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Corporate governanceregulations: A new term

for an ancient concern?The case of Gro Parand Maranho GeneralTrading Company in

Portugal (1754)Lcia Lima RodriguesUniversidade do MinhoAlvaro RicardinoPontifcia Universidade Catlica de So PauloSofie Tortelboom Aversari MartinsFipecapi Fundao Instituto de Pesquisas Contbeis,

Atuariais e Financeiras Brazil

Abstract In 1754, Governor Francisco Xavier de Mendona Furtado requestedhis brother, the Marquis of Pombal, obtain the Kings approval toestablish a trading company in Brazil. The Governor sent his brothera draft of the proposed trading companys by-laws. Its 27 paragraphsmimic the by-laws of the English East India Company and containvarious provisions that may be described today as good corporate

governance regulations. Later, the approved by-laws of the GroPar and Maranho General Trading Company (GPM), as based on

the draft prepared in Brazil and issued by Pombal in Portugal, wereamended under the influence of the by-laws of the Dutch and French

Copyright 2009 The Authors(Los Angeles, London, New Delhi, Singapore and Washington DC) and AFAANZVol 14(4): 405435. DOI: 10.1177/1032373209342475

Accounting History


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Accounting History Vol 14, No 4 2009

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East India companies. This local, time-specific study of the by-laws ofthe Gro Par and Maranho General Trading Company is intended tocontribute to the literature on the evolution of governance regulations,including the use of accounting and auditing mechanisms.

Keywords: Accounting; Brazil; chartered company; governance;government; Portugal; regulations

Introduction

The second half of the twentieth century is usually regarded as heralding attempts

to regulate and consolidate corporate governance practices,1,2

despite commonacceptance of the view that the maximization of the companys performanceand access to capital3 has always been part of investors concerns. Research onthe historical evolution of corporate governance, as it is known today, or thegood governance of companies, is still at an early stage (Toms & Wilson, 2003).As Maclean (1999, p.109) has suggested, business historians are well placedto contribute to the contemporary debate on corporate governance. Macleanargued that issues such as board selection, board performance, family control,shareholder maneuvering and the influence and regenerative potential of business

elites, would profit from systematic and closely documented historical enquiry.He also stated that the contemporary corporate governance debate offers aframework through which the past may be revisited and reassessed. In the samevein, Lloyd-Jones et al.(2005) pointed to the relevance of a historical perspectiveto the study of corporate governance. Carlos and Nicholas (1988) argued thatthe early trading companies sold goods and services across national boundariesand had a geographical extension that rivals the present day multinationalcorporations, but which has been generally overlooked or ignored.

The present study contributes to an understanding of notions of good gov-

ernance of companies in the eighteenth century, including local, time-specificaccounting and auditing mechanisms, specifically in the case of Companhia Geralde Comrcio do Gro Par e Maranho (Gro Par and Maranho GeneralTrading Company hereafter known as GPM) of Portugal. In so doing, the studyindicates that existing concerns about corporate governance in an increasinglyglobalized world should not be regarded as a peculiarly modern day concern.

To better understand this case, some brief clarifications are providedregarding the geographic location of the business, as well as the socio-economicconditions experienced by inhabitants in that region at the time. The State of

Gro-Par and Maranho was located in the north-east of Brazil and coveredan area of about 9,900,000 m2. It stretched from the current state of Cear to the


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extreme west of the Amazon region, including the current states of Tocantins andMato Grosso. The first colonization attempts in the area were in the seventeenth

century. The Portuguese monarchy wanted to extend its dominion to the North,with a view to establishing permanent colonies to defend the land from possibleDutch, French and English attacks. But the land in Maranho was not as fertilefor the growing of sugar cane as other regions in Brazil. There were also otherdifficulties such as geographical dispersion, a lack of labourers with sufficientendurance to work in agriculture, and insufficient administrative capacity tosupport economic development in the region. Thus, during the second half oftheseventeenth century and the first half of the eighteenth century, the effortsof colonists in the State were essentially aimed at survival. Furtado (1980, p.91)summarized the poverty of the inhabitants of So Luiz, the second city in theState, stating it was a small colony, in whose port there were one or two shipsper year, and whose inhabitants depended on the work of some Indian slaves tosurvive.

In this article it is argued that the by-laws proposed by Mendona Furtado,which he composed in Par, Brazil, from memory, were based on or closelyrelated to the British model of governance. In contrast, the approved by-laws andthe specific statutes for the good governance of the company, issued by Pombal,were influenced strongly by the Continental model of governance. Therefore,in this particular case, the cultural, political and legal context of the country,

Pombals regime of enlightened despotism combined with his knowledge ofchartered companies was evidently more influential than the mimetic pressures onMendona Furtado in explaining the approved government regulations.

The rest of the article is organized as follows. The next section briefly reviewsthe development of corporate governance ideas and practices and the history of

joint stock companies. The sections that follow describe how and why GPM wascreated, and analyse both the proposed and approved by-laws and the specificstatutes for the good government of the company. The last section of the articlediscusses the extent of differences between Mendona Furtados proposal and

Pombals decisions and presents the conclusions. This discussion focuses attentionon how governance can be explained in this case by reference to the cultural,political and legal context of Portugal and by reference to the knowledge andpower held by Pombal.

Corporate governance and the history of joint stock companies

Jensen and Meckling (1976) published one of the first studies that included a the-oretical framework on conflicts of interest between a companys shareholders,

managers, creditors and employees. Their reasoning was based on the relationsbetween agents and principals where the former represent the latters interests.


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Using the agency perspective, Shleifer and Vishny (1997, p.737) characterizedcorporate governance as the set of mechanisms by means of which resource

suppliers guarantee that they will get a return on their investment. Accordingto these authors, a problem arises when the agent contracted to defend theprincipals interests gives priority to the agents own interests to the detrimentof the principals interests. This kind of relationship is more strongly present incompanies where the shares are widely rather than narrowly held.

In enterprises where an individual (or groups of individuals) are shareholdersand managers at the same time, this conflict of interest dissipates or disappears.However, another conflict arises: small external investors versus the controllingshareholders. In this sense, shareholders or managers willingness to invest in abusiness becomes proportional to the existence of protection mechanisms againstthe controllers expropriation (La Porta et al., 2000, p.17).

Corporate governance regulations have developed around the world inresponse to market forces and national culture (La Porta et al., 1997). La Porta etal. (1997) have classified French, Scandinavian and German law in the civil lawtradition. Buck and Tull (2000) argued that countries with the strongest civil codes,such as France and Portugal, generally offer the strongest support to relationalinstitutional investors (that is, shareholders who hold large parcels of shares) andthe weakest protection for individual investors and, consequently, they have theleast developed capital markets. It has been demonstrated that the common law

basis of company regulation in the USA and UK has led to an emphasis on theprotection of individual shareholders from expropriation by insiders and alsofrom restrictions on the free tradability of their shares (Buck & Tull, 2000, p.120).Baskin (1988, p.199) pointed out that the development of corporate finance fromits beginnings among the British trading companies to its modern transformationin the USA was a result of the efforts (by capital markets) to minimize theproblems created by the asymmetry of information between company insiders andpotential investors.

