By 1916, the Ford Motor Company had accumulated a cash surplus of $60 million (the modern day equivalent of $1.35 billion). The price of the Model T, Ford’s signature product, had been cut over the years, yet the wages of the employees had increased dramatically, and these generous investments had been publicized. Two brothers, John Francis Dodge and Horace Elgin Dodge, owned 10% of Ford’s company.
They had been the manufacturers of the main chassis for the Model T for a dozen years. They decided to challenge Ford’s idea of investing these surplus funds into the infrastructure of the company and giving raises to the employees.
They argued, it’s a business, not a charity. "The Michigan Supreme Court held that Henry Ford could not lower consumer prices and raise employee salaries.”
The court ruled that the primary focus of a for-profit business is to profit the shareholders first. However, this has been extrapolated as a case that is the rule for profit maximization and wealth creation. Rather than a single case that was ruled on over 100 years ago.
This true story is where we get the idea that business profits are for the shareholders first—not the partners, not the customers, not the employees, not the community. But solely for the shareholders.
"The myth that profit maximization is the sole purpose of business has done enormous damage to the reputation of capitalism and the legitimacy of business in society,” wrote John Mackey, founder and president of Whole Foods Market. “We need to recapture the narrative and restore it to its true essence: that the purpose of business is to improve our lives and to create value for stakeholders.”
(This quote is ironic in light of the recent sale of Whole Foods to Amazon, but we’ll hold off on judgment until we see what their vision is).
The end of the story is interesting. Ford threatened to start a rival competitor to be able to obtain complete ownership. But ended up, the Dodge brothers used their $1.9 million ($42.5 million today) earnings from the settlement to continue to fund their own booming business, Dodge Brothers Company.
This case is only one. Contrary to myth, it's not the rule. Boards, committees, executives, and managers have to make decisions that favor the stakeholders, but that doesn’t mean their decisions have to slight employees and communities in return. There can be a double-bottom line more often than not.
[Sidenote, when the Dodge brothers agreed to manufacture the frames for Henry Ford in 1903, they floated him $10,000 ($250k today) in inventory. That was converted into stock, which equaled 10% of Ford Motor Company. They later sold that stock in 1919 for $25 million, which is the equivalent of over $350 million today. How’s that for a great investment!]
There can be many roles of great business. What’s yours?
- Create value for stakeholders.
- Create meaningful employment for thousands.
- Provide healthy and high-quality food for customers.
- Serve communities.
- Make a ton of money for yourself.
- Solve local problems.
- Change the world.
Know your roles. Recruit the right partners. And go change your part of the world.
(photo via ford eu)
Posted on June 19, 2017
by Tim & Tommy filed under