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If you find yourself at a roundtable discussion about law, policy, and social innovation there is a good chance you will hear buzzwords like fiduciary duty, Dodge v. Ford, Revlon, maximizing shareholder wealth, legal structures, benefit corporations, flexible purpose corporations, and business judgment rule.Key in all of that will be an account of some of the historical happenings in corporate law and how they hammered out our understanding about the way corporations, as distinct legal entities, relate to the individuals who own them (i.e. shareholders).And somewhere in the narrative, there’s a good chance that the story of the sale of Ben and Jerry’s will come up.

SSIR Article about the Sale of Ben and Jerry’s

In the Fall 2012 issue of the Stanford Social Innovation Review, Indiana University Law professors Antony Page and Robert A. Katz address the story of Ben and Jerry’s in an eloquent article titled, “The Truth About Ben and Jerry’s” that recalls the history of the company and context of its eventual sale to Unilever, and the impact of the sale to the social entrepreneurial vibe of the ice cream company.

Related Innov8Social Posts

As you read the article you may be searching for further background on some of the topics raised and buzzwords mentioned. Here are a few Innov8Social articles that may help.

 

Is There Still a Role for New Legal Structures for Social Innovation?

The SSIR article leaves it to the reader to decide on whether new legal structures are necessary, and if so, to what extent such structures should strive to create a presence in each state. In an earlier post, I suggested that these new legal structures may serve to formalize a way of measuring double and triple bottom lines.

Whether you are an avid supporter of new legal structures for social innovation, or are on the side of using existing legal constructs to support social entrepreneurship, the article provides a valuable history of the sale and its context.  And, above all, it keeps the discussion alive. It is through discussion, debate, and action that we can impact law and policy, that impact social entrepreneurs, who are steadfast on changing the way business is done.

Ask any law school graduate, and they will probably tell you that Michigan Supreme Court in Dodge v. Ford Motor Co. 170 N.W. 668 (Mich.1919) did.

Ford Overdrive

Dodge v. Ford: A Swashbuckling Tale for Maximizing Shareholder Profit

 

The historic case Dodge v. Ford tells a page-turning tale of astonishing innovation, mind-blowing wealth, deep rumination, distrust, and defection. There are larger-than-life personalities all-around, unafraid to use (legal) sword and shield to pursue and protect their interests.Less clear, however, is who is the hero and who is the villain. That can only be judged by the lens through which you see the story.

 

Ford Motor Co. Circa 1919: The Unstoppable Model T

 

In his enlightening law review article, “Everything Old is New Again: Lessons from Dodge v. Ford Motor Company” (December 2007) University of Chicago Law School Professor M. Todd Henderson sets the scene of the automobile industry in the early 1900’s.After two unsuccessful ventures, Henry Ford’s Ford Motor Company began expanding in a big way in the early 1900’s. With efficient mass production of cars, a growing market, and increased demand—the Ford Motor Co. was virtually unstoppable. The advent of assembly-line manufacturing led production of Ford’s original “Model T” to increase from less than 2000 cars per year in 1905 to over 2 million per year by 1923—growing over 700% in the span of 2 years.

 

An OMG Reaction to ROI

 

As reported by Henderson, financial life was not bad for the handful of Ford shareholders. Investments snowballed in their rate of returns. For example the brothers Dodge—who were shareholders at the time—made an initial investment of $10,000 and would yield over $35M over the next 13 years.

 

Restless Shareholders and Distrust

 

In his article, Henderson also paints broad brush strokes in describing the personalities of Ford and the Dodges. Henry Ford is described as suspicious and to some degree–unimpressed–that shareholders were so richly rewarded for investment of only money and no effort in creating the triumphant Model T.In the same vein, the Dodges were perhaps growing restless in the shadow of their overwhelmingly successful investment. And were ready to strike on their own. They knew of Ford’s plan to withhold dividends and build a factory—which would further lower the cost of manufacturing an automobile. And, incidentally, make it harder for them compete.

Legal Swords and Shields


Dodge v. Ford was not the first time Henry Ford stepped into a courtroom. He was well-acquainted with litigation and had filed cases to defend his name and reputation.

The Dodges decided to take action to prevent the building of the new factory by flexing their shareholder muscle. They first sent a letter to Dodge questioning the propriety of denying dividends and investing those funds in a large, expensive factory.

After their inquiry went unanswered, they filed a complaint demanding that the Ford Motor Co. establish a dividend policy that distributed all earnings except certain emergency funds and that an injunction be issued to prevent construction of the factory.

The Weight of Wealth


It is not clear whether Ford was always benevolent, strategically benevolent, or whether a sense of benevolence developed as he amassed great wealth. According to Henderson’s article, it may have been a complex hybrid.

Said Ford, “I believe it is better for the nation, and far better for humanity, that between 20,000 and 30,000 people should be contented and well fed than that a few millionaires should be made.”

It probably didn’t hurt the Ford Motor Co.’s prospects that the proposed actions (i.e. withholding dividend and reducing the cost of a car by ramping up production) would not only endear Ford to Americans but would also undercut future competition.

 

The Michigan Supreme Court Issues a Decision


While the lower court called for a special dividend to be issued and an injunction. The Michigan Supreme Court took a more subtle approach. It tried to keep courts at bay from making business decisions by declaring that courts must defer to the rational business judgment of a company. But allowed itself a loophole, by saying that Ford did not follow a rational business objective in denying dividends.

At the end, the Michigan Supreme Court gave Dodges their special dividend and Ford–the go-ahead for building his new factory.

 

Just a Load of Dicta?


In case law speak, judicial commentary articulating an opinion and not decisive to the case is known as “dicta” and is not binding in the court of law. The comments that have made Dodge v. Ford the single-most known case for defining a corporation’s duty to maximize shareholder wealth…comes in, well, dicta.

That has led some, such as UCLA Law Professor Lynn A. Stout to argue that Dodge v. Ford is not actually good law. She does so in her law review article “Why We Should Stop Teaching Dodge v. Ford“.

 

Why I am Fascinated by Dodge v. Ford


While I love learning the details of all of the law school cases I studied (note: this may be an overstatement :), I have truly been fascinated by the far-reaching implications of this case since the day I learned about it in a Corporation Law course. Whether or not the case has been misconstrued or is wrongly emphasized as an articulation of the maximize shareholder wealth principle, it is taught by law professors and learned by law students in that context.

And, in that context, the concept that the legal framework supports a single financial bottom line pursuit by corporations, I think, may impact the incentives and methodologies business chooses.

While, as Henderson argues, the Michigan Supreme Court may have found an ‘elegant’ solution to a complex situation of competing interests, the long-range result of emphasizing shareholder wealth above other measures suggests that other costs and outcomes are de-emphasized.

 

Triple Bottom Line and Shareholder Redefinition

Perhaps, to some degree, and according to the long-living dicta of Dodge v. Ford, businesses are not always incentivized to consider externalities such a corporation’s relationship to the environment, employee well-being, community involvement, and social justice.

If there was a way to work in such externalities to the ‘bottom line’ of rational business judgment outlined by Dodge v. Ford or expanding our definition of ‘shareholders’ to include non-monetary contributors it could literally change the way business is done by rewarding a company for its business acumen as well as its social innovation.