Academics have sought to explain and evaluate the reorientation of corporate

governance along Anglo-American lines, but the literature is largely ahistoricalin nature (Maclean, 1999; Cheffins, 2001, p.87). The development of joint stockcompanies is usually classified according to two models: the British on the onehand and the Continental on the other. The Continental model is representedessentially by Holland and France (Marcos, 1997). Under the Continental model,the government of the Dutch East India Company, for instance, was in the handsof seventeen directors, nominated by the State, who were required to have aminimum holding of equity capital. Usually, these directors managed the companyaccording to their discretion without necessarily responding to matters raised by

shareholders at meetings, and without rendering accounts (Marcos, 1997). Underthe British model, in the East India Company of England, the general assembly of


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shareholders had absolute deliberative power: each shareholder had one vote, theright to be informed about the daily life of the company and the right to inspect

the accounting books (Marcos, 1997). The creation of the company was essentiallyan initiative of individuals and the influence of the State was unimportant(Marcos, 1997).

The differences between the two models can be explained by the way capitalwas collected. In the Dutch case, capital was subscribed by individuals with money;nobles, farmers or waiters; inversely in the English case, capital was subscribedby elites, specifically the merchants and the nobles (Marcos, 1997). Therefore,while the democratic root of the English model was generally supported byelitist shareholders, the dictatorial Dutch model was supported by commonshareholders (Galgano, 1980, p.118). However, as time passed the Dutch modelbecame more democratic and it was almost impossible for the English EastIndia Company to keep shares solely in the hands of the elite (Marcos, 1997).The French East India Company was similar to the Dutch model: the directorssubscribed a minimum amount of the capital while experience as a merchant wasimportant and the shareholders did not influence the management of the companyexcept in the election of directors. In addition, there was a considerable degree ofState intervention over the company (Marcos, 1997).

As will be seen, the government regulations of the GPM, as proposed byGovernor Mendona Furtado, were based on the British model of governance,

while the subsequently approved by-laws and the specific statutes for thegovernance of the company were much closer to the French and Dutch models.Under D. Joo V(John V), Portugal began to imitate French mercantilism (Dias,1984, pp.14250, 21213). As Colbert (161983) had done in France, Cardeal daMota, Chief Minister ofD. Joo Vfrom 1736 to 1749, supported big corporationsthat were in the hands of certain privileged bourgeois (Falcon, 2005). For Pombal,who succeeded Cardeal da Mota, this model was desirable: royal interests couldnot be contested by ignorant shareholders who did not know or appreciate theStates interests. In effect, the board of the company was executing the official

policies of the King.The next section presents the research method and analyses both the

proposed and the approved by-laws. In the examination of the proposed andthe approved by-laws, the following themes were identified and form the basisof analysis: share capital and shareholders rights; duties and responsibilities ofdirectors; accounts and reports; directors remuneration; dividends, and audit.

The formation of GPM

This article presents a case study of GPM which poses two basic questions in thecontext of the creation of the company (Yin, 2003, p.7): How did it happen?


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and why did it happen?. In discussing the use of case studies as a researchstrategy, Yin referred to how and why as the most frequent questions to

answer in historical research. This is due to the fact that these questions dealwith operational links that need to be established over time, instead of beingconsidered as mere repetitions or incidental occurrences (Yin, 2003, p.25).Responses are now provided to these questions.

How did it happen? The creation of the

(GPM)

The reign ofD.Jos I(175077), through the action of his Chief Minister Pombal,was characterized by the re-emerging importance of Portugals colonial dominions,notably Brazil and Angola (Serro, 1996b, p.141; Schwartz, 1998, p.93). To assist

in bringing about this objective, different Viceroys and Governors who sharedsuch intentions were appointed to administer the Portuguese colonies. One ofthe measures used to connect the empire was the creation of monopoly tradingcompanies that had important implications in the commercial and financialadministration of the colonies, particularly in Brazil (Arruda, 1986; Serro, 1996b,p.140).4 The objective of establishing such companies was to develop the economyof Brazil through the monopoly of trading African slaves and exporting colonialproducts (Boxer, 1981; Serro, 1996b).

The GPM resulted from an initiative of Governor Francisco Xavier de

Mendona Furtado, the brother of the Marquis of Pombal. Mendona Furtadowas forced to find a solution for the economic viability of the state of Gro-Parand Maranho, of which he was governor at the beginning of the second half of theeighteenth century. The contents of a series of official and private letters, whichthey exchanged from 1751 onwards, enable an understanding to be derived of thecompanys origins and evolution.

The first letter, dated 21 November 1751, indicated, in broad terms, thatthe granting of tax exemptions to the Companhia de Jesus (Society of Jesus)was a partial cause for the extreme poverty of local inhabitants. The governoralso argued that the region depended on rudimentary agriculture and the trade ofnative forest products. European inhabitants did not work sufficiently hard and,consequently, did not produce anything of consequence.

Agriculture and mining depended on the local Indian workforce which, dueto the religious instruction of the Jesuits by the Society of Jesus, worked almostexclusively for the Jesuits, in semi-slavery. As a result, most of the items forlocal consumption or export to Portugal were traded by the Jesuits. The fiscalexemptions they were granted by the Portuguese crown thwartedany competitiveattempt by local traders, who did not have such privileges. The governor described

the gravity of the situation as follows:


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As the regulars [Jesuits] neither pay taxes on goods [products] of the land,nor do they pay, under the pretext of the missions, Consulado e Mercearia[Consulate and Food Commerce branches from the Portuguese government],

in Lisbon, nor the Alfandega [Customs] in this state, and as they do not payany taxes, it is demonstrated by actual calculation that, in the commercialbalance, the priests are gaining 80 per cent against the seculars [local traders],which allows Your Excellency to understand the progress the poor traders canmake when they are up against the Powerful Body [the Jesuits] with 80 percent of guaranteed gains in trade against them. (Mendona 1982, p.32)

The extent of the disadvantage that the local traders faced was such thatthe inhabitants of this State were reduced to misery ... because, nevertheless, itsReais Errios (Treasury) is extinct and without hope for relief; its dependents are

reduced to extreme poverty and misery, to the extent that there is not one soulin this captaincy (capitania)5 who can pay a debt of 30 ris ... (Mendona, 1982, p.33). The governors words mirror the gravity of the situation at that time anddemonstrate the need to promote initiatives to help overcome the problem.

Two years later, during which time many letters were written, MendonaFurtado sent his brother a further letter, in which he proposed the creation of atrading company. The explanation for this project is contained in the text of theletter of 24 January 1754 as follows:

Among various ideas that have occurred to me to try and partially repair

the sad destruction to which these two captainships [Maranho and GroPar] have been reduced to, none seemed better to me than to establish aCompanhia Geral de Comrcio here, which could introduce such a quantity ofblacks into this State that the lords of sugar mills and other farms would find amarket ready for them, where they could buy them for an adequate price andthus recover the extreme ruin they are in. (Mendona 1982, p.35)

The business, which was effectively nothing more than the official transportof slave labour, had two aims: to introduce a more resistant and dependableworkforce than that provided by indigenous people; and to take the trademonopoly from the hands of missionaries (Jesuits).6 At the beginning, the idea

was rejected by local inhabitants. The locals initially contended that they didnot possess sufficient resources to undertake the business. However, when thePortuguese military officials in the region agreed to the creation of the companythe local traders had a change of view and the traders managed to collect 32,000cruzados,as share capital for the project7 an amount that surprised the projectsinstigator himself (Pombals brother) (Mendona, 1982). The Governor wasenthusiastic about the support that emerged and extended his plan to the peopleof Maranho, who accepted his decision.

