Dodge v. Ford Motor Co.
|Dodge v. Ford Motor Company|
|Stakeholders, shareholders, directors' duties|
Dodge v. Ford Motor Company, 170 NW 668 (Mich 1919) is a case in which the Michigan Supreme Court held that Henry Ford had to operate the Ford Motor Company in the interests of its shareholders, rather than in a charitable manner for the benefit of his employees or customers. It is often cited as affirming the principle of "shareholder primacy" in corporate America. At the same time, the case affirmed the business judgment rule, leaving Ford an extremely wide latitude about how to run the company.
More recent cases such as AP Smith Manufacturing Co v. Barlow or Shlensky v. Wrigley suggest that the business judgment is very expansive, i.e., that management decisions will not be challenged under almost any circumstances where one can point to any rational link to shareholder benefits.
By 1916, the Ford Motor Company had accumulated a capital surplus 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. 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 increase production, and the number 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. Two brothers, John Francis Dodge and Horace Elgin Dodge, owned 10% of the company, among the largest shareholders next to Ford.
The Court was called upon to decide whether the minority shareholders could prevent Ford from operating the company for the charitable ends that he had declared.
The Michigan Supreme Court held that Henry Ford could not lower consumer prices and raise employee salaries. In its opinion, 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 nondistribution of profits among stockholders in order to benefit the public, making the profits of the stockholders incidental thereto. Because this company was in business for profit, Ford could not turn it into a charity. This was compared to a spoliation of the company's assets. The court therefore upheld the order of the trial court requiring that directors declare an extra dividend of $19.3 million. It said the following.
A business corporation is organized and carried on primarily for the profit of the stockholders. The powers of the directors are to be employed for that end. The discretion of 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...
As a direct result of this decision, Henry Ford threatened to set up a competing manufacturer as a way to finally compel his adversaries to sell back their shares to him. Subsequently, the money that the Dodge brothers received from the case would be used to expand the Dodge Brothers Company.
Ford was also motivated by a desire to squeeze out his minority shareholders, especially the Dodge brothers, whom he suspected (correctly) of using their Ford dividends to build a rival car company. By cutting off their dividends, Ford hoped to starve the Dodges of capital to fuel their growth. In that context, the Dodge decision is viewed as a mixed result for both sides of the dispute. Ford was denied the ability to arbitrarily undermine the profitability of the firm, and thereby eliminate future dividends. Under the upheld business judgment rule, however, Ford was given considerable leeway via control of his board about what investments he could make. That left him with considerable influence over dividends, but not complete control as he wished.
This case is frequently cited as support for the idea that corporate law requires boards of directors to maximize shareholder wealth. However, one view is that this interpretation has not represented the law in most states for some time.
Among non-experts, conventional wisdom holds that corporate law requires boards of directors to maximize shareholder wealth. This common but mistaken belief is almost invariably supported by reference to the Michigan Supreme Court's 1919 opinion in Dodge v. Ford Motor Co.
Dodge is often misread or mistaught as setting a legal rule of shareholder wealth maximization. This was not and is not the law. Shareholder wealth maximization is a standard of conduct for officers and directors, not a legal mandate. The business judgment rule [which was also upheld in this decision] protects many decisions that deviate from this standard. This is one reading of Dodge. If this is all the case is about, however, it isn’t that interesting.
However, others, while agreeing that the case did not invent the idea of shareholder wealth maximization, found that it was an accurate statement of the law, in that "corporate officers and directors have a duty to manage the corporation for the purpose of maximizing profits for the benefit of shareholders" is a default legal rule, and that the reason that "Dodge v. Ford is a rule that is hardly ever enforced by courts" is not that it represents bad case law, but because the business judgement rule means:
the rule of wealth maximization for shareholders is virtually impossible to enforce as a practical matter. The rule is aspirational, except in odd cases. As long as corporate directors and CEOs claim to be maximizing profits for shareholders, they will be taken at their word, because it is impossible to refute these corporate officials’ self-serving assertions about their motives.
- 170 N.W. 668 (Mich. 1919).
- 39 ALR 2d 1179 (1953)
- Shlensky v. Wrigley, 237 N.E. 2d. 776 (Ill. App. 1968). , a suit over the decision not to build baseball ground lights to allow games to be played at night-time
- Hodak, Marc (Fall 2007). "The Ford Squeeze-Out". New York University. SSRN 1011924.
- Stout, Lynn A. (2007-09-18). "Why We Should Stop Teaching Dodge v. Ford". Law-Econ Research Paper No. 07-11. UCLA School of Law. SSRN 1013744.
- Henderson, M. Todd (December 2007). "Everything Old is New Again: Lessons from Dodge v. Ford Motor Company". Olin Working Paper No. 373. University of Chicago Law School. SSRN 1070284.
- Macey, Jonathan R. (2008-01-01). "A Close Read of an Excellent Commentary on Dodge v. Ford". Virginia Law & Business Review.