Creation of Corporate Governance by Toulouse Flour Mills

The heart of corporate governance aims to separate the ownership of assets from day to day operations, for the overall benefit of investors. By employing risk-frameworks, instituting remuneration committees, and incentivising management to work in the best interest of the company, investors interests are protected and maximised. 

The inception of modern-day corporate governance traces its roots back to 12th century southern France, in the town of Toulouse, where two flour mills were owned by a cooperative. As the challenges of owning the business were encountered, the shareholders continuously iterated on the structures for managing the mills, effectively creating the first modern-day corporations. 

Toulouse Flour Mills

Under a feudal society, The Count of Toulouse gave away control of the Castel mill to a group of individuals in 1182 in exchange for pledged allegiance and rental payments in a process known as enfeoffment. Those individuals who swore servitude were vassals and effectively the renters (vassal) of the property (fief). 

In 1183, the monestary of the Darade similarly enfeoffs the Bazacle mill to a separate group of vassals. The original owners of both mills benefitted by receiving rents as well as a share of revenue generated from the mill. The vassals were permitted to sell their share of the mill, additionally the share ownership survived independent of the individual. 

Both the Castel company and the Bazacle company emphasised the need for equality amongst investors. The 1372 Bazacle Charter mandates the renouncement of any specially endowed rights to ensure amongst shareholders. The Castel corporate statute in 1417 mentions how the King who was a 1/7 owner in the mill must contribute towards expenses equally alongside his fellow investors. 

Establishment of Corporate Governance

Over the next few centuries, there is continued progress by both of these Toulouse companies. Overcoming the challenges associated with several shareholders, conflicts of interest and the need for capital resulted in many corporate governance overhauls that were landmark developments at the time, even if only in retrospect. Both companies recognised the need for clean financials by earmarking early investors to be responsible for bookkeeping. 

Eventually, the separation of ownership and control occurred through the appointment of agents; the first C-suites of the modern-day corporation. Agents were incentivised to execute operational discipline and cost control with a share of the profits aligning management to shareholder interests.

Conflicts of interest were managed. In 1661, the family of the Treasurer were not permitted to vote in board elections. Full separation achieved in 1679 by the decision to prevent the Treasury role from being held by a shareholder. 

Arguably the greatest corporate governance innovation was that of limited liability. The Castel company’s 1417 charter unequivocally stated, the company could ask for no more than the overall value of the shareholder’s shares. Prior to this document the notion of limited liability already existed.

The Castel company had suffered a severe setback in 1331 with a flood destroying the dam. Significant capital investment was needed with many shareholders not willing or able to provide further cash injections. Those who could not afford to contribute, abandoned their shares. The King then enfeoffed these shares to new investors who contributed to the rebuilding of the dam. Accordingly, the old shareholders were protected from further cash outlays, new investors were able to joint this commercial venture. 

Toulouse Legacy

The corporate structure developments within Toulouse were not symbolic of broader structures elsewhere; they were significant advancements limited to the Bazacle and Castel companies used to help manage the operate of grain mills. Only through the prism of time can we see how advanced these commercial ventures were.  

Modern listed companies must meet a stringent list of obligations aimed at protecting shareholder interests. The two Toulouse companies we have explored spearheaded many of the governance structures we consider gospel today. Without these enhancements to corporate governance, there would be little incentive for external investors to trust others with their capital. 

Corporate governance and the notion of a company cannot be unlinked. They occur simultaneously, or not at all. Corporations are legal vehicles through which assets are managed separately from their owners (even if they may be the same individuals). The advancements from two 12th century flour mills have undeniably pioneered corporate governance paving the way for the modern day corporation.