The initiative was not an original one in Portuguese colonies, and even

less so in other countries. Many years before, two other businesses had beencreated for the commercial exploration of Brazilian territory: the Companhia


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Geral do Comrcio do Brasil, the Brazilian General Trading Company (1647),whose main role was to supply slaves and guarantee sugar transports to Europe;

and the Companhia do Maranho (1682), which was also active in sugar andcotton exports and supplied credit, transport and slaves to the producers (Serro,1996a, pp.11721). In the same letter dated 24 January 1754, Mendona Furtadorequested Pombal to intervene with the King in favour of tax exemptions for thebusiness, a prerogative that seemed to be unprecedented for private companies.Later, the arguments in favour of this request are reinforced ... If our Majestygrants this exemption to the Company, he will realize a business of extreme utilityto his royal crown (Mendona, 1982, p.37).

Three weeks later, Mendona Furtado wrote another letter to his brotheradvising that he had collected the starting capital of 250,000 cruzados and thathe had prepared minutes of the company by-laws.8 In their first version, theproposed by-laws referred to the difficulties that had been experienced in theirpreparation due to the absence of literature or suitable persons that may havebeen of assistance:

As this Company could only be founded under certain conditions that wereuseful for the interested parties and that by themselves served as ruling laws, Ifound myself facing the obstacle of making them, since there is not one singleperson in this land who understands these determinations [subjects].

...Because I do neither have a book about this subject here, nor a copy of anyof these determinations to serve as guidance and accommodate them to themodes of the country, I needed to set the mentioned conditions through therigour of a strong discourse, and only with a slight recollection of somethingI saw, the interested parties were thus advised to send the determinationsto Lisbon, notwithstanding the satisfaction they had in them, to consultindividuals to ensure all possible precautions were taken.9 (Mendona 1982,p.39)

It is highly probable that Mendona Furtados claim that he composed the

by-laws on the basis of a slight recollection of something I saw referred to theknowledge about this subject that he had acquired during the time in which theBriton John Cleland,10 on Pombals request, was visiting Lisbon. Cleland showedthe Portuguese court plans for the constitution of a trading company which, dueto the envy of its opponents, was not turned into reality (Barreto, 1986; Azevedo,2004, p.58; Rodrigues & Craig, 2004). Pombal and Cleland became acquaintedwhen the former was in London in the service of the Portuguese crown. Barreto(1986, p.LIII) claimed that Pombal developed a friendship in London with JohnClelands father, William Cleland (see also Rodrigues & Craig, 2004) and, at that

time, he came to know Cleland, a British esquire who recently arrived from theEast and who had occupied a high post in the East India Company of England.


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The repeated conversations between them would finally give rise to a project fora company for the Portuguese possessions in India, which was similar to the British

Company (Azevedo, 2004, p.42). Pombal became so interested in and familiarwith the subject that, in 1742, in a letter to Cardinal da Mota, he described thescript elaborated by Cleland for setting up the East India Company. This is quitea generic enumeration of the basic points of a project which, as stated in the textitself, is modeled on the East India Company of England model (Falcon, 1982,p.290). In this letter, Pombal argued that Cleland held many documents relatingto the rules or articles of the English Company. In December 1742, MendonaFurtado arrived in London to join Pombal. It is also possible that the three metthere and worked on the idea of developing the East India Company together.

Clelands links with Portugal are evident also in a letter that Pombal wrote fromVienna in 1748, disclosing that Cardeal da Mota had received Cleland in his homein the presence of Portugals Secretary of State, Marco Coutinho (Pombal, 1748;Rodrigues & Craig, 2004).

A comparison made of the by-laws proposed by Mendona and the by-lawsof the East India Company of England revealed certain similarities. Commonpoints between these by-laws relate to the internal organization of the companies,especially the importance of the general assembly and the rule that all shareholderscould vote independently of the amount subscribed.

By including what is nowadays known as corporate governance mechanisms,Mendona Furtado displayed his preoccupation with the going concern status ofthe company. In the Governors own words, these initiatives seemed to me thatthey could help in the good government of the company (Mendona 1982, p.40).This care for government or governance of the proposed company was not withoutreason. The failure and fraudulent conditions in which previous businesses hadbeen settled in Portugal are mentioned in the same letter dated 15 February 1754:

It seems to me that the authority which the interested parties [stockholders]ask of His Majesty, for the directors of the Company, will help a lot to disclose

the endless frauds with which these people usually surround business, so thataccounts are never found and, while the money is extinguished through thetricks by which lawyers usually render things of this kind useless, the businessis totally ruined, the interested parties suffer and the current account ishardly ever or never obtained, of which Your Excellency must have seen alot of examples at our court, mainly in numberless companies that wanted toestablish themselves, whose accounts were destroyed with eternal demandsand, as I know about some myself, I have not heard of any that had an end.(Mendona, 1982, p.40)

He concluded the letter to his brother intimating ... the love I have for this

new undertaking and the anxiety to see it prosper. Mendona Furtado attachedthe minutes of the by-laws with the following title: Conditions for the establishment


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of the new company by the inhabitants of the Par captaincy to supply Negroes tothe state of Maranho and Minas do Mato Grosso.

In view of the focus of this study, one part of the title stands out: which theinhabitants of the captaincy intend to establish. This highlights the likelihoodthat the initiative emerged from the colony, for the benefit of its inhabitants.There is nothing in the proposed by-laws that suggested the intention to gobeyond the frontiers of the colony for administration and control purposes, as willbe demonstrated below.

Analysis of the proposed and adopted by-laws

The proposed minutes consist of 27 articles. The minutes contained a series ofinitiatives that, two and a half centuries later, are comparable with some of the

main regulations of what is now known as corporate governance regulations. Asmentioned earlier, several levels of analysis are used to analyse the articles: sharecapital and shareholders rights; duties and responsibilities of directors; accountsand reports; directors remuneration; dividends; and audit.

The proposed by-laws

Share capital and shareholders rights

Art. 1. That this company is established with one thousand shares of onehundred mil ris each, giving each person the liberty to enter with one or

many shares ...

The by-laws do not distinguish between the shares according to kind but, ascan be seen in article 6, all shareholders had the right to vote.

Art. 2. That, after contemplating the mentioned one thousand shares, thecompany can issue another one thousand shares. The price of these secondshares is one hundred and fifty mil ris.

The figure of share premium on the occasion of a second stock issue can beobserved here.

Art. 3. That ..., after completing the second shares, ..., the directors can issueanother one thousand shares; however, the third set of shares will be at200$ rs each, and the second as well as the third ones will only be rated at100$ rs per share, like the first ones, while the surplus amount at which theyentered [difference between the acquisition value and the nominal value] isincorporated into company funds.

Apart from the figure of share premium, this article indicates its nature.There is no indication about its accounting treatment.

Art. 6. To elect the mentioned administrators, all interested parties

[shareholders] will be called, and they will freely chose 13 shareholders.


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Although the writing sequence of articles 6 to 8 is somewhat confusing, theshareholders elected 13 partners, equivalent to a Board, (article 7), which would

then elect the four Administrators mentioned in articles 7 and 8. As happenedin the East India Company, the general assembly had deliberate powers and itwas by that assembly that the directors were elected (Marcos, 1997). Also, eachpartner had one vote at these meetings (Marcos, 1997, pp.5960; BL, Shelfmk,100.m.39, p.32).11

Duties and responsibilities of directors

Art. 7. As soon as the mentioned 13 persons have been elected ... amongthose interested parties who seemed to be most capable, they will electthe mentioned four administrators, always keeping in mind that the solid

establishment and development of the mentioned Company, or its total ruin,depend on their good or bad choice of the mentioned Administrators.

