In light of recent corporate scandals such as Wells Fargo’s, one can be excused for wondering whether corporations seek anything beyond profits for their shareholders by any means necessary. In these days of activist hedge funds pressing companies for ever more share buybacks, is there room for a company that cares about its workers, the environment, or the communities in which it does business? In other words, can a company have a soul?
Mark Fields, the CEO of Ford Motor Company, believes so. In an interview with Fortune, he called Ford “a company with a soul,” pointing to a long-held policy of donating money and employees’ volunteer hours to the communities in which the company operates and to the company’s high rankings for good corporate behavior by an organization called the Ethisphere Institute. Fields quoted the company’s founder, Henry Ford, as saying, “A business that earns nothing but money is a poor business.”
According to Fields, then, Ford Motor has a soul because it donates a small portion of its resources to charity and behaves ethically. Otherwise, Ford Motor would just be an ordinary, profit-maximizing entity that sends the bulk of its net profits back to its shareholders.
That entity doesn’t seem to be what Henry Ford had in mind, at least according to the position he took in a famous court case from almost a century ago, Dodge v. Ford Motor Co. In the case, Ford and his company were sued for allegedly trying to divert too much of the company’s cash resources to pro-social ends. The suit was brought by two of the company’s major shareholders, the brothers John F. Dodge and Horace E. Dodge. The Dodge brothers were frustrated that Ford had declined to distribute the company’s surplus funds to shareholders, and instead planned to expand the company’s manufacturing capacity, hire more workers, and reduce the prices of its cars.
The Dodge brothers complained that Ford’s intent was not to ensure the business’s long-term prosperity but to benefit its workers and customers, effectively turning it into more of a charity than a corporation. Demand for the company’s cars was so great that it could have sold its entire inventory at much higher prices, yet Henry Ford insisted on lowering the price substantially almost every year.
As evidence of Henry Ford’s charitable intent, the Dodge brothers, in their brief, pointed to a statement that Ford had been quoted as saying in local and national newspapers: that his “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 lives and their homes. To do this, we are putting the greatest share of our profits back into the business.” In other words, the Dodge brothers argued that Henry Ford believed that after ensuring shareholders had earned a reasonable return (which the Dodge brothers certainly had), a company should devote its resources to improving society. From Ford’s perspective, this meant producing better products at lower prices and employing more people at good wages.
Not surprisingly, Ford Motor’s shareholders felt differently. The Dodge brothers demanded that Ford pay out 75 percent of the company’s accumulated cash surplus as a special dividend and stop investing in new factories. The Dodge brothers’ lawsuit made it to the Michigan Supreme Court, and the most commonly cited quote from Dodge v. Ford Motor comes from the court’s reminder to Henry Ford and the company’s other directors that the purpose of a company is to pursue profits for shareholders:
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.
The case is famous—and appears in nearly every U.S. corporate-law textbook—for this language, which seems to support the idea that directors must run corporations for shareholders’ benefits and cannot divert profits for the good of other corporate constituencies, such as customers or employees, or for the benefit of society generally. According to that narrative, Henry Ford appears to be a chastened humanitarian forced to cancel his plans to lower the price of his company’s cars and abandon his expansion strategy.
That was far from what happened, though. In fact, the Michigan Supreme Court permitted Ford to go through with his plans as he pleased. The language about maximizing shareholders’ wealth, though powerful, was completely irrelevant to the court’s holdings. It acknowledged that its judges were “not business experts,” and for that reason deferred to Ford and the rest of the company’s board, permitting them to set forth on whatever strategy they deemed fit. After all, the court noted, Ford Motor’s previous strategies had already been extremely successful.
Though Dodge v. Ford Motor is usually cited as requiring companies to operate solely for their shareholders’ benefits, it actually pushes for a broader deference to boards’ judgment. Faced with evaluating Henry Ford’s clear and unambiguous statement that his purpose was not to make money for the company’s shareholders, the court granted him permission to do what he liked, essentially saying that anyone as successful as Ford must have been furthering a plan to boost profits in the long run, even if his plans seemed to limit profits in the short run and even if he explicitly said he had little interest in lining shareholders’ pockets.
Perhaps Ford sincerely believed that shareholders did not deserve to share any more in the company’s success. Or perhaps the court was correct that Ford’s comments and tactics were just masking a long-term strategy to maximize profits for shareholders. And certainly Ford, a notorious anti-Semite, was no saint. But whatever his intentions, he was permitted to go through with his plans as he pleased.
In a sense, Mark Fields finds himself in a similar situation to Henry Ford’s. Like the Dodge brothers, some present-day institutional investors and hedge funds demand that companies’ profits be distributed to shareholders as a reward for supplying capital. And, for its part, Fields’s company has led some noble corporate initiatives. A Ford Motor spokesperson insisted that “using only the definition included in the Fortune interview clip does not fully represent Ford’s vision and all that we are doing,” and indeed, the company has in the past few years greened its production processes, made its sourcing more environmentally friendly, and launched projects to promote driver safety and investigate ways to reduce congestion on the roads.
These are worthy projects, but Fields’ ambitions are still different from, and not as ambitious as, Henry Ford’s plan to give up corporate profits in order to increase American employment and to supply better cars at an affordable price.
Though all for-profit corporations are designed to make money, what they do with that money is up to the people running them, which is usually a board of directors. Boards are free to pay out dividends or buy back the company’s stock; they are also free to invest in research and development, increase employees’ wages, give back to their communities, put money into less environmentally harmful production methods, improve product quality, and lower prices. As long as there is some sort of connection to boosting long-term earnings, boards can essentially do as they please, as Ford’s court battle demonstrated. If they choose, directors can imbue a company with a purpose beyond distributing money to shareholders. Ford dealt with powerful shareholders too, but he faced them down and built a company that earned profits but also didn’t focus exclusively on them.
The question, then, is not what boards and executives must do, but what they will elect to do. Fields’s primary goal is to make decisions that will help the business succeed, which he says requires persuading workers and customers that the company is about something more than just producing cars. When asked about the risk of not having a mission, Fields replied, “I think the risk is you won’t be able to attract and retain the talent that you want to make your business successful over time. And that’s the bottom line.” But for Ford, the bottom line was something different, something grander.
In the absence of any radical new regulations, for American-style capitalism to work again for the middle class as well as for the wealthy, more CEOs like Fields are going to have to adopt ambitious plans for implementing Henry Ford’s advice, plans that stretch far beyond making some charitable donations and implementing sustainability initiatives. They are going to have to give their companies true souls.
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