Duty to Maximize Profits for Shareholders and Stakeholders

Discuss about the Implications to Expanding the Corporate Mind-set of Profitability.

Corporate officers and directors have a duty to manage the corporation for maximizing profits for the benefit of the shareholders and stakeholders. As per the Corporations Act, 2001, Corporations do not maximize profits. The corporate directors are said to have a legal duty to maximize the corporate profits and the values of the shareholders. Therefore, there are plenty of existing reasons as to why the managers and corporate directors should pursue long-term. For sustainable wealth maximization according to the interests of other existing stakeholders, the major one states that managers who are said to be responsible for everyone are generally not responsible to any individual. The case of Dodge v Ford Motor Co., dealt with the role of company directors and officers who were not associated with maximizing the profits. It was said in this case that the decisions of the management will not be challenged especially where one point to any rational link to benefitting the entire corporation.

According to the facts of this case, it can be stated that the Ford Motor Company had collected a total surplus of $60 million. Their product have cut over the years successfully whereas the there was an increase in the wages of the workers. Henry Ford, the president of the company had sought to end the special dividends for the stakeholders in favor of the major investments in the new plants that will increase the level of production of Ford along with the individuals engaged with it. On the other hand, the prices and cost were cut down of the cars. This strategy was incorporated because it will be beneficial for them and the company in the long-run. The shareholders of the company stated that the value of this strategy[1]. However, the minority shareholders did not agree this strategy since it demanded that Ford must stop decreasing the prices when they failed to fill orders for the cars and continued paying the special dividends. The Ford company had plenty of shareholders, among which Horace Elgin Dodge and John Francis Dodge were the largest as they owned 10% of the company. Thereafter, the Court wanted to decide whether the minority of the shareholders could prohibit Ford from functioning the company for the carrying out the charitable ends.

The Supreme Court of Michigan decided the judgment of the above-mentioned fact, where it was stated that the consumer prices could not be reduced and the salaries could not be increased by Henry Ford. However, in such a situation the discretion of the directors should be applied which must not extend to the decrease in the amount of profits or the profits that were not distributed among the stockholders for the benefit of the public. It can be said that a business corporation is formed and works according to the profit of the shareholders or stakeholders[2]. Hence, the power of the directors can only be employed for that end. Thus, this was the decision of the Supreme Court in the matter of Dodge v Ford Motor Co.

Long-Term Benefits of Maximizing Profits

As per the outcome of the decision, the relevance of the scenario dealing with the case of Dodge v Ford Motor Co.  stated that one of the largest shareholders was threatened to set up a competing manufacturer as a way to induce all the existing adversaries for selling the shares back to him. However, Dodge Brothers received the money involved in this case as it had helped to expand the Dodge Brothers Company[3]. The significance of this case stated that Ford was said to be motivated by a desire to take out the shareholders who belong to the group of minorities including the Dodge brothers. The Dodge brothers were suspected of using the dividends of Ford for building a rival car company. However, Ford was given considerable leeway regarding the investments that can be made. There was an exact statement of the law as per the above-mentioned act that the corporate directors and officers have a duty to manage the corporation in order to maximize the profits so that the shareholders can gain benefits.

Corporations are organizations that are formed primarily with the objective of earning profits. A company is a body corporate and thus has its own separate legal entity. By virtue of its separate legal entity a body corporate can enter into contracts and can sue and be sued in its own name. However, in practicality, the decision making process of a corporation is in the hands of the Board of Directors and they are the top administrators of the corporations organizational hierarchy. A company is formed by raising capital, from the capital or in case of private companies from the seat capital obtained from the promoters. This money is ultimately obtained from the shareholders, who maybe the public or may be the promoters in case private companies. Thus the ownership of the venture lies in the hands of the shareholders of the company[4]. Thus, in essence the directors of a venture mobilize the funds obtained from the shareholders to execute business transactions and thus are ultimately duty bound towards the investors to user in adequate returns on the investment made by them. The following paragraphs will analyze the duties of directors of a corporation in Australia in light of the judgment delivered by the Supreme Court of Michigan in Dodge v. Ford Motor Company[5].