The Governors intention conforms with present day corporate governanceregulations which state that 5.1 Duties of the Board: The boards duties andresponsibilities and key functions, for which they are accountable, include thoseset out below: [ ] iii) Selecting, compensating, monitoring and, when necessary,replacing key executives and overseeing succession planning.12

In this case, the Directors, equivalent to a Board, would not only electone, but four main executives, since all of them have equal powers and had

co-responsibility:

Art. 8. The administrators will buy a safe with four keys, one for eachadministrator where the monies of the Company will be kept and it will not bepossible to receive or to pay without the presence of the four administrators.13

Art. 18. Every time any of the administrators is proven guilty of omission,... the thirteen directors will be called and they, in the same way as in thebeginning, can install another administrator to replace the one found guilty asmentioned above ... and they have the right to maintain or dismiss the abovementioned administrators as they consider to be most convenient for thecompanys interested parties.

This reinforces the privileges of the directors to nominate and dismiss thecompany directors, as described in the seventh article.

Accounts and reports

Nowadays, it is recognized that financial accounts are a means of relievingthe asymmetry of information between managers (agents) and shareholders(principals) (Whittington, 1993). It is recommend in all modern day corporategovernance codes that companies establish an internal control system, as ameans of safeguarding their assets and enhancing the transparency of corporategovernance practices.


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Art. 9. For a good expedition [development] of the business that belongsto the mentioned company, the mentioned Administrators will meet atleast three days per week ... at that house agreed upon by the mentioned

administrators, in which the books will safely be kept.

Article 9 refers to the use and safe-keeping of accounting books (withoutspecifying the particular books involved). However, at that time, the accountingbooks used in Portugal were the Borrador(waste-book) the Razo (ledger) andthe Dirio (journal) (Pedreira, 1995, p.404). The recognition of the importance ofaccounting may have derived from the personal knowledge of many directors ofMediterranean commercial practices who found double entry bookkeeping to bean important tool for business control purposes (Pedreira, 1995, p.400). Duringthe early years the reporting had a managerial rather than a financial emphasis(Baskin & Miranti, 1997, p.67).

Art. 11. As soon as any of the companys ships reach this port, the sameadministrators will be required, ... to offer some public reports to theinterested parties [shareholders], about the uses made in Lisbon [contentsacquired and embarked in Lisbon]; the navigation the ships carried out andwhich ports they entered; the uses [acquisitions] and expenses they incurredwith them; the effects [goods] they brought; and, after the sales are realized,they will offer other reports of what the mentioned effects imported [valueobtained from the sale], the load the ships transported to the kingdom, for thementioned interested parties to be fully informed about the way in which the

business is handled in the good faith of trade, and about the profits they mayexpect from them, whose reports will also be sent to the administrators, for theinterested parties in the kingdom to be informed in the same way.

One key component of present good corporate governance practices relatesto disclosure of accounting information. In this case, the intention of the writer ofthe minutes becomes clear, when establishing that all operations of the entity andnot only the final result of a period should be known in detail by all shareholders.To be able to inspect the accounting information was also a characteristic of theoperations of the East India Company of England (Marcos, 1997, p.76).

The Governors intention was extremely healthy, mainly when takinginto account that the business was located in two distant continents (Carlos &Nicholas, 1990, p.856).Even when the commodities arrived, the directors still hadto ascertain whether their officials had cheated them (Carlos & Nicholas, 1990,p.856). Cheating could involve an active policy of trading for commodities onones own account at the expense of the company. This problem (private trade) isbelieved by most historians of the chartered companies to have been widespread(Carlos & Nicholas, 1990, p.856). The East India Company of England complainedthat the inter-Asian trade was poorly developed because of private trade (Carlos &

Nicholas, 1990, p.857). Furthermore, in 1710 the Dutch East India Company


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accused its Bengali factories of putting aside the most profitable assortment oftextiles for their own benefit (Carlos & Nicholas, 1990, p.857).

Art. 12. The Lisbon cashiers and administrators will be obliged to make thesame reports ...

The information prepared in Brazil mustbe prepared in the same way as inPortugal on the grounds of consistency and for equity purposes.

Directors remuneration

Art. 15. While the administrators will be occupied with this administration,... as a premium, from Company gains, they will get 100$ rs per year, and forwhat they register and collect for the Company books on their own account

[the business they generate with income returned to the company], they willget another 60$ rs, through the same gains ...

The by-laws anticipated increases in remuneration as new share issues weresubscribed. The publication of remuneration bases for the entitys main executivesis an important corporate governance regulation. An obvious place instrumentfor any firm to exercise control is with the employment contract (Carlos &Nicholas, 1988, 1990; Baskin & Miranti, 1997). The remuneration package andwork provisions in employment contracts are critical in reducing opportunism andencouraging managers to work in the best interests of the firm. Firms can use both

fixed and incentive fee payments to encourage managers to be productive in theinterest of the owners. For their part, managers promise to work effectively and inthe best interests of the company (Carlos & Nicholas, 1988, 1990).

Dividends

Art. 20. Since the company will take one or two years to be properlyestablished, the shareholders will not receive dividends in the first threeyears.

The first distribution of dividends happened only after three years.

Art. 21. After the first distribution, the four administrators will be obligedto render accounts every two years to the two interested parties [the expertswho will examine the accounts]. At the same time the profits will be dividedby all shareholders and the new thirteen directors will be elected. This will beobserved throughout the future.

This article sets the period of two years for rendering accounts. While currentcorporate governance principles establish a period of one year, it seems that twoyears is an acceptable period, given the characteristics and geographic distance ofthe business. The two interested parties were to be two partners of the company

(see also Article 19).


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Audit

Art. 19. After any ship leaves this place [Brazil] with its load, the administrators

will be obliged to update and settle their account [render updated accounts],and the thirteen administrators will nominate two members of the interestedparties [shareholders] who are most expert to assist [verify] and take theaccounts to the four administrators, about whose result [closing] they willrender account to the same directors, not only for them to know but also tomake public how the administration of the companys cabedal[resources] isdoing.

Although it is conjectural to refer to auditing in Portugal in 1754, thegovernors intention is obvious: to establish the examination of accounts by two ofthe most experienced interested parties for them to assist and take accounts from

the administrators,14 and make public how the administration of the Companysresources is doing. In using the expression make public, the intention to effectdisclosure when conducting business is again made clear. When referring to theEast India Company of England, Baskin and Miranti (1997, p.82) also state thatarrangements were made for regular audits of overseas account balances.

Art. 22. The two interested parties that have to take accounts from the fouradministrators will be obliged, after closing the accounts, to inform the13 directors about the state they found them in [opinion about companyaccounts], and they will enter the closing register in the ledger, which they will

sign together with the four administrators.

In accord with modern day corporate governance practices, the expertswould express their opinion on the companys accounts. The criteria for analysisare not specified in the by-laws.

Art. 23. If, after the accounts are approved, a fraud is detected, the fouradministrators and the two shareholders nominated to observe the accountswill be responsible and they will immediately forfeit their shares to theCompany.

