The following is an excerpt from John Kay’s new book,“The Corporation in the 21st Century,” now out at Yale University Press.
It is neither necessary nor sufficient to determine whether shareholders are owners of the corporation to decide whether the company does, as [Milton] Friedman asserts, have a responsibility to maximise its profits. The legal duties of directors and executives follow the law of the country where they operate. Here also the relevant corporate law differs across countries and, indeed, across different American states. And, within every legal framework, the actions of all but the most tone-deaf executives and directors must be sensitive to the culture and expectations of the society in which they operate. These cultures and expectations also vary across the world [….]
The United States
The classic American case is that of Dodge v. Ford, a ruling that has recently celebrated its centenary. Henry Ford, struggling to gain a foothold in the emergent automobile industry and with a poor credit record, reached an agreement in 1903 with the Dodge brothers, who would supply the components for his Model A. The arrangement gave the Dodges 10 per cent of the Ford Motor Company stock. Ford himself retained a majority stake. Early Ford cars enjoyed modest success, and in 1908 Henry launched the Model T. The following year he declared his vision:
I will build a motor car for the great multitude. It will be large enough for the family, but small enough for the individual to run and care for. It will be constructed of the best materials, by the best men to be hired, after the simplest designs that modern engineering can devise. But it will be so low in price that no man making a good salary will be unable to own one – and enjoy with his family the blessing of hours of pleasure in God’s great open spaces.
Sales of the Model T increased year after year, but the assembly line production that Ford implemented enabled the company to keep reducing the price, and by 1915 the Model T was by far the best-selling car in America. Following this success, profits and cash balances mounted, and the Ford company paid regular special dividends. The Dodge brothers used the proceeds to expand their own car production. But the irascible Ford and the Dodges inevitably fell out, and Ford, who had ambitious plans to build what would become the massive River Rouge complex, ceased to pay special dividends.
The Dodges sued. Henry’s testimony made it difficult for any court to find in his favour. The court observed that Ford had ‘the attitude towards shareholders of one who has dispensed and distributed to them large gains and that they should be content to take what he chooses to give’. The judgment went on: ‘His testimony creates the impression, also, that he thinks the Ford Motor Company has made too much money, has had too large profits, and that although large profits might be still earned, a sharing of them with the public, by reducing the price of the output of the company, ought to be undertaken.’
A modern commentator has observed that ‘It would be wonderful to know what advice Mr Ford’s lawyers gave him before he testified so helpfully for the plaintiffs who were suing him.’ It is, of course, unlikely that he paid much attention to whatever his attorneys did say. The lower court findings were almost ludicrously hostile, the court even issuing an injunction against the Ford company investing at River Rouge. The Michigan Supreme Court reversed much of the judgment. But the court nevertheless ordered that Ford pay a special dividend, asserting 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 Michigan Supreme Court finding (although not binding in other states) has been influential in US jurisprudence throughout the century that followed.
Ford bought out the Dodge stake in 1919 for $25 million.7 The Dodge brothers both died in the Spanish flu pandemic that followed the First World War, and did not have an opportunity to regret their legal success. But if they had lived, they would certainly have done so. Ford’s strategy of investment in building new plant and acquiring market share paid off handsomely for continuing stockholders – principally Henry and his family and foundations. When Ford again became a public company, in 1956, the business was valued at $3.2 billion, making a 10 per cent stake worth $320 million. (The Dow Jones industrial index of American stocks increased threefold over that period, and the US consumer price index by 60 per cent.)
The scene shifts forward in time to 2010, and eastward in location to Delaware, to the somewhat similar case of Newmark v. eBay. Craig Newmark was the founder of Craigslist, an inter- net site for classified advertising. Together with technology officer Jim Buckmaster, he owned a majority of the company’s shares. Newmark and Buckmaster had little interest in money – most listings on their site were and continue to be free and the modest expenses of the business are covered by paid job ads from companies wishing to recruit the millennials who use the site to buy sofas and arrange hook-ups.
eBay was impressed by the success of the start-up and wanted to buy it. The internet auction site saw an opening; an early sup- porter of Craigslist had been given some equity in Newmark’s rather casual style. eBay offered the minority shareholder $15 million for his stock. At that point, Newmark and Buckmaster decided they were not so uninterested in money after all and demanded and received $8 million each from eBay in return for agreeing to the stock transfer. From this unpromising start, the relationship between Craigslist and eBay ran steadily downhill and ended in a series of actions and counteractions in the chancery court of Delaware.
In an extended article in 2015 the then chancellor of the Delaware court, the highly respected Leo Strine, asserted that Delaware law dictates shareholder primacy. He rejected the view of some academic legal scholars, such as Lynn Stout, that the scope of the business judgment rule allows a stakeholder perspective. Strine relied primarily on the chancery court findings in eBay (and an earlier case, Revlon, in which the court ruled that having decided to put the company up for sale the board was required to accept the highest offer). Strine gave this view while expressing a personal opinion that he wished the law were otherwise.
Yet it seems likely – as was probably also true for Henry Ford – that if the Craigslist founders had been willing to make some conciliatory noises about building value in the business over the long run, the result would have been different. The Delaware court ruled that
the Craigslist directors are bound by the fiduciary duties and standards that accompany that [for profit] form. These standards include acting to promote the value of the corporation for the benefit of its stockholders … I cannot accept as valid … a corporate policy that specifically, clearly, and admittedly seeks not to maximize the value of a for-profit Delaware corporation for the benefit of its stockholders.
It is plain that any commercial activity that hopes to survive must aim to make a profit. Like staff, directors, customers and the local community, shareholders are stakeholders in the firm and are entitled to their rewards. eBay had paid to acquire its equity in Craigslist, and just as it would have been inappropriate – bad business – for Craigslist to sell ad space to companies and then not promote their ads, so it was inappropriate to fail to provide a way for eBay to profit from its investment. But it does not logically follow that an obligation to make a profit entails an obligation to maximise that profit; the Delaware Court may seem to imply that but does not say so. As is often noted, we breathe to live but that does not mean we live to breathe.
American corporate law is primarily state law, but the case of Hobby Lobby, an unlisted corporation registered in the state of Oklahoma, went to the US Supreme Court in 2014. The federal courts became involved because the case concerned the constitutionality of a federal statute. Hobby Lobby operates a chain of arts and craft stores across the United States. The corporation was founded by David Green, a militantly evangelical Christian, and the Green family owns all its shares. Hobby Lobby claimed that the obligation on employers under the Affordable Care Act (Obamacare) to provide health insurance coverage which included abortion and contraception violated the constitutional right to religious freedom.
But could a corporation have a right to religious freedom? Five years earlier the same court had concluded in Citizens United that the First Amendment right to free speech extended to corporations. But the extension of this finding to religious freedom was a further large step. It was a step the majority of the court, led by conservative Justice Samuel Alito, was willing to take. (Justice Ruth Bader Ginsburg lodged a vigorous dissent.)
Excerpted from “The Corporation in the 21st Century.” Copyright © 2025 by John Kay. Reprinted by permission of Yale University Press.
Articles represent the opinions of their writers, not necessarily those of ProMarket, the University of Chicago, the Booth School of Business, or its faculty.
