The Dysfunctions of Sodor Railways

Or, why does Sir Topham Hatt still have a job?

The neolithic political ideology of Thomas and Friends is so overbearing and obvious that it’s not worth writing about (except in parody, which I won’t attempt here). Duncan Weldon has taken up the more interesting question of what Thomas, Percy, and their friends can tell us about the economy of Sodor, that strange island trapped somewhere off the coast of Great Britain and in a weird time warp that vaguely resembles the mid-twentieth century.

Like Duncan, I have watched plenty of Thomas videos, in my case in the company of my three-year-old son Henry. One thing that has often struck me about Sodor Railways is the vast amount of excess capacity. The most common plotline goes like this: Some engine has a job to do. However, said engine chooses to do something else out of vanity, unwillingness to go out in bad weather, curiosity, or something similar. Late in the episode, either the engine realizes the error of his ways and does his job, or some other engine does it for him. In either case, the original engine learns his lesson: that it is best to be Really Useful and not to cause Confusion and Delay. (Only, he never really learns the lesson — see the next episode.)

This plot structure clearly implies that Sodor Railways has far more engines lying around than it actually needs. This impression is reinforced by the fact that you often seen engines chugging happily around the island pulling nothing, which is something you hardly ever see in real life. What could be propping up such a staggering level of inefficiency? Here I think Duncan’s speculation about the lack of competition is probably accurate.

Another corollary of these repetitive plots is that the same engines keep on doing the same stupid things over and over again, yet no one ever faces any consequences. Sodor Railways seems to be the epitome of a fat, dumb, and happy company. Labor is incompetent, yet management does nothing about it, and in return labor is eternally loyal to management. Who loses? Customers and shareholders. Again, you suspect the workings of a monopoly — probably one owned by ultra-wealthy aristocrats who manage it as a hobby, without regard for profitability.

It should not be surprising that profits never come up as an explicit concern — this is a children’s show, after all. But as far as I can recall, money is never even mentioned, and this is a show that centers on a business, and in which all the activities of every character (every engine, at least) are presumably devoted to making money. This is another reflection of the show’s aristocratic ideology: money is something too bourgeois to bear mentioning in polite company (and workers are motivated not by money, but by the desire to please their betters). But it’s also an indictment of management, who go about their jobs without giving a second thought to whether they are making or losing money.

So Duncan is probably right in guessing that Sodor Railways is owned by Sir Topham Hatt or his family, and that they are closely intertwined with the local political establishment. In my law school exams, however, I’ve started using Sodor Railways as the fictional business entity for my questions on corporations and corporate finance. Here’s one real question from a past exam:

Sodor Railways, Inc. is a railroad company that owns tracks and train cars and makes money by transporting freight and passengers. Topham (a person) is the CEO and chairman of the board of Sodor. Sodor Railways has 10 million shares of stock outstanding. These shares of stock are owned by thousands of shareholders, and no shareholder owns more than 10% of the stock.

For the past five years, Sodor Railways has paid regular dividends to shareholders, amounting to $10 per year per share of stock.

Tidy Trams, Inc., is a separate company that operates streetcars in the city of Tidmouth. (A streetcar, or tram, runs on tracks embedded in city streets.) Tidy Trams owns 9% of the stock of Sodor Railways, or 900,000 shares, so it has been receiving $9 million per year in dividends.

Sodor Railways announces that it will no longer pay dividends. Instead, it will invest in building a subway system in Tidmouth, which will compete directly with Tidy Trams. Sodor releases business plans indicating that all of the cash it generates from operations (revenues minus costs such as salaries, maintenance, and coal) will be needed to invest in the new subway system.

(a) (5 points) Tidy Trams sues, claiming that the proposed subway is a bad investment for Sodor Railways and that the termination of dividends is intended to harm Tidy Trams, a minority shareholder. Tidy Trams asks the court to compel the payment of dividends and to block the subway system. How will the court evaluate these claims? What is the likely outcome and why?

Shortly after Tidy Trams files suit, the local newspaper reports that Sodor Railways is only building the subway because Topham, the Sodor CEO, has a secret agreement with Mac, the mayor of Tidmouth. Mac wants the subway because he wants to please the local construction union; in exchange, Mac has promised to help elect Topham to the city council.

(b) (5 points) If the story turns out to be true, how should Tidy Trams amend its lawsuit? How will the court evaluate the amended suit, and how does this affect the likely outcome?

I never trusted Topham Hatt.

James Kwak is, among other things, an associate professor at the University of Connecticut School of Law. Find more at Twitter, Medium, The Baseline Scenario,The Atlantic, or jameskwak.net.