Art. 24. The shareholders who will audit the accounts will have two months toperform the task; if not possible in this period, they are allowed to ask anothertwo months to the 13 Directors, at the maximum.

Since employment contracts do not necessarily solve the problem ofprivate trade, firms needed to generate supplementary sources of informationby means of systems of internal controls and from auditors in order to monitormanagers. Written records of decisions and notification of compliance to formalrules and procedures (accounting procedures, inventory systems) provide a flowof information to the board (Baskin & Miranti, 1997; Carlos & Nicholas, 1990,

p.858). Managers were required to follow standards in the maintenance of postrecords and, in particular, of all account books. Through these accounting records


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the company could also monitor the trading activity of individual managers(Carlos & Nicholas, 1990, p.875).

Art. 25. The interested parties [experts] nominated to take the accounts fromthe four administrators cannot be nominated for the two following years, andthey will only be allowed to take accounts again after six years, and each ofthese two nominees will receive fifty mil ris, for each account he takes.

Two hundred and fifty years before the enactment of the Sarbanes-OxleyAct of 2002, Mendona Furtado had already anticipated the need for the rotationof account analysts/experts, so as to preserve the fairness of business accountanalysis.

As indicated earlier, the Governor, as author of the proposed by-laws, does

not imagine anywhere in the by-laws or throughout the letters sent to his brother,that the administration would be located in Lisbon, as actually eventuated. Thebiggest concession Mendona Furtado made in his proposal (Art. 27) is thatthere be administrators in both places: that the four administrators, in this Cityas well as in Lisbon . The order in which the cities were indicated, in an agecharacterized by high levels of servitude, suggests that the authors wanted thecentral business administration to be established in Belm, Brazil. But this didnot occur because the central business administration was indeed established inLisbon.

As evident from the earlier outline of the proposed by-laws, the Governorplaced importance on the general assembly of the company, the democraticparticipation of all shareholders in all its events, and the importance of disclosureof all kinds of accounting information (as happened with the East India Companyof England). As will be seen, the system proposed by Pombal was less democraticand transparent in terms of the way the company reported its earnings and how itdescribed its operations to shareholders.

The approved by-laws and the specific statutes for the good government of GPM

On 6 June 1755, the King of Portugal, D. Jos I(Joseph I), approved the 55 articles

that made up the final version of the GPM by-laws. Several draft versions of theseby-laws were produced and they provide evidence of successive negotiationsin reviewing and refining the articles. For instance, in a document found at the

Arquivo Histrico Ultramarino there are several annotations and corrections tothe proposed by-laws in different handwriting.15 The changes introduced in thedocument were considered in the final version of the by-laws and confirm theinfluence of Pombal in the elaboration of the by-laws (Marcos, 1997).

To reduce the directors discretion, and in accord with similar corporationsin many European courts,16 specific statutes (also known as rules for the

economic government of the Company) were issued for each chartered companyin Portugal. The objective of each statute was to regulate the boards conduct. The


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specific statutes of the GPM were issued on 16 February, 1760.17 The origin ofthis document can be found in a Royal resolution on 15 December 175618 which,

although incomplete, as certain parts were missing from this initial draft version,was very similar to the last published version of the specific statutes. The delayis explained in the Preface of the specific statutes of the GPM: the effects of theLisbon earthquake which occurred in 1755. Hence, there were two key documentsfor regulating the affairs of the GPM: the approved by-laws and the specificstatutes. In Portugal, these formal documents were complementary. The by-lawswere more general in their orientation while the specific statutes established manymanagement procedures.

Share capital and shareholders rights

The approved by-laws established the main privileges conceded to the company,19the way the capital should be constituted, and the rights and duties of theshareholders. The companys capital was 1,200,000 cruzados, divided into 1,200shares of 400 mil ris each. This was paid half in cash and the rest in two equalinstallments, due four and eight months later, respectively.

According to the third article of the by-laws, the political body, a Junta(Board), was elected from only those Portuguese partners whose stock interestwas higher than 10,000 cruzados (Art. 2). Only those partners who individuallyor collectively represented interests higher than 5,000 cruzados were allowed to

vote. The by-laws also considered the right to sell the shares (Arts. 50 and 51)and the right over remaining assets in the case of the liquidation of the company(Art. 53).

Duties and responsibilities of directors

In the proposed by-laws, the board was to be composed of 13 directors. Inthe approved by-laws, this proposal for a board of 13 people was replaced bya political body composed of one superintendent, eight deputies and onesecretary.20 In addition, three merchant counsellors who did not hold any shares

in the company were appointed as independent advisers. The political bodywas called a Junta (Board) and the Superintendent/President was the Provedor.Nevertheless, for the first three-year mandate, the members of the board weredesignated by the King, that is, the partners did not elect them. After this three-year period, the mandates were to be annual and a member of the board couldonly be elected again if he achieved two thirds of the votes (Arts. 3 and 5). Becauseit was a private initiative, the business could be managed without the interferenceof the State, although the King had the power to intervene himself. It was the taskof the eight deputies to supervise the conduct of the business.

The specific statutes for the good government of the company establishedthat the deputies were forbidden to practice commerce in their own interests,


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because it was considered that such behaviour could damage the company(Art. 31).21 In addition, a cash fine was to be applied to any deputy who missed

any meeting without reason. The specific statutes also established the principleof co-responsibility of all deputies concerning the deposits and withdrawals fromthe safe and the importance of providing shareholders with access to accountingbooks. However, such access to accounts was not a right of the shareholder but aduty of the directors.

Accounts and reports

Under the approved by-laws, the company took the initiative of disclosing theannual detailed and summarized balance sheet (prepared using double entrybookkeeping [Art. 29]),22 to all the interested shareholders (Art. 28).23 The

printed summary was informative to shareholders since it showed the sum of thecapital and accumulated profits which, when divided by the number of shares,provided the official quotation to transfer stocks.24 The need to disclose financialinformation annually is related to the fact that the directors were to renderaccounts because every year there were elections to choose the new board, andbecause of profit distributions.

Directors remuneration

The directors remuneration under the approved by-laws was established as acommission of six per cent, comprised as follows (Art. 25): two per cent of the

expenses in Lisbon, two per cent of the sales in Gro Par and Maranho andtwo per cent of the profits. However, this money was to be used also to pay thedirectors located in Gro Par and Maranho, the accountant and two cashiers(see, AHMF, Livro e Registo das Consultas, sheet 11V where it is stated that thesepeople assisted the board and, therefore, should be paid by the board; see alsoDias, 1984). As already discussed, such variable remuneration was considered tohelp guarantee that the interests of the board members accorded with those of thecompany (Marcos, 1997).

Dividends

In terms of the rights of shareholders, a period of no less than three years wasthe time for the first profit distribution, in accordance with the minutes of the pro-posed by-laws. Further distributions were to occur on an annual basis (Art. 52).

Audit

The examination of accounts under the approved by-laws was to be undertakenby two experts, both offering their opinion about them. Article 6 stated All[superintendent and deputies] will serve as long as the Company wants to main-tain them and will keep accounts of its revenues and will offer a settlement

signed by two deputies and sealed with the Companys seal, after being seen andexamined by the Company Accountant. But the auditing was not independent,


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Table 1: The proposed and the approved regulations

Proposed regulations Approved regulations

Share capital andshareholdersrights

Share Capital: 250,000cruzados;

Share Capital: 1,200,000cruzados;

All shareholders had the rightto vote and elect the Board.

