Question

WK7 D2 - Corporate Governance and Ethics: A series of decisions

Research the famous business case Dodge vs. Ford Motor Company, in 1919.

This story invites students to think about how a corporation distributes its profits.

Answer the following regarding the story.

Should all returns flow to shareholders, or can managers choose to return profits to stakeholders in terms of lower prices or higher wages?

Should the Corporation be run to maximize the immediately apparent (as opposed to merely short run) benefit of shareholders?

Answer 1

1) Should all returns flow to shareholders, or can managers choose to return profits to stakeholders in terms of lower prices or higher wages?

Dodge vs Ford case re-inforced the idea that corporations are accountable to making profits for the share holders.Judgements in both the trial court and Michigan supreme court held that dividends need to be distributed to the share holders.
However the supreme court also held that directors have some discrition to chart the course of the business,but not at the reduction of stock holder profits.
The judgements Basically told that a corporation is a business and not a charity.The primary function of the corporation is increasing wealth of share holders.

2) Should the Corporation be run to maximize the immediately apparent (as opposed to merely short run) benefit of shareholders?

The Dodge Vs Ford case clearly held that, the function of a organisation is to increase profits of share holder.In such a scenario ,the main objective becomes, 'earning a larger amount of profit'.Achieving the short term objective of profit maximization becomes the concern of the managers.

There is also another view that the ultimate goal of a organisation is to improve the market value of shares, thus forcing the managers to formulate and achieve long term goals.

Keeping in view both the schools of thought, it is wise to not only think of increasing immediate benefits of share holders, but to improve market value as well as care for other stake holders. The stake holders are employees,community, public,environment etc. Sharing profits with stake holders adds tangible as well as intangible advantages to the corporation.
The intangible advantages are increased morale of employees,a committed work force, positive environment for the organisation to operate in.
The tangible advantages are increased production from a committed work force, sales will increase because of increase in buying power of workers and community, healthy employees and environment etc.

Also if the market value improves the corporation can gain a larger market share.