Why We Should Keep Teaching Dodge v. Ford Motor Co.

• Author: Bainbridge, Stephen M.

1. Introduction 77 II. The Decision 80 A. The Facts 80 B. The Historical Context 81 C. Was There a Business Case for Ford's Plans and Policies? 84 1. If Ford Had Made the Business Case, What Would the Court Have Said? 86 2. Ford Declines to Make the Business Case 87 D. The Opinion 87 III. Defending Dodge 92 A. Is Dodge Mere Dicta? 92 1. Dodge's Judicial Antecedents 93 2. Contemporary Scholarly Comment on Dodge 97 B. Is Dodge Too Old to Matter? 98 C. Does Modern Case Law Reject Dodge? 98 D. What Does Delaware Say? 100 E. Is Dodge Limited to Controllers of Close Corporations? 111 F. Opting In/Opting Out 112 G. Doesn't the Business Judgment Rule Make All of This Moot? 113 H. But What About Constituency Statutes? 116 IV. Conclusion 119 I. INTRODUCTION

   What is the purpose of the public business corporation? Is it to maximize shareholder value? Or is it to simultaneously enhance the welfare of shareholders, stakeholders, and the larger society? These are perennial questions, of course, but they also have been much in the news in recent years. (1) Whether tagged as stakeholder capitalism, stakeholder theory, corporate social responsibility, or environmental, social, and governance (ESG) metrics, much attention is being paid. (2)

   In the 2020 U.S. Presidential campaign, for example, numerous Democratic politicians carved out strong positions in favor of stakeholder capitalism. Senator Elizabeth Warren (D-MA) was especially active in that regard, contending that a root cause of many of America's economic problems was the emphasis by businesses on maximizing shareholder wealth. (3) Her proposed Accountable Capitalism Act would have required boards of public corporations with over $1 billion in revenues to consider stakeholders' interests when making corporate decisions. (4) Eventual Democratic 2020 nominee and now President Joe Biden called for an end to the era of "shareholder capitalism." (5) Strikingly, one also finds skepticism about shareholder wealth maximization on the right end of the political spectrum. Senator Marco Rubio (R-FL), for example, argues that shareholder wealth maximization "provides a framework to reduce or ignore the longer-term, economy-and-society wide negative externalities that result [from business activity], by placing them outside the realm of business decisions." (6)

   There also have been many important pertinent anniversaries in the last few years. The foundational Dodge v. Ford Motor Co. (7) opinion turned 100 in 2019. Milton Friedman's famous New York Times essay on corporate social responsibility turned 50 in 2020. (8) The not-quite-so-famous--but perhaps more important--debate between Adolf Berle and Merrick Dodd in the pages of the Harvard Law Review turned 90 in 2022. (9)

   The time has thus seemed propitious to many legal scholars to revisit the law of corporate purpose. (10) Many of these scholars have been influenced by my former colleague, the late Lynn Stout's work on the topic. Ten years ago, Stout published her book, The Shareholder Value Myth, (11 ) which built on her earlier article, "Why We Should Stop Teaching Dodge v. Ford." (12) As the latter title suggests, Stout's principal foil was the Dodge case. (13)

   Stout's focus on Dodge was well chosen since the case and "its statement of shareholder primacy have taken on lives of their own in law school casebooks, in the academic literature, and in the minds and hearts of American businesspeople." (14) Stout's critique of Dodge has been described as "novel and provocative" (15) and "a compelling critique of the shareholder-centric view" (16) of corporate purpose. The influence her work has had was confirmed by a March 31, 2022, search of the Westlaw Law Reviews and Journals database, which identified 98 articles published in the last three years that cited her book and 43 during the same period that cited her article.

   Given the renewed attention to the corporate purpose question and the continuing influence of Stout's work on that debate, it seems appropriate to revisit her arguments to determine whether she was correct that law professors should stop teaching Dodge. Part I of this Article sets the context for the discussion that follows by reviewing the facts and holding of the Dodge decision. Part II identifies Stout's numerous doctrinal arguments against Dodge. (17) I conclude that law professors ought to keep teaching Dodge. It was good law when handed down in 1919 and remains good law today.

