Corporate Governance in the 19th Century: Evidence from the Chesapeake and Ohio Canal Company
Russ, Robert W., Previts, Gary John, Coffman, Edward N., Accounting Historians Journal
Abstract: Presenting evidence from a 19th century corporation, the Chesapeake and Ohio Canal Company (C&O), the paper shows that issues of corporate governance have existed since the first corporations were established in the U.S. The C&O used a stockholder review committee to review the annual report of the president and directors. The paper shows how the C&O stockholders used this committee to supplement the corporate governance structure. The corporate governance structure of the C&O is also viewed from a theoretical structure as espoused by Hart .
The U.S. approach to corporate governance is being challenged due to corporate failures in the early part of this decade and the more recent decline in markets and the trading value of corporate equity securities. These recent episodes have raised public concern over corporate behavior in many areas such as compensation, performance measurement, and accountability.
While these corporate failures have diverse consequences and details, the conditions which enabled them can be related to corporate governance failures. Evidence and theory available to the investor show that managerial discretion combined with other incentives can cause managers to pursue personal interests at the expense of the investor. In their discussion of corporate governance, Shleifer and Vishny  try to answer the question of why investors part with their money in the face of potential managerial misuse of the investment. Currently, investors theoretically control management. In the 19th century, stockholders were directly involved in the corporation and established governance procedures and policies for the protection of their investments.
Hart  provides a theoretical framework for corporate governance, describing the problem of incomplete agent contracts and how corporate governance relates. Hart proposes that if the agency problem exists and contracts are incomplete, then the structure of corporate governance has a role and is important. Five issues of corporate governance raised by Hart are: cost of agent contracts; individual stockholders are too numerous to exercise control on a day-to-day basis; large stockholders; limitations of the corporate board of directors; and the potential that management will pursue its own goals at the stockholders' expense. Resulting from these issues, providers of capital have designed systems of corporate governance with checks and balances to protect their financial interests in the corporation.
With methods of corporate governance and the success of those methods today being questioned, this paper reviews corporate governance from an historical perspective. While several studies [Roe, 1993; Charkham, 1994] have compared corporate governance methods between countries, few have looked at corporate governance in history [Gallhofer and Haslam, 1993].
Over the past several years, the structure of our corporate governance system has come into question. At Enron, the board of directors removed governance controls, allowing the CFO to operate off-balance-sheet partnerships that greatly obscured the true financial condition of the company. At Adelphia, the president ignored the economic entity assumption and used the assets of the company as his own. Before these companies faltered, some academics were already questioning our corporate governance system. Hart  and Shleifer and Vishny  published papers presenting evidence that there are flaws in the corporate governance system upon which investors rely. Both of these papers state the limitations of the corporate governance system and potential problems associated with those limitations. Issues mentioned in both papers include agency problems and large stockholders.
As previously indicated, Hart proposed a framework of corporate governance, maintaining that the market approach to monitoring corporate governance theoretically should create a good system of corporate governance that would work in all cases. …