Shareholder Theory: The Dodge V Ford Motor Company
THE SHAREHOLDER THEORY
1. Introduction
1.1 History of the shareholder theory
The exact period of time when the shareholder theory became renowned is not certain. However, on the 13 September 1970, the corporate world was revolutionalised by an article published in the New York Times by the Nobel Prize winner in Economics, Milton Friedman. According to him, the corporate executives had a direct responsibility towards the owner of the companies and thus the one and only social responsibility of companies was to use its resources and engage in activities so as to increase its profits.
At that time, the private sector firms were starting to feel the pressures of global competition and executives were looking around for ways to increase their returns.
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1.2 Dodge v Ford Motor Company case
The Dodge v Ford Motor Company , a decision of the Michigan Supreme Court in 1919 is considered to be the landmark case whereby this theory was applied. It was held that:
“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 non distribution of profits among stockholders in order to devote them to other purposes.”
The Dodge’s theory has been widely accepted by courts for a very long period of time, especially since it has established a basic rule for directors that they have a primary obligation to maximise the shareholders’ wealth, within the
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First of all, many theorists believe that the interests of shareholders is closely linked with the profits of the company but this is not always the case. Shareholder primacy involves the maximization of the share value which is defined as a measure of the performance of the company. “The maximization of the share value is said to permit the shareholder to secure the highest possible utility from the investment made from the company.”
Other theorists believe that shareholder primacy favours the short term investment strategy as compared to the long term one. However, the non-financial affairs of a company are out of the scope of this
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