2. THE DECISION

   1. The Facts

      The Ford Motor Company (FMC) was incorporated in 1903. (18) It was hugely successful almost from the outset. By the time the 1916 fiscal year ended, FMC was earning almost $60 million on annual sales of $207 million. (19) In just 13 years, it had accumulated surplus of $112 million, even while paying out $41 million in special dividends on top of regular quarterly dividends "equal to 5 per cent.[five percent] monthly on the capital stock of $2,000,000." (20)

      FMC's financial success came despite--or, as some have argued, because of--Ford's pursuit of policies that today might be regarded as socially responsible. (21) In 1914, FMC raised its shop floor employees' minimum pay to $5 per day, which was twice the going rate for industrial workers. (22) FMC claimed that the new pay rate was intended give employees a stake in the business. (23) Indeed, it characterized half of the new pay packet not as wages but as a share of company profits. (24) In addition to the increased daily pay, FMC cut the working day from nine to eight hours. (25) These new policies infuriated some elements of the business community while drawing praise from some surprised social reformers. (26)

      As far as customers were concerned, FMC benefited that constituency by consistently lowering prices. Starting from an original selling price of $900 per car, regularly repeated cuts lowered the price to $360 per car by 1916. (27) Not surprisingly, customers flocked to FMC. It was working at full capacity and selling cars as fast as it could make them. (28)

      The driving force behind these dramatic developments was Henry Ford, who was FMC's largest shareholder (owning 59% of the stock), a director, and president of the company. (29) The other shareholders included the Dodge brothers--John and Horace--who each owned five percent of FMC's stock. (30) In addition to being investors, the Dodge brothers were also suppliers, as FMC outsourced the making of its cars' engines to the Dodge brothers' machinery company. (31) In 1913, the Dodge brothers also became competitors as they founded their eponymous automobile manufacturing company, using the massive dividends they received on their FMC shares to help get Dodge Motor off the ground. (32)

      In October 2015, FMC stopped paying the special dividends. (33) Instead, FMC began plowing the bulk of its earnings back into the business. As a result, by the end of the 2016 fiscal year, FMC had accumulated over $52 million in cash (out of total assets of $132 million). (34) Ford announced that the accumulating cash would be used to further reduce the price of the company's cars and to construct a new plant at River Rouge, Michigan, which would be the world's largest auto factory. (35)

      In response, the Dodge brothers sued. They sought an injunction forbidding FMC from undertaking the River Rouge expansion and compelling FMC to issue a special dividend out of its accumulated earnings. (36) The trial court granted both requests, ordering FMC to pay half of its cash assets out as a dividend. (37) Ford and the other defendants appealed.

   2. The Historical Context

      Although there were a few recognizably modern business corporations in Colonial America, they remained rare until the late 1700s. (38) Into the early 1800s, moreover, most business corporations in the United States were actually quasi-public works such as canals and turnpikes. (39) Almost all early corporations thus served public interests beyond making a profit for their shareholders. (40) The public-regarding nature of these early corporations was reinforced by the moral climate and social structures within which they operated. The owners of these businesses often were leaders of the local communities their business served. (41) Many believed that noblesse oblige was therefore the order of the day. (42)

      Early American society was not prepared to trust the goodwill of corporate shareholders and directors, however. At that time, forming a corporation required obtaining a charter from the state legislature. (43) This requirement likely "reflected the 'cloud of disfavor under which corporations labored' in the early years of this Nation," (44) which was driven by fear of "the evils attendant upon the free and unrestricted use of the corporate mechanism." (45)

      Supreme Court Justice Louis Brandeis claimed that, as a consequence of this fear, state legislatures granted charters only when "necessary in order to procure for the community some specific benefit otherwise unattainable." (46) If Brandeis intended to suggest that a stated commitment to social welfare was legally required in order to obtain a legislative charter, there is no evidence of such a requirement. (47) If all Brandeis meant was that there was an expectation that corporations have a public-regarding purpose, however, there is some evidence of such an expectation at least up until the 1830s. In the famed Dartmouth College case, for example, Chief Justice John Marshall observed that states created corporations to accomplish such "objects . . . as the government wishes to promote." (48) Marshall further stated that the "advantages to the public" that followed from granting a charter constituted the sole consideration to which the state was entitled, (49) which suggests that the state was entitled to expect such advantages.

      In any case, after New York adopted the first modern enabling corporation statute in 1811--pursuant to which one could form a corporation simply by filing the appropriate...