The Board was elected fromonly the Portuguese partnerswhose stock interest washigher than 10,000 cruzados.Only those partners whoindividually or collectively

represented interests higherthan 5,000 cruzados wereallowed to vote.

Duties andresponsibilitiesof directors

The solid establishment andincrease of the Company, or itstotal ruin, depend on their goodor bad choice of the mentionedAdministrators.

The regulations specifiedclearly that the directors wereforbidden from practisingcommerce in their owninterests.

Accounts andreports

The shareholders should befully informed about the wayin which the business is

handled in the good faith of trade.

The access to accountinginformation was not a right ofthe shareholder but a duty of

directors.Directorsremuneration

From Company profits, they wereto receive 100$ ris per year, andfor the business they generatedwith income kept in the companythey will get another 60$ ris,through the same gains.

The directors remunerationwas established as acommission of six per cent,comprised as follows: two percent of the expenses in Lisbon,two per cent of the sales inGro Par and Maranho andtwo per cent of the profits.

Dividends Shareholders will not receivedividends in the first three

years; further distributionswere to occur biennially.

Three years was the minimumtime for profit distribution;

further distributions were tooccur on an annual basis.

Audit The examination of accountsby two of the most experiencedshareholders; the expertsnominated to take the accountscannot be nominated for thetwo following years.

The examination of accountswas done by only two deputies(managers).


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since the auditors were managers (deputies). Article 23 of the specific statutesestablished the control of expenses. Each deputy responsible for an expense

presented a supporting document to the board, which passed the document onto the accountant, who duly acknowledged the expense. Only then was theexpense paid.

To illustrate the main differences, Table 1 presents the most importantcharacteristics of the proposed and the approved regulations.

As was common in that age, the duration of the business was pre-set at 20years. However, in accordance with shareholder interests, this could be extendedby another 10 years (Art. 53). The prerogative of nominating eight deputiesfor the first mandate was described as follows in the last article (Art. 55) of theby-laws.

Art. 55. It is because Your Majesty, hearing the petitioners, was served bynominating the people mentioned below for establishing and governing thisCompany during the first three years: all of them will sign this paper for thementioned Company, assuming obligations for the capital by which they enterthis Company and, in general, that of the persons who also become part of itonly by means of their entries ... , Lisbon, June 6 1755.

Sebastio Jos de Carvalho e MelloJos da Costa RibeiroRodrigo de Sande e Vasconcellos

Antonio dos Santos PintoDomingos de Bastos ViannaEstevo Jos de AlmeidaBento Jos lvaresManoel F. da CostaJoo Francisco da CruzJos Francisco da CruzJoo de Arajo Lima

Francisco Xavier de Mendona Furtado, the enthusiastic idealist of theCompany who wrote the initial by-laws, was not included as a member of the

business board. All the Pombaline companies had the same characteristic: thefigure of Pombal who was always the first subscriber of the companys capital.As Marcos (1997) argued, although the idea to form the company was fromMendona, its by-laws were elaborated by Pombal and Jos Francisco da Cruz.25The by-laws of all the Pombaline companies were similar (see Marcos, 1997)26 andPombal is recognized as being directly involved in the writing of several of them(see, Fonseca, 1961/1962, p.16). Marcos (1997) argued that Pombals presencein the formulation of the by-laws of the Pombaline companies is absolutelyincontestable. Pombal was very well versed in international commerce and

chartered companies (see Pombal, 1742, 1748).


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Why did it happen? The characteristics of the new entrepreneurs

Why would the new enterprise have excluded Mendona Furtado from membership

of the board of directors? What was the main reason for making substantial changesin the by-laws? Before answering these questions, it is important to understandthe economic and political context of the time. Pombals reign was one of theenlightened despotism. He yielded supreme power, consolidated by enlistinginto the government persons he trusted (Livermore, 1976; Maxwell, 1995). Theauthoritarian and sometimes ruthless character of Pombal was so strong that allsubjects concerned with the administration of the country, regardless of theirimportance, were assigned to his supervision (Schneider, 1980, p.209). Pombalsmain actions in leading the country were influenced by enlightenment ideals and

mercantilist policies, and by the experiences of several European countries basedon his own observation. In particular, the knowledge Pombal acquired whileabroad determined his preference for French mercantilism (Dias, 1984, pp.14250,21213). From his own writings, it is clear that Pombal strongly admired FrenchStatesmen:

lately France with the King Louis XIV having the help of the importantMinister Jean Baptiste Colbert [facing the opposition against the novelties]made all the useful establishments of Commerce and Navigation, in whatimitated all the others mentioned before [cities of Genoa and Venice, Hansa

cities, The Netherlands, and England]. (Pombal, 1777, p.256) and from all of this [talking about the French measures related with

industry and commerce] came as a natural consequence all the measuresthat the King adopted [imitating the example that the King Louis XIV hadpracticed with Colbert], and made me the honour of serving him and help withmy diligences to establish the manufactures and industries of this kingdom (Pombal, 1777, p.298)

This can explain why Pombal was always the first subscriber of the charteredcompanies, as Colbert was in France (Marcos, 1997). Indeed, according to Serro

(1982, p.412), France was for the Portuguese of that time the exemplary school ofculture and civilization. All things that were associated with France were defendedeven if they were contrary to the national spirit. Therefore, it is not surprisingthat when Pombal was creating this company the French model of governancewas considered.

Pombals preference for the Continental model can also be explained bythe general lack of regard Pombal had for English exploitation. In his importanteconomic manuscript Relao dos Gravames (Report on Grievances), Pombal(1741) reflected Portugals angst at economic exploitation by England. The

Portuguese believed the English were profiteering unduly at their expense(Rodrigues & Craig, 2004).


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The first directors, as nominated by Pombal, were important merchants ofLisbon (see for example Pedreira, 1995). Such was Pombals desire to promote

merchants that it was said widely that if a merchant and a nobleman wereannounced simultaneously [in his ante-chamber], it was Pombals custom toreceive first the merchant since, he said, a merchants time was more valuablethan a noblemans (Cheke, 1969, p.159). Under all the by-laws of the Portuguesechartered companies that were established (during Pombals reign) (Art. 39), themerchants who were shareholders of those companies could become a Knight ofChrists Order. This prestigious award was a quasi-nobility title, awarded to peoplewho rendered exceptional service to Portugal. It was regarded as a certificate ofpure blood (Pedreira, 1995, p.88). Article 39 of the company by-laws praisesand encourages those who adhered to it: Not only will the trade, realized in thiscompany as described above, not impair the nobility of persons who realize it ...but, rather the opposite, it will be a means of achieving the acquired nobility(Mendona, 1982, p.66).

