In response to the massive corporate tax cut passed by the Republican-led U.S. Congress, major companies have said they’re doling out relatively small bonuses to workers, thereby attempting to shed any notion they exist solely to make a profit. It’s misleading PR, because of course corporations solely exist to maximize profit, and a case involving Henry Ford from a century ago can help explain how that idea evolved.
A case taught widely in corporate law classrooms everywhere, the story of Dodge v. Ford hits squarely on the notion of why corporations exist. There’s strong disagreement among some academics over the relevance of the case, but the outcome of it still resonates today.
Back in the mid-1910s, Ford Motor Company was sitting on a surplus of $60 million, thanks in no small part to the success of the Model T. The automaker’s extremely controversial, Nazi-sympathizing president, Henry Ford, had a novel idea of what he’d like to do with that extra crash: restrict dividend payments to shareholders and, instead, build more affordable cars and pay higher wages. This move pissed off a pair of minority investors, John and Horace Dodge.
A paper on the case from the UCLA School of Law, Law & Econ Research Paper Series explains what sparked the case:
Brothers John and Horace Dodge were minority investors in the firm. The Dodge brothers brought a lawsuit against Ford claiming that he was using his control over the company to restrict dividend payouts, even though the company was enormously profitable and could afford to pay large dividends to its shareholders.
Ford defended his decision to withhold dividends through the provocative strategy of arguing that he preferred to use the corporation’s money to build cheaper, better cars and to pay better wages.
Ford’s perspective isn’t earth-shattering: most CEOs today would probably argue that, as part of their strategy to maximize profits, they’ll try to ensure employees are happy. But unlike announcing a $1,000 bonus—a drop in the bucket for most corporations today and a PR stunt at best—the moment a tax cut is approved, Ford here explicitly argued the company should reinvest profit into the company by raising wages.
(Of course, being that it’s Ford—an industrialist who held racist and anti-Semitic views—separate papers on the case point out that he probably had another motivation here: the Dodge brothers wanted to launch their own car company. And depriving them of shareholder dividends would complicate their ambitions.)
In the end, the case made its way up to the Michigan State Supreme Court, which agreed with the Dodge brothers that Ford should be required to pay its shareholder. But there’s one specific passage from the court—an off-hand remark, really—that enshrined the case into history as an example to teach in corporate law, according to Lynn Stout, who wrote the UCLA paper.
The court wanted to make clear why a corporation exists. Stout quotes its opinion as saying:
There should be no confusion... 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 the directors is to be exercised in the choice of means to attain that end, and does not extend to... other purposes.
Emphasis mine. To be sure, it’s not a federal case, so it holds limited weight in the legal world. And as Stout points out, it’s been cited only one time since the Court handed down its opinion. The oft-referenced passage was virtually irrelevant to the actual holding in the case, she says, which is that Ford had breached his fiduciary duty to act in good faith as the majority shareholder.
Academic agreements aside about the purpose of a corporation or the case itself, Dodge v. Ford resonates in an era where corporations are treated as benevolent for simple actions like a one-time bonus simply because they’re about to make a windfall from a haphazard tax break. (AT&T earned $13 billion in profit last year; its announcement this week that 200,000 employees will receive a $1,000 bonus as a result of the tax bill, at a cost of $200 million to the company, is a relatively small, virtually irrelevant drop in the bucket.)
Yet as I mentioned, there are others who disagree with Stout. In response to her essay, Jonathan Macey of Yale’s Law School said that, while he agrees for the most part with her position, the case “still has legal effect, and is an accurate statement of the form, if not the substance, of the current law that describes the fundamental purpose of the corporation.”
Macey goes on with what he says is a pertinent example for the present:
By way of illustration, the American Law Institute’s (“ALI”) Principles of Corporate Governance (“Principles”), considered a significant, if not controlling, source of doctrinal authority, are consistent with Dodge v. Ford’s core lesson that corporate officers and directors have a duty to manage the corporation for the purpose of maximizing profits for the benefit of shareholders. Specifically, section 2.01 of the Principles makes clear that “a corporation should have as its objective the conduct of business activities with a view to enhancing corporate profit and shareholder gain.”
There’s only three exceptions to the ALI’s principles, Macey says, when corporations can ignore the necessity of profit maximization: 1) comply with the law, 2) make charitable contributions, and 3) to devote resources for philanthropic, educational, or humanitarian purposes.
“In other words,” Macey writes, “the only exceptions permitted to the shareholder wealth maximization norm are those necessary to ensure that corporations be given sufficient latitude to act like responsible community members by complying with the law and supporting charities and other worthy causes.”
That’s a short way of saying, in reality, corporations are exactly who we think they are: entities that exist to achieve maximum profit. Nothing more.