The Duty of Corporations

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 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:

"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.

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i would argue that capitalism has a responsibility beyond making a profit / delivering a dividend to shareholders. many of us who support capitalism do so because it provides society and individuals a greater opportunity for advancement. absent that, it's more or less re-heated feudalism.

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Krhazy said:

Right now it is understood that corporations have a duty to their shareholders, but not to their employees, consumers, or the remainder of the public (although they of course have a duty to comply with the law, which includes many regulations designed to protect employees/consumers/third parties).

The clearest example of the warped effects of this is probably the famous case of Dodge v. Ford Motor Company.



When the shareholders sued, the court ruled in their favor, stating Ford's duty was to profit his shareholders, not the community or his employees.

In light of the growing gap between the wealthy and the rest of America, do you think that this idea needs to be re-examined?

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Mach said:

However, if you start a public business that has specific shareholder obligations, you're being essentially invested in, to maximize profits.

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tessaesque said:

It's funny, isn't it? A company tried to do good by the consumer and the worker and the government told them "no, no. you need to focus on benefitting your shareholders short-term."

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What if...? said:

Well, the courts actually, which is a little bit different than the govt as normally considered in this type of discussion.

But a good point, nonetheless.

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When the shareholders sued, the court ruled in their favor, stating Ford's duty was to profit his shareholders, not the community or his employees.

In light of the growing gap between the wealthy and the rest of America, do you think that this idea needs to be re-examined?

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tessaesque said:

What's weird to me is that lower cost, faster production, and a larger product line would have expanded profits in the long-term, even if short-term gains were stiffled or erased. The decision in this case essentially said that long-term expansion is less important than short-term profits. Hardly seems like the best mentality to promote long-term economic growth and "middle class" stability...which is what we're struggling with today, right?

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Held. Plaintiffs are entitled to a more equitable-sized dividend, but the court will not interfere with Defendant’s business judgments regarding the price set on the manufactured products or the decision to expand the business. The purpose of the corporation is to make money for the shareholders, and Defendant is arbitrarily withholding money that could go to the shareholders. Notably, Ford did not deny himself a large salary for his position with the company in order to achieve his ambitions. However, the court will not question whether the company is better off with a higher price per vehicle, or if the expansion is wise, because those decisions are covered under the business judgment rule.

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Kandahar said:

I've never understood people who think that a corporation's duty is to produce a profit for its shareholders, period. Sure, that's the duty of SOME corporations. But really, a corporation's duty is whatever it's management decides its duty is. If you don't like it, don't invest in it.

I think of it like this: If I started my own business, and wanted to give half of my profits to charity, no one would tell me I'm wrong for doing so. If I started a partnership with four other people and we agreed to majority rule, and a majority agreed to give half of our profits to charity, we're still fine because we all agreed to abide by the majority's decision. If I started a corporation where the shareholders elected a Board of Directors that agreed to give half of our profits to charity, I think the same logic applies. Obviously a lot of the shareholders would want the corporations to take on that responsibility (or else they would've elected a different board), and the ones who don't agree are under no obligation to continue to invest in the company.

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DrunkenAsparagus said:

If that's what the investors want, there's nothing wrong with that. What is wrong is the CEO taking their money with the promise of maximizing returns and using it for a purpose that the investors did not want.

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Krhazy said:

Right now it is understood that corporations have a duty to their shareholders, but not to their employees, consumers, or the remainder of the public (although they of course have a duty to comply with the law, which includes many regulations designed to protect employees/consumers/third parties).

The clearest example of the warped effects of this is probably the famous case of Dodge v. Ford Motor Company.



When the shareholders sued, the court ruled in their favor, stating Ford's duty was to profit his shareholders, not the community or his employees.

In light of the growing gap between the wealthy and the rest of America, do you think that this idea needs to be re-examined?

Click to expand...

Kandahar said:

I've never understood people who think that a corporation's duty is to produce a profit for its shareholders, period. Sure, that's the duty of SOME corporations. But really, a corporation's duty is whatever it's management decides its duty is. If you don't like it, don't invest in it.

I think of it like this: If I started my own business, and wanted to give half of my profits to charity, no one would tell me I'm wrong for doing so. If I started a partnership with four other people and we agreed to majority rule, and a majority agreed to give half of our profits to charity, we're still fine because we all agreed to abide by the majority's decision. If I started a corporation where the shareholders elected a Board of Directors that agreed to give half of our profits to charity, I think the same logic applies. Obviously a lot of the shareholders would want the corporations to take on that responsibility (or else they would've elected a different board), and the ones who don't agree are under no obligation to continue to invest in the company.

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apdst said:

No, it does not. Forcing corporations, by law, to fulfill some imaginary responsibility to society is called Socialism.

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apdst said:

No, it does not. Forcing corporations, by law, to fulfill some imaginary responsibility to society is called Socialism.

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haymarket said:

Did you just invoke that right wing boogeyman because it is Halloween season and you wanted frighten all of us half to death?

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haymarket said:

from Khrazy in the OP

100% absolutely positively without a doubt.

As long as the only imperative for a corporation is to make money, there will always be societal problems and fall out. We need new rules for new times and a new paradigm that takes in much more than simple greed fo a corporation or its stockholders.

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