- 1. The Shareholder Primacy Norm The Shareholder Primacy Norm
Professor Hector R Rodriguez School of Business Mount Ida College
Dodge v. Ford Motor Co
2.
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- The Corporation and Its Stakeholders
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- People for the Ethical Treatment of Animals
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- The Social Responsibility of Business
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- The Shareholder Primacy Norm
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- CSR, Citizenship and Sustainability Reporting
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- The Community and the Corporation
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- Taxation and Corporate Citizenship
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- Corporate Philanthropy Programs
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- Employees and the Corporation
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- Managing a Diverse Workforce
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- A Balanced Look at Climate Change
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- Non-anthropogenic Causes of Climate Change
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- Sulfates, Urban Warming and Permafrost
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- Green Information Technology
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- Transportation, Electric Vehicles and the Environment
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- Carbon Capture and Storage
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- Solid, Toxic and Hazardous Waste
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- Forests, Paper and Carbon Sinks
Course Map Topics Covered in Course 3.
- 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:
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- Everyone who works at Ford should be able to afford the product
he produces
Source: Dodge versus Ford Motor Co., 170 N.W. 668, 684 (Mich.
1919) Dodge v Ford Basic Facts 4.
- 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:
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- "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."
Source: Dodge versus Ford Motor Co., 170 N.W. 668, 684 (Mich.
1919) Dodge v Ford Basic Facts 5.
- 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
Source: Dodge versus Ford Motor Co., 170 N.W. 668, 684 (Mich.
1919) The Lawsuit 6.
- 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:
Source: Dodge versus Ford Motor Co., 170 N.W. 668, 684 (Mich.
1919) The Verdict 7.
- 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.
Source: Dodge versus Ford Motor Co., 170 N.W. 668, 684 (Mich.
1919) Shareholder Primacy Norm 8. That was then
- 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:
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- 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.
Source: American Law Institute, Principles of Corporate
Governance: Analysis and Recommendations (1994) 9. The Shareholder
Primacy Norm The Shareholder Primacy Norm Professor Hector R
Rodriguez School of Business Mount Ida College Shlensky v. Wrigley
10. Shlensky v. Wrigley
- 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.
Source: Shlensky v. Wrigley,Appellate Court of Illinois, First
District, Third Division, 1968, 95 Ill. App. 2d 173, 237 N.E.2d 776
11. Shlensky v. Wrigley
- The complaint further alleged a plethora of facts supporting a
conclusion that installing lights would in fact have increased
corporate profits:
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- Every other baseball team had installed lights for the purpose
of increasing attendance and revenue;
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- Cubs road attendance, where night baseball was played, was
better than Cubs home attendance;
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- 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
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- 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.
Source: Shlensky v. Wrigley,Appellate Court of Illinois, First
District, Third Division, 1968, 95 Ill. App. 2d 173, 237 N.E.2d 776
12. The Verdict
- 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.
Source: Shlensky v. Wrigley,Appellate Court of Illinois, First
District, Third Division, 1968, 95 Ill. App. 2d 173, 237 N.E.2d 776
13. Conclusion
- 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.
Source: Environmental Protection and the Social Responsibility
of Firms, Einer R Elhauge, p.30, 2005 14. What about Dodge v.
Ford?
- 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.
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- 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.
Source: Environmental Protection and the Social Responsibility
of Firms, Einer R Elhauge, p.30, 2005