Question

Henry Ford, majority shareholder of the Ford Motor Company, announced that rather than pay a special dividend to the company's shareholders, he was going to reinvest the accumulated earnings in order to expand the company and hire more workers. He further indicated that he wished to lower the price of the Model T car to make it more accessible to the general public. Two minority shareholders, John and Horace Dodge, sued to require payment of the dividend. The court upheld management's right to make decisions for the benefit of the company; however, the court said that the corporation is a business, not a charity, and found for the Dodges because Henry Ford's decision was to benefit the public instead of shareholders.

explain

Should a corporation act solely to maximize shareholder wealth?

Answer 1

The debate over whether a corporation should solely maximize shareholder wealth involves shareholder primacy vs. stakeholder theory. Henry Ford's decision to reinvest in the company and make cars more affordable reflects stakeholder theory, considering broader societal impacts alongside shareholder interests. Ford's practices contributed to shaping the automobile industry and societal structure.

Step-by-step explanation:

The question of whether a corporation should act solely to maximize shareholder wealth is a significant one in the field of business ethics. The debate involves two primary theories: shareholder primacy and stakeholder theory. Shareholder primacy holds that the main obligation of a company's management is to increase the wealth of its shareholders, as these are the owners of the company who invested their capital with an expectation of returns. On the other hand, stakeholder theory posits that a corporation should consider the interests of all stakeholders, including employees, customers, and the community as a whole, when making decisions.

Henry Ford's approach to reinvesting profits and lowering the price of the Model T to make it more accessible to the general public aligns more closely with stakeholder theory. This move not only provided value to the customers and wider society by making cars affordable, but also indirectly benefited shareholders by expanding the potential market for Ford's automobiles. However, the Dodge brothers, who were minority shareholders, advocated for the distribution of dividends, representing a shareholder-centric view. The courts ruled that while a corporation is not a charity and must consider the interests of its shareholders, management does have the right to make decisions that they believe will ultimately benefit the company, even if they include the consideration of broader societal impacts.

Historically, Ford Motor Company's practices under Henry Ford's leadership, such as paying workers a high wage, have been viewed as methods to ensure worker loyalty and create a consumer base for their products, indicating an early form of stakeholder engagement. Although Ford was hostile to unions and operated a very controlled environment, the high wages allowed workers to afford the very cars they produced, contributing to the rise of the automobile industry and altering the socio-economic structure of the society.