Financial History 140 Winter 2022 - Page 24

Shareholder Wealth Maximization

Variations on a Theme

By Dalia Mitchell
In the debate over whether a corporation ’ s primary purpose is to make money for shareholders or protect the interest of all stakeholders , some argue that corporate law requires directors and corporations to serve shareholder interest . However , an analysis of the history of corporate law reveals that , throughout the past century , courts used the rhetoric of profit maximization not to impose affirmative duties on directors and executives nor to define
Left to Right : John Francis Dodge , Horace Elgin Dodge and Henry Ford . The 1919 Dodge v . Ford Motor Co . case is often cited to back corporate law ’ s commitment to shareholder value . a purpose for corporations , but rather to assuage minority shareholders ’ concerns about the power of those in control while upholding the latter ’ s unrestricted freedom to manage corporations .
Dodge v . Ford Motor Co ., a 1919 Michigan case , is often cited to back corporate law ’ s commitment to shareholder value . In 1903 , John and Horace Dodge , owners of an auto-parts making business , entered an exclusive agreement with Henry Ford to supply parts to the new Ford Motor Company . Ford could not pay for the initial parts , and instead offered the Dodge brothers a 5 % stake each in the Ford Motor Company . The company was extremely successful and the Dodge brothers , as shareholders , received large amounts of special dividends . But in 1916 , Ford decided to stop paying special dividends , announcing that he intended to put the profits back into the company , hire more employees and further reduce the price of Ford cars . The Dodge brothers sued , claiming that Ford ’ s actions turned the company into a semi-eleemosynary institution in violation of its charter . The Michigan Supreme Court sided with them , holding that “ a business corporation is organized and carried on primarily for the profit of the stockholders .”
To proponents of shareholder primacy , Dodge v . Ford is golden . But the decision did not support the idea that profit maximization should guide directors . Rather , it reflected the Progressive era ’ s concerns
22 FINANCIAL HISTORY | Winter 2022 | www . MoAF . org