The Shareholder Primacy Norm - Dodge v. Ford

1. The Shareholder Primacy Norm The Shareholder Primacy Norm Professor Hector R Rodriguez School of Business Mount Ida College Dodge v. Ford Motor Co

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The Shareholder Primacy Norm

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The Ford Motor Company was incorporated in 1903 with John and Horace Dodge as two of the original investors

By 1916, the Ford Motor Company had accumulated a capital surpluses of $60 million. The price of the Model T, Ford's mainstay product, had been successively cut over the years while the cost of the workers had dramatically, and quite publicly, increased.

When hourly wages for skilled workers ran as low as $.15, Ford startled the world by announcing that he would pay a guaranteed daily wage of $5 to every worker:

Everyone who works at Ford should be able to afford the product he produces

The company's president and majority stockholder, Henry Ford, sought to end special dividends for shareholders in favor of massive investments in new plants that would enable Ford to dramatically grow the output of production, and numbers of people employed at his plants, while continuing to cut the costs and prices of his cars. In public defense of this strategy, Ford declared:

"My ambition is to employ still more men, to spread the benefits of this industrial system to the greatest possible number, to help them build up their lives and their homes. To do this we are putting the greatest share of our profits back in the business."

While Ford may have believed that such a strategy might be in the long-term benefit of the company, he told his fellow shareholders that the value of this strategy to them was not a primary consideration in his plans.

The minority shareholders objected to this strategy, demanding that Ford stop reducing his prices when they could barely fill orders for cars and to continue to pay out special dividends from the capital surplus in lieu of his proposed plant investments.

During trial Ford admitted his view that corporations should be operated incidentally to make money because business is a service not a bonanza

The Court held that a business corporation is organized primarily for the profit of the stockholders, as opposed to the community or its employees.

The discretion of the directors is to be exercised in the choice of means to attain that end, and does not extend to the reduction of profits or the non-distribution of profits among stockholders in order to benefit the public.

Because this company was in business for profit, Ford could not turn it into a charity. The court therefore ruled in favor of the plaintiff:

From Dodge v. Ford Motor Co

A business corporation is organized and carried for the profit of the stockholders.The power of the directors is to be employed for that end.The discretion of the directors is to be exercised in the choice of means to attain that end, and does not extend to a change in the end itself, to the reduction of profits, or to the non-distribution of profits among stockholders in order to devote them to other purposes.

30 states have adopted corporate constituency statutes that explicitly authorize managers to consider non-shareholder interests, specifically including the interests of employees, customers, suppliers, creditors and the community or society at large.

The Principles of Corporate Governance by the American Law Institute states as follows:

Even if corporate profit and shareholder gain are not thereby enhanced, the corporation, in the conduct of its business may take into account ethical considerations that are reasonably regarded as appropriate to the responsible conduct of business and may devote a reasonable amount of resources to public welfare, humanitarian, educational and philanthropic purposes.

The case considered the claim that the directors of the corporation owning the Chicago Cubs (including 80% shareholder Mr. Wrigley) had violated their fiduciary duties by refusing to install lights in the field.

The complaint alleged that Mr. Wrigley has admitted that he is not interested in whether the Cubs would benefit financially from installing lights, but rather was motivated by his personal opinions that baseball is a daytime sport and that the installation of lights and night baseball games will have a deteriorating effect upon the surrounding neighborhood.

The complaint further alleged a plethora of facts supporting a conclusion that installing lights would in fact have increased corporate profits:

Every other baseball team had installed lights for the purpose of increasing attendance and revenue;

Cubs road attendance, where night baseball was played, was better than Cubs home attendance;

Cubs weekday attendance was worse that that of the Chicago White Sox, who played at night in the same city, even though their weekend attendance, when both teams played day ball, was the same; and

The cost of installing lights, which could be financed, would be more than offset by the extra revenue that would result from increasing attendance by playing night baseball.

The court affirmed dismissal of the complaint stating that it was not satisfied that the motives assigned to [Mr. Wrigley] are contrary to the best interests of the corporation and the stockholders, because in the long run a decline in the quality of the neighborhood might reduce attendance or property value.

The court did not allow inquiry into whether such long-run profitability was Mr. Wrigleys actual motivation. Rather, it held irrelevant any motives other than fraud, illegality or conflict of interest, thus rendering moot the allegations that Mr. Wrigley was motivated not by corporate profits, but by public interest concerns.

Even if profit maximization is the nominal standard, business judgment review still would sustain any public-spirited activity without any inquiry into actual profitability or the managers actual purposes as long as it had some conceivable relationship to long-run profitability, however tenuous.

Such relationship can almost always be conceived.

It is in fact to see what socially responsible conduct could not plausibly be justified under the commonly accepted rationalizations that it helps forestall possible adverse reactions from consumers, employees, government regulators, etc.

Although the decision did include strong pro-shareholder language, the decision never stated that it is the directorsexclusiveduty to maximize shareholder profits.

Rather it held that profits should be the primary but not exclusive goals of managers.

TheDodgecourt stated:

We do not draw in question, nor do counsel for the plaintiffs do so, the validity of the general proposition stated by counsel that although a manufacturing corporation cannot engage in humanitarian works as its principal business, the fact that it is organized for profit does not prevent the existence of implied powers to carry on withhumanitarian motivessuch charitable works as are incidental to the main business of the corporation.

The Shareholder Primacy Norm - Dodge v. Ford

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