Wednesday, October 20, 2021

Roe on Dodge v. Ford

Mark Roe has posted "Dodge v. Ford: What Happened and Why?" on SSRN (here). The first half of the abstract is excerpted below. My initial reaction to the abstract (I have not read the paper) is that lying in this context is similar to breaking the law when it comes to the business judgment rule.  IOW, just like a business decision to break the law is not protected by the BJR even if that decision otherwise maximizes shareholder value, so too should deceit be unprotected. This obviously has implications for our current stakeholder governance debate, given that this "noble lie" defense is one of the justifications given for greenwashing / woke-washing.

Behind Henry Ford’s business decisions that led to the widely taught, famous-in-law-school Dodge v. Ford shareholder primacy decision were three relevant industrial organization structures that put Ford in a difficult business position. First, Ford Motor had a highly profitable monopoly. Second, to stymie union organizers and to motivate his new assembly line workers, Henry Ford raised worker pay greatly; Ford could not maintain his monopoly without sufficient worker acquiescence. And, third, if Ford pursued monopoly profit in an obvious and explicit way, the Ford brand would have been damaged with both his workforce and the company’s consumers. The transactions underlying Dodge v. Ford should be reconceptualized as Ford Motor Company and its auto workers splitting the “monopoly rectangle” that Ford Motor’s assembly-line produced, with Ford’s business plans requiring tremendous cash expenditures to keep and expand that monopoly. Hence, a common interpretation of the litigation setting—namely that Ford let slip his charitable purpose when he could have won with a business judgment defense—should be reversed. Ford had a true business purpose—spending on labor and a vertically-integrated factory to solidify his monopoly profit and splitting that profit with labor—but he would have jeopardized the strategy’s effectiveness by articulating it.

https://lawprofessors.typepad.com/business_law/2021/10/roe-on-dodge-v-ford.html

Stefan J. Padfield | Permalink

Comments

I think Professor's Roe argument is very plausible. However, from a legal perspective, the facts must be taken as presented to the court. Back in the day, over 100 years ago, the court correctly presumed that the implicit agreement between shareholders and mgt. was that mgt. would try to maximize profits for shareholders. Perhaps this is no longer the case at some companies, but that was the presumption back then. So, mgt., unless there was 100% agreement among shareholders that the board could act otherwise, had a fiduciary duty to max. profits for the benefit of shareholders. The court felt the board of Ford was not in compliance. That is, the board was not acting in good faith. So, that trumped the BJR.

Posted by: Bernard S. Sharfman | Oct 20, 2021 8:09:25 AM

More amazing work out of HLS. First, Mark Ramseyer tells that child prostitutes enter into legitimate contracts. Now his colleague Mark Roe claims Henry Ford “shared” profits with his workforce. Isn’t it time we all realize what a sham law and economics is?

Posted by: Steve Diamond | Oct 20, 2021 10:13:31 AM

Hi Steve,

It has been a long time. So, you are claiming that all arguments based on a law and economics approach are invalid? If so, maybe you should re-read Henry Manne's "Mergers and the Market for Corporate Control. Maybe you will change your mind. Also, I thought we discussed Henry's work back in 2015? At the time I thought you were a fan. Stay safe - Bernie

Posted by: Bernard S. Sharfman | Oct 20, 2021 11:26:48 AM

Hi, Bernie, I take seriously what many “L&E” scholars produce including, of course, Manne. But his work was based on the concrete realities of economic and legal institutions. On the other hand, what are we to make of the strained application of fanciful metaphors like “contracts” and “sharing” to the reality of the most shameful forms of exploitation? A subfield that can accommodate that has become, it seems to me, a sham.

Posted by: Steve Diamond | Oct 20, 2021 7:46:50 PM