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s toward
another constituency, they have almost always lost.
But What about Dodge Bros, v. Ford.^
Stakeholder theorists who argue that shareholder interests are (fortunately or
unfortunately) paramount typically cite the famous dictum from the Michigan
case Dodge Bros. v. Ford that "the corporation exists for the benefit ofthe shareholders"
(Goodpaster, 1991; Boatright, 1994) as evidence of a restraint on the
discretion of management. Leaving aside the question as to whether dicta from a
state court decision remains influential after seventy-five years, an examination
of the context of the statement and the circumstances of the lawsuit makes it
clear that this perspective was not meant to empower the shareholder at the expense
of managerial discretion.
The lawsuit was aimed at Henry Ford's tightfisted dividend policy. Ford
Motors had become one of the world's most profitable companies and was literally
piling up unspent cash that it could not invest fast enough, yet was recently
refusing to pay out much more than 1 percent of its net income in dividends.
Because it was the company's principal shareholder, Henry Ford, who managed
the company, this was a classic case of upholding the rights of minority shareholders
against the tyranny of a majority investor. Ford Motors was, at the time,
a privately held corporation and courts have been particularly sensitive to protect
minority interests in such firms (Mitchell et al., 1996), such as the Dodge
brother plaintiffs. Unlike holders of publicly traded shares, minority shareholders
in a private corporation are not usually in a position to readily sell out and
thereby exit from an unsatisfactory relationship^ and by definition minority holders
IRRELEVANCE OF FIDUCIARY DUTIES TO SHAREHOLDERS 279
possess little or no power to replace an unsatisfactory board of directors with
one more amenable to their perspective. One might, in fact, argue that the stockholders
of privately held companies deserve more consideration as stakeholders
than their public counterparts. Because minority shareholders in a privately held
company are far less free to exit the relationship if management makes a decision
they find objectionable, they are more dependent upon a right to have their
interests considered by management.
The court rejected Henry Ford's defense that "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 iives and their homes'" {Dodge Bros. v. Ford.
1919: p. 505). While his assertion is usually taken at face value to violate accepted
norms of proper business purpose, the court may weli have been aware
that he was speaking with dubious sincerity (Jardim. 1970). Testimony indicates
that Ford Motors had issued higher dividends in the past, suggesting perhaps
that Ford's primary motive in refusing to pay out was to prevent the Dodge Broth -
ers from creating their own rival auto manufacturing company, which, in fact.
they eventually did. But whatever Ford's true motives were, it would be difficult
to imagine that any normative stakeholder theory would deny shareholders the
right to share in some of the prosperity generated by a successfui business.
It shouid also be noted that the court did not hold that investors could interfere
with managerial business planning or insist that