Emilie Bonhoure*

Conflicts among shareholders can be highly deleterious to a firm. They are usually generated by the divergent interests of the different categories of shareholders: controlling shareholders, or management shareholders, and minority shareholders who own only a few shares in the company and therefore do not have the heft to influence its decisions (except through selling their shares). The interest of the latter is that the firm makes the highest possible profits (which will earn them higher dividends and, most importantly, increase the sale value of their shares). The majority shareholders, on the other hand, can be tempted, as managers, to extract “private benefits” (1), which are likely to reduce the firm’s profits. The literature offers various solutions to this divergence of interests, particularly the payment of higher dividends: when the money is thus distributed to shareholders, it is no longer available to be “diverted” by the management shareholders.

In this article, Emilie Bonhoure discusses another solution likely to reduce conflicts among shareholders. This original scheme is a statutory distribution of the company profits. This arrangement, common in French companies in the 19th century and the beginning of the 20th, fixes profit-sharing in the company’s by-laws. Each year, shareholders receive a share of the profit specified in the statutes. E. Bonhoure examines the statutory rules of distribution of French businesses based in Paris between 1906 and 1909 and shows that they were designed precisely to reduce conflicts among shareholders and were indeed effective. The companies with the most severe conflicts (2) fixed the largest parts of their profits to be distributed in dividends, and the highest fixed dividend payments helped to lessen the conflicts among shareholders.

By promising (and delivering) a larger part of their profits to their shareholders (in the form of higher dividends), firms reduce their available cash by the same amount. In addition, the higher dividends promised by this rule constitute a commitment to the minority shareholders, which helps firms to attract them, on the one hand, and on the other to encourage management shareholders to extract fewer “private benefits” and thus allow profits to meet that commitment. This scheme is thus an unconventional solution to an old problem which, as well as distributing money (done conventionally in earlier solutions) represents a solid commitment by the company vis-à-vis its shareholders.

(1) For example, by contracting with a supplier who is part of their private network or in which they also have shares, at prices favourable to the supplier but not to the company.
(2) The older firms with less debt, that is, those whose shareholder base is larger and among whom there are more conflicts.



Original title of the article: An Original Solution to Agency Issues among Pre-WWI Paris-Listed Firms: the Statutory Rule of Profit Allocation

Published in: PSE Working Paper n°2021 – 04

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* PSE Member

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