Dodge v. Ford Motor Company
Dodge v. Ford Motor Company, 170 NW 668 (Mich 1919) is a case in which the Michigan Supreme Court held that Henry Ford owed a duty to the shareholders of the Ford Motor Company to operate his business to profit his shareholders, rather than the community as a whole or employees. It is often cited as embodying the principle of "shareholder value" in companies.
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 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 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.
This case is frequently cited as support for the idea that "corporate law requires boards of directors to maximize shareholder wealth." The following articles attempt to refute that interpretation.
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.
The contested actions of Henry Ford that led to this decision can also be viewed as a conscious attempt 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 as complete control as he wished.
As a result of this decision, Ford ended up resorting to threatening 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.
- Dodge v. Ford Motor Company, 170 N.W. 668 (Mich. 1919).
- a suit over the decision not to build baseball ground lights to allow games to be played at night-time
- Dodge was distinguished in its application to the mutual insurance industry. See Churella v. Pioneer State Mut. Ins. Co., 258 Mich.App. 260 (2003).
- 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.
- Hodak, Marc (Fall 2007). "The Ford Squeeze-Out". New York University. SSRN 1011924.