You see it all the time in the United States: a publicly-traded company has the option of thinking long-term and/or building goodwill with a loyal customer base, but instead squeezes the consumer with unfair business practices and price-gouging. Whether it’s gas distributors fixing prices, Netflix jacking its subscription fees up yet again, or a jackass raising the cost of life-saving medicine, corporate America seems bent on squeezing every penny out of the consumer, consequences be damned.

Why do they do it? If you think it’s just because they’re evil…well, you’re basically right. But even evil people pretend to have a justification for what they do, and when it comes to shady business practices it usually goes back to a 1919 case in the Michigan Supreme Court where Henry Ford failed to stop a revolt within his own company.

Not This Guy Again!

Yes, it’s Henry Ford again. The guy whose racist and anti-Semitic conspiracies helped cement square dancing as a national pasttime and create the fake “War on Christmas” narrative that still crops up today. Adolf Hitler expressed his admiration of the guy and once hoped Ford could be “the leader of the growing Fascist movement in America.”

Ford was an industrial pioneer but also the creator of all sorts of terrible things because he couldn’t stand the concept of a black man or a Jew existing. Strangely, though, he’s arguably the good guy in this story, albeit mostly by accident. His opponents, the Dodge brothers, were the ones who really enabled the profits-above-people approach that became du jour for generations to come.

An Excess of Profit

Despite his many significant flaws as a person, Ford was a shrewd businessman. In the early 20th century, the Ford Motor Company had accumulated a surplus of $60 million (the equivalent on over $1.8 billion today), all while cutting the cost of the Ford Model T and increasing wages to workers. Profits were soaring, customers could buy cars at increasingly lower prices, workers got well compensated, and Ford intended to use the company’s surplus to build more factories and hire more well-paid workers. Said Ford, “My ambition is to employ still more men, to spread the benefits of this industrial system to the greatest possible number, to help them build up their lives and their homes.”

So everybody was winning. Then the shareholders got involved.

Ford’s decision to invest in more infrastructure and employees wasn’t entirely altruistic. By putting the surplus back into the company, he hoped to avoid paying dividends to his largest minority shareholders, John and Horace Dodge.

The Dodges owned the Dodge Brothers Company, which had supplied Ford with components for the Model A in 1903. This allowed the Ford Motor Company to produce their vehicles cheaply, and in exchange Ford gave the Dodge brothers a 10% share in his company. But a decade later Ford started to worry that the Dodges could use the money they made from his company to become significant competitors. Investing the surplus back into the company had the altruistic end of helping employees live better lives, but also the personal benefit of allowing Ford to stick it to the Dodges.

The Dodge brothers, unhappy that they would not receive their portion of a $60 million surplus (which, in fairness, their deal with Ford had helped to create), took the case to court.

The Day in Court

While I would argue that reinvesting a surplus into the company is an excellent way to increase long-term profitability, I am not a judge in the year 1919, when the case of Dodge v. Ford Motor Co. made its way to the Michigan Supreme Court. Russell Ostrander, who was, saw things differently.

Ostrander ruled against Ford. In a non-binding remark, he stated, “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.”

And thus, the Dodge brothers got their dividends. The Ford Motor Company remains an automotive force even today, but the Dodges used the money they got from Ford to expand their own business, building the Dodge Brothers Motor Company into a force to be reckoned with. Ford essentially created his biggest competitors, and the ruling remains cited to this day as a reason to justify the shady business habits of publicly-traded companies.

It Doesn’t Have to be This Way

The Dodge decision reinforced the idea of shareholder primacy, in which corporations are essentially machines designed to pump profits into the pockets of a wealthy few investors.

Whenever Amazon puts yet another small business under with its shady business practices, gas companies churn out record profits during an oil crisis, or Wal-Mart asks its customers to feed its employees because it won’t pay a livable wage, somebody will inevitably cite the Dodge decision and say that the company’s hands are tied–they simply must be greedy bastards for the sake of their shareholders. But that’s just a convenient excuse.

In the century since Dodge v. Ford Motor Co., legal scholars have argued that the ruling is frequently misread, producing no legal mandate for maximization of shareholder wealth. Indeed, Ostrander’s remark above is an obiter dictum, which essentially means that it was said in passing and isn’t binding. Other legal scholars have pointed out that the case is a “dead letter,” having been cited only once in a span of decades.

The decision against Ford didn’t establish legal precedent that corporations have to focus exclusively on shareholder profits. But companies play it that way because it’s convenient to them. Rather than admit that the boardroom is full of greedy, unethical twerps who are too happy to step on the little guy, the people in charge can pretend that their hands are tied and they are simply obligated to behave that way.

When money is on the line, people will always find ways to justify their terrible behavior. A century ago, Dodge v. Ford opened up the opportunity for companies to do just that, and they continue to take advantage of that to this day.

_{Featured Image: The Henry Ford, CC BY-NC-ND 2.0, cropped and resized}