So you saw the title and the feature image, were talking about Dodge v Ford here, but if you’re looking for a Hellcat v Shelby GT350 shootout you came to the wrong place. Motor trend has got you covered on that front. We are going to look at a fascinating precedent setting bit of legal conflict.
What are we talking about here?
So what are we on about? We are going to take a look at one of the most famous cases in American corporate law. Dodge v Ford Motor Company is a case in which the Michigan Supreme Court discussed an interesting question: Does the corporation owe a duty to its shareholders to maximise their profits? Or can the corporation add value to its employees and local community (at the expense of the shareholders)?
Way back in 1916, the Ford Motor Company had managed to accumulate a capital surplus of $60 million. A conservative valuation of $60 million back then in today’s money is in the tens of billions. Over the preceding years, the price of the mega popular Ford Model T had been cut time and time again, whilst the cost of the workers had dramatically increased. The company’s president and majority stockholder, Henry Ford, sought to cut the special dividends that were often paid out to shareholders and use that money to invest in new plants that would enable Ford to dramatically increase both production, and the number of people employed at his company. All this whilst simultaneously cutting the prices of his cars and increasing employee benefits.
Why was Henry Ford so kind?
There is the official statement and then you have the hidden motive that is quite obvious if you take a look at the facts. First, the official statement. Ford explained that his ambition was to employ more men, and spread the benefits of his company to the biggest amount of people possible. Ford wanted to help his employees build up their lives and their homes. These all seem like a legitimate reason for investing the vast majority of companies’ profits back in the company.
The second and more sinister reason: There were two brothers, John Francis Dodge and Horace Elgin Dodge, they owned 10% of The Ford Company. The Dodge brothers where the largest shareholders after Henry Ford. Ford got word that those pesky brothers wanted to start their own company. So what could be done to discourage them? Easy, make that 10% of theirs be worth as little as possible and reduce the car’s prices to a point that wound make it unviable for rivals to even attempt to compete. By reducing prices, investing in plants and raising employee salaries Ford Managed to hit a whole nest of full of birds with one rock. He increased his companies’ value in the long term by making massive investments, he made both consumers and employees happy and he sent the Dodge brothers plans down the drain. The man was clearly a genius.
Who got short end of the stick?
- The minority shareholders – At the time, The Ford Company couldn’t make the Model T fast enough. Demand was solid and every car made was instantly sold. The minority shareholders couldn’t see the sense in reducing vehicle prices when they were flying off the lots like hot potatoes. That’s a logical claim. It make no ecomonic sense to lower prices when demand for your product is solid.
- The Dodge Brothers – As stated above, the Dodge brothers wanted to start their own company and Ford did everything he could to reduce the short term value of the brother’s 10% stake in Ford and make it financially unviable for them to compete.
So what do we need to answer here?
Put simply, the court needed 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 does not extend to the reduction of profits or the non-distribution of profits among stockholders in order to benefit the public. The Ford Company was in business for profit. The Ford Company isn’t a charity.
“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“.
So there you have it, in a nut shell, screw the workers and the corporate social responsibility. Let’s make money!
The Significance and meaning of this judgement
First of all, we see that many motor companies seem to get founded on the grounds of spite. Lamborghini got pissed off at Enzo so he started his own company. Here the Dodge brothers got annoyed with ford. Imagine what we could have if Elon Musk pissed off a wealthy customer?
We also learned that boards of directors need to maximize shareholder wealth, and this is the top priority. Although it is important to note that Shareholder wealth maximization is a standard of conduct for officers and directors, it’s not a legal mandate! The business judgment rule protects many decisions that deviate from this standard.
On a personal note, we have been truly fascinated by the implications of this case. Dodge v Ford set the framework for the idea that the financial bottom line is the primary pursuit of corporations. This of course leads to a deeper question. If the corporation makes more money, it will pay more taxes. This tax money will be spent according to the governments decisions. Do we want to let corporations invest in public causes via CSR or the government? On the one had, a corporation is most likely to invest locally where it can reap the rewards. Just like Ford did by investing in his employees. If the money is sent off to the government it could easily be sucked into a cause which most people don’t believe in (such as military operations abroad). So what option do we prefer? The Government spending the money? Or the corporations? It really boils down to who we trust more the government or the corporations? What’s your take?