Directors just as the early-17thC Dutch Shareholders had. Then as now the State has a huge say in what is what. Maybe it’s time for a new pamphlet campaign to once again wrestle back power from the State and the management?



[1] John Temple Lang ‘Supervision is the Key’ Financial Times 20/12/74

[2] The full tale of the transformation of English company governance from the 16thC to the present comprises chapters 2 and 3 of “The Realpolitik of the Unlisted Board”



[5] “In 1598 the Compagnie van Verre merged with the Nieuwe Compagnie and in 1597 with the Oude Compagnie. The resulting company then merged with the Nieuwe Brabantsche Compagnie in 1601 to form the Verenigde Amsterdamse Compagnie, which in turn merged with many other companies (including the Verenigde Zeeuwse Compagnie) in 1602 into the Dutch East India Company (VOC),”

[6] Gaastra F. trans Robson-McKillop R “The Organization of the VOC” 2007

[7] de Jongh M. “Shareholder Activism at the Dutch East India Company 1622 – 1625” 2010

[8] de Jongh M. “Shareholder Activists Avant La Lettre: The Complaining Shareholders in the Dutch East India Company” September 2008

[9] Exchange History NL “Corporate Governance Code”