The main investors were the Cruz family, monopolist traders of the TobaccoCompany and a closed merchant group that was very important to the Portugueseeconomy. This familys influence was so large that, according to Ratton (1813/1920),Antonio Jos da Cruz, one of its members, had been responsible for the rise ofPombal. A significant sample of his power can be found in the nomination ofthe deputies to the first board of the Companhia de Comrcio do Gro Par e

Maranho. Two of them belonged to the Cruz family. When the initiative attractedthe governments attention, the 250,000 cruzados collected by Mendona Furtadobecame insignificant in comparison with the total subscribed capital (1,200,000cruzados), which consequently led to the removal of him and other provincialinvestors from management of the company. This capital concentration gaverise to a complaint in 1755, entitled Complaint against the Company that wasestablished for the State of Maranho e Gro-Par in the name of commerce inLisbon. The complaint was against the creation of the company which, throughits monopolistic privileges, threatened free commerce. It was signed by the

Deputies of the Confraria da Mesa do Esprito Santo (Brotherhood of the EspritoSanto Table)27 and indicated that the company [de Comrcio do Gro-Par eMaranho] is dominated by a small group of contractors. This put an end to thethesis that anybody could be a shareholder, since only the people they confided inwould manage the Company (Falcon, 1982, pp.3756).

The differences between the proposed and the approved by-laws can beexplained as well by the different cultural and knowledge background held byPombal and by his brother. Pombal was a very well travelled man and stronglyskilled in commerce. The period of time Pombal spent abroad allowed him to have

access to different literature and ideas,28 and therefore to develop an understandingof economy and society in many prominent European countries, particularly in


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England, France and in the Netherlands (Serro, 1996b, pp.98100). During theperiod spent in London, Pombal developed important contacts and connections

with foreign businessmen and attended conferences with important professors ofcommerce (Pombal, 1742, para.37). He also had discussed this matter with theprevious Prime-Minister, Cardeal da Mota, who was also an admirer of Colbert.Pombals brother only had contact with this matter when Cleland was in Lisbonand when he went to visit his brother in London in December 1742.

Like today, in companies where stock control is concentrated in the handsof a small number of people, minority shareholders did not have the right toparticipate in a companys day-to-day life. The Pombaline companies were creatednot only to provide dividends to shareholders but were also considered to be a key

element of the economic measures of the State (Marcos, 1997). In England, theimpulse to create the East India Company came from individuals (Coornaert,1967, p.240). The Pombaline companies were essentially a state initiative (Marcos,1997), as had occurred in France. The first directors were selected by Pombal andwere important merchants in Lisbon.29 At that time, Portugal was experiencinga regime of enlightened despotism and those who dared to stand up against thecrown or its chief minister, Pombal, were persecuted and punished without mercy,like, for example, the members of the Confraria do Esprito Santo (Falcon, 1982).After having sent their complaint to King D. Jos I, they were captured and

punished by imprisonment and exile (Falcon, 1982, p.376).Marcos (1997) argued that the main difference between the English and theContinental East India companies was the internal organization of the companies:the English company was democratic and shareholders were permitted to makeclear their points of view in general assembly; the Dutch and French companieswere autocratic and shareholders were almost unable to influence the evolutionof the company. In this Portuguese case study, it is apparent that MendonaFurtados proposal was indeed close to the English model in terms of internalorganization of the company since a more democratic and transparent model

was proposed (the general assembly was important and all shareholders couldvote and be elected). Pombal, however, in view of his experience and skills wasinfluenced instead by the Continental model (the management of the GPMwas in the hands of the big merchants of Lisbon).As with the Dutch East IndiaCompany, partners were placed in the hand of the directors, who managedthe company in an arbitrary way (Marcos, 1997, p.64). Partners had the rightto transmit their shares and abandon the company if they did not agree withdirectors management. Furthermore, as it was a royal chartered company theycould appeal to the King.


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Discussion and conclusion

Concerns for adopting mechanisms to protect shareholders, whether against the

power of majority shareholders or against the agents chosen to manage businessesin their name, did not commence in recent decades. While the academiccommunity has endeavoured to characterize and give names to ancient practices,for example agency theory, businessmen in other times, without worrying aboutlabels, sought to establish rules of behaviour to safeguard their interests, includingthe adoption of accounting and auditing mechanisms.

The original minutes of the GPM are a clear example of such an attempt.However, they were substituted by another form of management that focusedexclusively on the interests of majority shareholders. Mendona Furtado, the State

Governor, aided by his memory and the experience he had acquired in London andduring Clelands stay in Lisbon, seems to have had a good understanding of whatis now called good corporate governance regulations (that is consistent as perabstract). The governance rules of today may have been considered as appropriateand, therefore, as contributing to the good government of companies by readersof the proposed by-laws for GPM of approximately 250 years ago. As in the EastIndia Company of England, each partner had one vote, independently of capitalparticipation, the right to be informed about the business of the company, and toinspect the accounting books. The creation of the company was thought to be an

initiative of individuals, with the support of the State. However, not all practicesthat are now part of different guidelines throughout the world were applied tothose minutes. The needs for shareholder protection in the eighteenth centurywere substantially different from current needs, due to the nature of businessesand the commercial characteristics of both ages.

Pombal wanted to integrate and connect what action within the Empirewas dispersed through the world and permanently connect the colonies with themetropolis. The monopoly trading companies were a characteristic of the mono-polistic policy of Pombalism (Serro, 1996b). The objective was to develop the

economy of Brazil, and consequently of the Portuguese Empire, through themonopoly in trading African slaves and in exporting colonial products (Schwartz,1998; Serro, 1996b). The administration of the colonies reflected the enlighteneddespotism practised by Pombal in Lisbon. Therefore, the action of the differentgovernors appointed to the colonial territories became oriented and conditionedby an authoritarian conception of power akin to what Pombal was exercisingin Portugal (Magalhes, 1998, p.35). This state conception makes it easy tounderstand that although the minutes were written by his brother, the approvedby-laws and the specific statutes were very different.


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The State and Portuguese people experienced strong French influences.Therefore, it is not surprising that the approved by-laws and the specific statutes

of the GPM, as well as all other monopolist trading companies created by Pombal,were influenced by the Continental model of governance.The system of capitalsubscription at the GPM was democratic but the management of the companywas autocratic. Only shareholders who individually or collectively representedinterests higher than 5,000 cruzados were allowed to vote, although the numberof votes was independent of the amount subscribed. To be a director it wasnecessary to subscribe to a minimum amount of shares. To be a member of theboard, as in the case of French companies, it was necessary to be a merchant.This requirement assured that the board was composed of people who wereknowledgeable in business. The shareholders did not influence the managementof the company except in the election of the directors. There was a considerablestate interference.

The accounting and governance practices of the GPM are a rich source forfurther enquiry. The National Archives of Torre do Tombo (ANTT) provides aninventory of 217 books, including accounting books, legislation and documentsdealing with legal aspects of the company as well as documents dealing withimportant financial transactions, and others dealing with the way the companywas organized. This is a major under-explored archival resource that merits closerattention by scholars, fluent in the Portuguese language, who wish to enhance

our understanding of accounting and governance practices in Portugal in theeighteenth century. It will be important to understand what sorts of informationflows shareholders could rely on to protect their interests, and how they monitoredbusiness activities to protect them against the opportunism of agents. It is alsoimportant to understand how managers and officials were controlled, since oneof the major problems confronting the trading companies was that of effectivelycontrolling them at a distance. In spite of the assertions that the early tradingcompanies failed or suffered from their inability to control their managers, therehas been very little archival research undertaken to ascertain whether the directors

understood the nature of the agency problem; and what steps, if any, they tookto assist in dealing with the problem (Carlos & Nicholas, 1990, pp.8556). Furtherstudy of the documents of the GPM seems to be highly desirable.

Notes

1. For further reading on the origins of corporate governance, see Carlsson (2001,p.307), Siffert Filho (1998, p.2), Jensen and Meckling in Silveira (2002, p.13).

