The Limits of Fiduciary Obligation

• Pages: 303-318
• Author: Stephen M. Bainbridge

303

Chapter 9

THE LIMITS OF FIDUCIARY

OBLIGATION

§ 9.1 Introduction

What is the social role of the corporation? What goals should

corporate directors and managers pursue? Managerialist schools of

thought claim that managers are autonomous actors free to pursue

whatever interests they choose (or society directs). Shareholder

primacy theorists believe that corporations should be run so as to

maximize shareholder wealth. Proponents of corporate social

responsibility argue that directors and managers should consider the

interests of all corporate constituencies in making corpor ate

decisions. Hence, these commentators define the “socially responsible

firm” as “one that becomes deeply involved in the solution of society’s

major problems.”

1

In particular, they emphasize the corporation’s

obligation to consider the impact of its actions on nonshareholder

corporate constituents, such as employees, customers, suppliers, and

local communities.

§ 9.2 Corporate Social Responsibility and the

Law

In general, corporate law does not mandate corporate social

responsibility. Instead, the question is whether the law even permits

corporate social responsibility. Put another way, to what extent do

the fiduciary duties of corporate directors permit them to consider

nonshareholder interests when making corporate decisions?

A. Case Law

Despite the obvious centrality of this problem to the operation of

business corporations, there are surprisingly few authoritative

precedents on point. The law’s basic position on corporate social

responsibility famously was articulated in Do dge v. Ford Motor Co.

2

In 1916, Henry Ford owned 58% of the stock of Ford Motor Co. The

Dodge brothers owned 10%. The remainder was owned by five other

individuals. Beginning in 1908, Ford Motor paid a regular annual

dividend of $1.2 million. Between 1911 and 1915 Ford Motor also

regularly paid huge “special dividends,” totaling over $40 million. In

1916, Henry Ford announced that the company would stop paying

1

Robert Hay and Ed Gray, Social Re sponsibilities of Business Managers, in

Managing Corporate Social Responsibility 8, 11 (Archie B. Carroll ed. 1977).

2

170 N.W. 668 (Mich.1919).

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THE LIMITS OF FIDUCIARY OBLIGATION

Ch. 9

special dividends. Instead, the firm’s financial resources would be

devoted to expanding its business. Ford also continued the company’s

policy of lowering prices, while improving quality. The Dodge

brothers sued, asking the court to order Ford Motor to resume paying

the special dividends and to enjoin the proposed expansion of the

firm’s operations. At trial, Ford testified to his belief that the

company made too much money and had an obligation to benefit the

public and the firm’s workers and customers.

The plaintiff Dodge brothers contended an improper altruism

towards his workers and customers motivated Ford. The court

agreed, strongly rebuking Ford:

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 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 nondistribution of

profits among stockholders in order to devote them to other

purposes.

Consequently, “it is not within the lawful powers of a board of

directors to shape and conduct the affairs of a corporation for the

merely incidental benefit of shareholders and for the primary

purpose of benefiting others.”

Despite its strong rhetoric, Dodge does not stand for the

proposition that directors will be held liable for considering the social

consequences of corporate actions. To be sure, having found that Ford

had failed to pursue shareholder wealth maximization, the court

ordered Ford Motor to resume paying its substantial special

dividends. Invoking the business judgment rule, however, the Dodge

court declined to interfere with Ford’s plans for expansion and

dismissed the bulk of plaintiff’s complaint. The shareholder wealth

maximization norm set forth in Dodge thus can be understood as a

standard of conduct, while the business judgment rule remains the

standard of review. Consequently, Dodge does not stand for the

proposition that courts will closely supervise the conduct of corporate

directors to ensure that every decision maximizes shareholder

wealth. As the court’s refusal to enjoin Ford Motor’s proposed

expansion illustrates, courts generally will not substitute their

judgment for that of the board of directors. If a proposed course of

action plausibly relates to long-term shareholder wealth

maximization, courts will not intervene. Ford’s proposed expansion

plans did so, and thus were allowed to go forward. Ford’s refusal to

pay a special dividend, while simultaneously lowering prices,

compounded by his anti-profitmaking trial testimony, did not.