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June 18, 2008
Does it Matter if Dodge v. Ford is Good Law?
Recently, I've read several articles and book chapters asserting that corporate law places undue emphasis on Dodge v. Ford. Dodge is traditionally understood to hold that corporations have a exclusive duty to maximize shareholder welfare. The basic argument runs as follows. Courts (Delaware and others) often defer to management's decisions despite weak claims of shareholder benefit, and permit the consideration of other constituencies. This is true in part because shareholder welfare is a malleable concept, and there are almost no short term considered decisions a Board can make that can't be justified in the long-term. And, of course, courts are institutionally ill-placed to second guess this kind of nuanced long-term calculus. To the extent that Dodge is the antipode of how courts ordinarily treat claims of waste, the Dodge rule either shouldn't be taught to students or should be highlighted as, at best, a piece of exceptional dicta.
I am pretty sure I disagree with this critique of teaching Dodge.
Fundamentally, it is a mistake to think of any one opinion, or set of opinions, as representative of how trial and appellate courts resolve the real-world fact patterns presented by complaints. There is certainly some relationship between the law that courts write in reasoned decisions and the decisions they don't explain, but I don't know why we would assume that relationship is a parallel one. I'm thus as unconvinced that Dodge represents the law-in-action as the cases often cited on the broader-constituency side of the argument. To know how courts actually treat a claim that officers have not maximized shareholder wealth, we would have to look at a representative sample of complaints, and grind out some statistics. Tedious? Sure! Absent such a study, the best we can say about any particular case or set of cases is that it is a way that a particular court has approached a problem at a particular time. Maybe students find the reasoning the court provides persuasive, and maybe it fits well with other cases (on like and unlike legal issues) they've read during the semester, thus helping them to develop a situation sense on what kinds of arguments resonate with legally-trained minds. But that's it. Saying that Dodge is unrepresentative of how court opinions treat waste and care claims doesn't tell us all that much, in the end, about how such cases are resolved.
But this isn't exactly charitable to the anti-Dodge position. Critics know that the Dodge rule's expressive function is more significant than its limited holding. Corporate directors might believe that Dodge is the rule governing their conduct, and thus be guided by its concept of how corporations should be run, even if their actual liability risk for contrary behavior is small. Or they might not: we have almost no information on what corporate directors understand about corporate law. Thus, the debate about Dodge is really, I think, best understood as a normative contest about what we should teach the next generation of gatekeeping intermediaries, in the hope that they will relay their (new) learnings to their clients.
A way to make this problem concrete is Google CEO Eric Schmidt's (in)famous statement that "The company isn't run for the long-term value of our shareholders but for the long-term value of our end users." Clearly, he hasn't internalized the Dodge rule, perhaps because his GC, David Drummond, didn't relay the gospel to him.
The question now being batted around in the law reviews thus seems to me like the old CSR problem re-dressed in a debate about what the doctrine looks like. Should we teach Dodge? Certainly, because it provides one view of how courts think about directors' duties. Not teaching Dodge would expose students to only one side of the contest going on every day in boardrooms and partners' suites.
And Bainbridge thought that there was nothing new under the CSR-sun.
[Photo Credit: Crazy Horse Monument, in South Dakota, taken during a recent trip. It seemed relevant, at least when I began drafting this post. I can't for the life of me remember why.]
Posted by Dave Hoffman at June 18, 2008 01:28 AM
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Comments
Having been in industry, may I provide a reality check:
1. On a day-to-day basis, even more important than what corporate directors believe to be the rules of the game is what corporate managers believe.
2. In my experience, your average American corporate manager, and possibly director too, is likely to believe that his or her company has a legal duty to maximize profits. And they are amazed when you tell them that this is not actually the law. But see 4 below.
3. The businesspeople who believe this sure don't attribute it to Dodge. Most corporate managers wouldn't know any court case from a hole in the wall. I would guess that most directors wouldn't either, aside from a couple of Delaware ones like Revlon and maybe, maybe Van Gorkom.
Actually, after many years of practice in NYC, L.A. and Silicon Valley, even I hadn't heard of Dodge until I started reading stuff by law professors as research for articles I was writing. The fact that Dodge is an old Michigan case is a rather potent element of any critique of the case, IMHO, unless you're going to practice in that state. (I leave aside the question of whether a duty to maximize profits is the actual hodling of Dodge.)
4. For many managers, more salient than any legal duty to maximize profits is their belief that it's their duty as a practical matter. They believe that otherwise the company's share price will get hammered, or it won't be "globally competitive", or some other awful thing will result (like losing their job or missing out on a promotion). So if much corporate behavior follows the "norm," it's almost certainly not because of the "Dodge rule's expressive function," but rather managers' fear of some adverse business result.
Posted by: A.J. Sutter at June 18, 2008 06:15 AM
I agree with Andy Sutter's analysis. I would also point out that part of the problem in Dodge was the completely un-"woodshedable" Henry Ford. The fact is that you can always come up with a rationale for what seems to beyond the corporate purpose in language that suggests it inures to the long-term benefit of the shareholders. For example, spending corporate funds on civic improvement makes the city a more attractive place, easier to recruit top employees, etc., etc.
Dodge isn't the only business association case that makes me scratch my head. I've always thought Judge Andrews dissent in Meinhard v. Salmon was far more sensible (and in accord with common understandings) than Cardozo's overwrought opinion.
Posted by: Jeff Lipshaw at June 18, 2008 06:05 PM
Um, Dave, if it’s “the old CSR problem re-dressed,” it ain’t new. Or perhaps you’re being ironic? More at my blog.
Posted by: Steve Bainbridge at June 19, 2008 02:36 PM
BTW, Jeff: You might be interested in some thoughts on meinhard over at my blog.
Posted by: Steve Bainbridge at June 19, 2008 02:54 PM
