The law’s basic position on corporate social responsibility famously was articulated in Dodge v. Ford Motor Co. 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 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."
Ford's real motivation was to keep money out of the hands of the Dodge brothers - he thought they were going to use the dividend money to start a rival automaker, and he was right.
The court ruled against Ford because he was acting in bad faith towards his shareholders, not because it's wrong for a corporation to accumulate assets and reinvest in its business instead of paying dividends. (Otherwise Steve Jobs and Warren Buffett would be in trouble...)
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."
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