Corporate law requires corporations to maximize profits to shareholders. This absolute requirement may expose corporate leadership (and the corporation itself) to potential litigation if shareholders disagree with decisions made by the corporate leadership, as was shown in the case of Dodge v. Ford Motor Co., 170 N.W. 668 (Mich. 1919).
Henry Ford, and the Board of Directors at Ford Motor Co., had a plan to accumulate capital in order to expand production capacity. The higher production of cars would in turn lead to higher profits down the road. Mr. Ford had good business sense, and Ford Motor Company accumulated capital according to the plan. However, shareholders (receiving a regular 60% annual dividend!!!) were unhappy that Ford had accumulated so much capital. They wanted the capital distributed to them, rather than used to build new plants.
Some shareholders brought suit for failing to distribute the maximum wealth to shareholders in the form of a special dividend. And, Ford’s successful accumulation of cash proved to be a basis for the court to step in and alter the business plans of the corporation. The court recognized that Mr. Ford personally was responsible for the phenomenal growth of the business. The court stated:
“Mr. Henry Ford is the dominant force in the business of the Ford Motor Company… A business, one of the largest in the world, and one of the most profitable, has been built up. It employs many men, at good pay.”
Despite Mr. Ford’s successful history in running the business, the court apparently believed it was better able to determine the future business plans of Ford Motor Company. The court reviewed the production plans, including the projected number of car sales and projected price for the cars, and determined that Ford Motor Company should not accumulate cash to increase production capacity. Instead, the court decided that the company should distribute the accumulated cash to the shareholders as a special dividend. This court decision remains good law, and is frequently referenced as a clear example that the primary purpose of a for- profit corporation.
Dodge v. Ford makes clear that the purpose of for-profit corporations is to maximize short-term wealth to its shareholders. Socially responsible purposes are not a relevant consideration when a board of directors makes decisions regarding the future actions of a for-profit corporation.
A social purpose corporation or a benefit corporation are new corporate structures that allow the board of directors to consider factors other than maximizing shareholder profits. For more information, see here.