As stated above the directors of a corporation are obligated to serve in the best interests of the shareholders who have been invested in the venture. Thus for the shareholders to gain adequate returns the Board of Directors must act in the best interests of the company as the same would lead to increased returns for the shareholders. The Supreme Court of Michigan observed in this case that even if the company could foresee a loss in light of charitable activities undertaken by the company even then it would not be legally permissible as the directors would not be obligation towards the company and shareholders who incorporated the same with a view of earning profits. This is known as a fiduciary duty, which directors of an organization must observe. The fiduciary duty is defined under common law which is developed through judicial precedents in the United Kingdom. Common law principles are incorporated into the framework of Australian laws and the fiduciary duties of directors are statutorily provided for in the Corporations Act, 2001 which governs and regulates companies formed and transacting within the commonwealth of Australia. Sections 180-184 of the Corporations Act, 2001 embody these obligations[6]. In Dodge v. Ford Motor Company[7] the Supreme Court of Michigan dealt with the duty of director to act in the best interests of the company which is mainly a duty to act in good. The statutory provision which embodies the duty of a director to act in good faith and in the best interests of the company is Section 181 of the Corporations Act, 2001. Section 180 of the Corporations Act, 2001 embodies a duty to act with due diligence when acting on behalf of the company. Due diligence refers to a comprehensive understanding of the implication of all steps taken by the company which are ratified by the board of directors. Thus when acting on behalf of the company the directors must be acquainted with all the documents involved in the transaction and must have a wholesome understanding of the implications of each and every document and step taken by the company. Ideally these steps must be such that they work for the betterment of the corporation. Thus this duty of due diligence also acts as a protection of the rights of the shareholders and the interests of the company. Coupled with the duty to act in good faith these provisions ensure that the interest of the shareholders are the foremost concern of the board and every step taken by the company must protect and serve these interests. Section 184 of the Corporations Act, 2001 mandates that these duties be observed with utmost seriousness as the breach of the same would lead to a criminal offence under this section[8].

In the case Dodge v. Ford Motor Company[9] the board sanctioned a move which would cost the customers less and pay its employees higher remuneration. The only drawback was that the shareholders would not be getting adequate returns on their investment as such a charitable move would be detrimental for the company. The court held that this would be gross breach of director’s duties as the corporation (which the board seeks to serve) would be facing a loss for the same. Thus, the obligation of the board of directors lies towards the interests of the company as the highest priority.

References:

Statute

Corporations Act, 2001 (cth).

Case laws

Dodge v. Ford Motor Company 170 N.W. 668 (Mich. 1919).

Articles

Hanrahan, Pamela F., Ian Ramsay, and Geofrey P. Stapledon. “Commercial applications of company law.” (2013).

Mortimore, Simon. Company directors: duties, liabilities, and remedies. Oxford University Press, 2013.

Gerner-Beuerle, Carsten, Philipp Paech, and Edmund-Philipp Schuster. “Study on directors’ duties and liability.” (2013).

Statute

Corporations Act, 2001 (cth).

Case laws

Dodge v. Ford Motor Company 170 N.W. 668 (Mich. 1919).

Articles

Acevedo, Arthur. “Corporate Ethics: Approaches and Implications to Expanding the Corporate Mindset of Profitability.” Loy. U. Chi. LJ 49 (2017): 637.

Gerner-Beuerle, Carsten, Philipp Paech, and Edmund-Philipp Schuster. “Study on directors’ duties and liability.” (2015).

Hanrahan, Pamela F., Ian Ramsay, and Geofrey P. Stapledon. “Commercial applications of company law.” (2013).

Mortimore, Simon. Company directors: duties, liabilities, and remedies. Oxford University Press, 2013.

Sollars, Gordon G., and Sorin A. Tuluca. “Fiduciary Duty, Risk, and Shareholder Desert.” Business Ethics Quarterly 28.2 (2018): 203-218

[1] Acevedo, Arthur. “Corporate Ethics: Approaches and Implications to Expanding the Corporate Mindset of Profitability.” Loy. U. Chi. LJ 49 (2017): 637.

[2] Gerner-Beuerle, Carsten, Philipp Paech, and Edmund-Philipp Schuster. “Study on directors’ duties and liability.” (2015).

[3] Sollars, Gordon G., and Sorin A. Tuluca. “Fiduciary Duty, Risk, and Shareholder Desert.” Business Ethics Quarterly 28.2 (2018): 203-218.

[4] Hanrahan, Pamela F., Ian Ramsay, and Geofrey P. Stapledon. “Commercial applications of company law.” (2013).

[5] 170 N.W. 668 (Mich. 1919).

[6] Mortimore, Simon. Company directors: duties, liabilities, and remedies. Oxford University Press, 2013.

[7] 170 N.W. 668 (Mich. 1919).

[8] Gerner-Beuerle, Carsten, Philipp Paech, and Edmund-Philipp Schuster. “Study on directors’ duties and liability.” (2013).

[9] 170 N.W. 668 (Mich. 1919).