2. Government of the company is a long-used term but corporate governance,

as a term, seems to date from the 1990s. Portuguese regulations use the term


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government of the company (governo da companhia). The same words canbe found on the East India Company of Englands by-laws. We use the term

corporate governance when we refer to the present regulations and practices,and the term government of the company when we refer to the analysisperiod.

3. Text extracted from the definition of corporate governance published by theIBGC Brazilian Institute for Corporate Governance, according to which itis a set of practices and relations among stockholders, administrative council,board, independent auditors and fiscal council, aimed at optimizing the companys

performance and facilitating access to capital. (http://www.ibgc.org.br/Secao.aspx?CodSecao=20, emphasis added).

4. After the Companhia Geral do Gro-Par e Maranho (Company of Gro-Par and Maranho) (1755), the Companhia Geral do Pernambuco e Paraba(Company of Pernambuco and Paraiba)was created, in 1759.

5. Captaincy (Capitania) was the name given to the administrative regions ofBrazil.

6. Companies activities were substantially broadened. According to the approvedby-laws, the company possessed commercial exclusivity from the Gro Par andMaranho captainship to trade dry and liquid foods, construct ships, capture shipsand their respective loads from nations considered enemies, as well as transportloads from third parties.

7. The monetary unit was the real(plural ris,and abbreviated to rs.). To indicateone thousand ris a $ was written, followed by three zeros. Thus, 2,000 ris waswritten as 2$000. One cruzado values 400 ris.

8. 54th letter from 15 February 1754 (in Mendona, 1982).9. He left the interested parties the freedom to consult professionals in Lisbon who

could adequately evaluate the mentioned by-laws.10. Cleland had served with great distinction as an employee of the East India

Company of England in Bombay between 28 August 1728 and 23 September1740 and was described as well versed in the Portugeze [sic] Language (Epstein,

1974, pp.32, 52, 48; Rodrigues and Craig, 2004).11. And we do hereby ordain and appoint, that no one member of the said company

shall, in any election of any director or directors or other officers of the saidcompany or in any business or affairs of the same, have or give any more than onevote, whatsoever his share or interest in the said principal stock or fund shall be(BL, Shelfmk, 100.m.39, p.32).

12. http://www.calpers-governance.org/principles/international/global/page05.asp,accessed 10 September 2007.

13. This was a usual practice at the chartered companies of the time (Marcos, 1997,

p.729).


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14. Independently from the name, the description of both experts activity ispertinent.

15. Arquivo Histrico Ultramarino (AHU), Maranho, box 36, no.866.16. AHU, Estatutos Particulares, ou Directrio Econmico para o governo interiorda Companhia geral de Pernambuco e Paraba, Lisbon: Officina de MiguelRodrigues, 1760, codice 450, p.1.

17. Charter of 16 February 1760 (ANTT, Estatutos Particulares ou DirectrioEconmico para o Governo interior da Companhia Geral do Gram Par e

Maranho, Conservatria da Companhia Geral do Gro Par e Maranho,box 67).

18. AHMF, Livro do Registo das Consultas, sheet 10V.

19. The Governor only asked for three privileges but many others were establishedin the approved by-laws (Marcos, 1997, p.386).20. The use of the word deputy suggests an official delegation.21. As mentioned before, private trading was a very common practice in chartered

companies and an active policy of trading for commodities on ones own accountat the expense of the company was usually forbidden.

22. At the time, most of the bookkeepers were foreigners. The first bookkeeper ofthe company was a Frenchman, Darnaud (Ratton, 1813/1920).

23. A document found at the archive AHMOPTC explains the information provided

to the shareholders:on the right side [of the balance sheet] the debt of the company is exposed,being specified the capital, profits by year and liabilities The sameformality should be used to the credits of the company, the assets hold to paythose debts. These assets are composed by stocks hold in the city where thecompany is being managed and overseas; but also the ships, fixture assets andothers, all evaluated to the acquisition cost. The credit part should finish withthe cash account.

The utility of this method is related with the clarity since only a few wordsare used [ ]. The shareholders who are instructed in commerce matters and

who wish to understand the accounts in detail used to elaborate the balancesheet, can read the Ledger book; and using this book and others detailedaccounts, the progress of which business can be observed by the shareholders(AHMOPTE, Companhia Geral do Gro Par e Maranho, 3).

24. There are at least two copies of this statement for this company: Resumo doEstado da Companhia Geral do Gram Par e Maranho no fim do anno de 1767(BGUC, mao 2976, no.15, sheets 402) and Resumo do estado da CompanhiaGeral do Gro Par e Maranho no fim de 1769. All the members of theboard signed this summary of this last accounting statement (BGUC, mao 693,

sheet 271).


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25. Cruz was a prominent merchant in the city of Lisbon and had been involved in thecreation of the Depsito Pblico [Public Deposit] and was deputy of the Board of

Trade. He was later administrator of the Company of Gro-Par and Maranho.26. The differences were related to the kind of business. For example, theCompanhiados Vinhos do Alto Douro (Alto Douro Wine Company) allowed for capitalsubscriptions in the form of wine.

27. This was an unofficial body; it was the heir to theJunta de Comrcio Geral, (whichoperated until 1720). Its prestige peaked during the reign of D. Joo V.

28. His diplomatic career took him to London, where he represented the PortugueseCrown from October 1738 until May 1743, and during a further period of sixmonths in 1745, and also to Vienna, from 1745 to 1749 (Barreto, 1986, p.xxvi).

29. Deputies were required to be a merchant, since Pombal believed that the goodgovernment of the companies made it necessary to have people with commercialknowledge. Most of the shareholders of the Pombaline companies were merchants(Marcos, 1997). See, for example, the pleasure expressed in the letter of the Boardof Companhia Geral de Pernambuco e Paraba (the other Brazilian Company)on 24 December 1759 because most of the capital was subscribed by merchants(AHMF, Copiador de Pernambuco, no.1, sheet 1).

References

Primary sources

Arquivo Histrico do Ministrio das Finanas (AHMF), [Historical Archive of theMinistry of Finance], Portugal.

AHMF, Livro do Registo das Consultas, sheets 10V and 11V.AHMF, Aces da Companhia Geral do Pernambuco e Paraba, Copiador de

Pernambuco, no.1, sheet 1. Arquivo Histrico do Ministrio das Obras Pblicas e Transportes e Comunicaes

(AHMOPTC), [Historical Archive of the Ministry of Public Works and Transport

and Communications], Portugal.(AHMOPTC), Companhia Geral do Gro Par e Maranho, 3.Arquivo Histrico Ultramarino (AHU), [Overseas Historical Archive], Portugal.AHU, Estatutos Particulares, ou Directrio Econmico para o governo interior

da Companhia geral de Pernanmbuco e Paraba, Lisbon: Officina de MiguelRodrigues, 1760, codice 450, p.1.

AHU, box 36, no.866.Arquivo Nacional da Torre do Tombo (ANTT), [National Archives Torre do Tombo],

Portugal.


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Acknowledgements: The authors thank Garry Carnegie for ongoing editorialsupport and the two anonymous reviewers for the constructive and helpfulcomments that were provided on earlier versions of the articles.

Address for correspondence: Lcia Lima Rodrigues, Universidade do Minho,R. da Universidade, 4710 Gualtar, Braga, Portugal.E-mail: [email protected]

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