The case cited for the rule that companies are run for their shareholders hands the wages to the directors in the very next sentence. What holds boards to that rule on wages comes from somewhere else.
4 October 2026
In 1919, ruling on a suit by two shareholders against Henry Ford's company, the Michigan Supreme Court wrote three sentences that still anchor the argument over what a company is for.
"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. The discretion of directors is to be exercised in the choice of means to attain that end and does not extend to a change in the end itself, to the reduction of profits or to the nondistribution of profits among stockholders in order to devote them to other purposes."
The paragraph ends there. The next one begins on the same page, in the same opinion, by the same judge:
"There is committed to the discretion of directors, a discretion to be exercised in good faith, the infinite details of business, including the wages which shall be paid to employees, the number of hours they shall work, the conditions under which labor shall be carried on, and the prices for which products shall be offered to the public."
The first passage is the one the case is known for. It is the canonical statement of what lawyers call shareholder primacy: a company exists for its shareholders, and a board that pays its workers more than it must is spending someone else's money. The next sentence says who sets the wages: the directors, in good faith.
Read together, the two passages divide the labor. The shareholders' profit is the end. Wages are among the means, and the means belong to the directors. The shareholder-first rule that boards follow today is real. What holds them to it on wages, though, is mostly not the courts.
By the summer of 1916 the Ford Motor Company was sitting on a surplus of almost $112 million, with nearly $54 million in cash and municipal bonds. It paid a regular dividend of $1.2 million a year, sixty percent of its $2 million of capital, and special dividends on top. That summer Henry Ford decided there would be no more special dividends "for the present." Asked in court for how long, he answered: "That was indefinite, yes, sir."
He wanted the money for something else: to expand the plant, build a smelter, and cut the price of the car from $440 to $360. The court calculated that the price cut meant at least $48 million less in "the return for capital, labor and materials." Ford had explained himself in the press. "My ambition," he said, "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. To do this we are putting the greatest share of our profits back in the business."
The Dodge brothers owned ten percent of the company. They had supplied Ford's parts and taken their stake in 1903, and had since begun building cars of their own. In November 1916 they sued to force a dividend and to stop the expansion. Later that month the company declared one more special dividend, of $2 million.
The court took Ford's motives seriously. It called his sentiments "philanthropic and altruistic, creditable to Mr. Ford." It drew a line between "an incidental humanitarian expenditure of corporate funds for the benefit of the employees, like the building of a hospital for their use," and "a general purpose and plan to benefit mankind at the expense of others." Then came the famous passage, then the wages sentence, and then a limit: it is not within the lawful powers of a board "to shape and conduct the affairs of a corporation for the merely incidental benefit of shareholders and for the primary purpose of benefiting others."
That is shareholder primacy, and the court meant it. The wages sentence sits between two statements of it and is not the court's main point. What matters is what the court then did.
It upheld the trial court's order for a dividend of $19,275,385.96. The reason was arithmetic. Even accepting the expansion plan in full, the court found, "it was their duty to distribute on or near the first of August, 1916, a very large sum of money to stockholders." Holding it all back was "not an exercise of discretion on the part of the directors, but an arbitrary refusal to do what the circumstances required to be done."
And it refused to stop the expansion. The paragraph after the wages sentence begins: "We are not, however, persuaded that we should interfere with the proposed expansion of the business of the Ford Motor Company." Two sentences later: "The judges are not business experts." The court added that it was "not satisfied that the alleged motives of the directors, in so far as they are reflected in the conduct of the business, menace the interests of shareholders."
The dividend followed from the size of the surplus. The expansion survived on the directors' judgment. The famous passage decided neither.
Nor was the court of one mind about it. Eight justices sat. Justice Ostrander wrote the opinion, and four colleagues joined him. The other three, in a concurrence by Justice Moore, agreed with the result but not with all of the reasoning: "I do not agree with all that is said by him in his discussion of the question of dividends." Moore did not say which part. The famous passage sits in that discussion.
Robert Rhee, a law professor who has traced the case's history, calls the passage "a forceful and forced political commentary that was unnecessary to deciding the case."
A Michigan decision binds no court outside Michigan, including the Delaware courts, where most large American public companies are incorporated.
Few courts have leaned on it. Rhee counted the citations. American courts cited Dodge v. Ford 70 times between 1919 and 2019, and 20 of those were Michigan courts. Law reviews had cited it 1,145 times by the summer of 2022, and 1,108 of those citations came after 1979. "Dodge has never been influential in American courts," Rhee concludes. He calls it "a prosaic case of minority shareholder oppression, business judgment, and asset distribution."
The principle it is cited for was written down most forcefully somewhere else.
In September 1970 The New York Times Magazine published an essay by the economist Milton Friedman under a headline that read, in part, "The Social Responsibility of Business Is to Increase Its Profits." Its central passage: "In a free-enterprise, private-property system, a corporate executive is an employe of the owners of the business. He has direct responsibility to his employers. That responsibility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom."
The essay cites no case or statute and never uses the word "fiduciary," the legal term for a duty of loyalty owed to someone else. It is an argument about what executives ought to do, made by an economist, in a magazine.
In 1997 the Business Roundtable, an association of chief executive officers, wrote the rule down as its own: "the paramount duty of management and of boards of directors is to the corporation's stockholders; the interests of other stakeholders are relevant as a derivative of the duty to stockholders." The same document conceded that "a number of states have enacted statutes that specifically authorize directors to take into account the interests of constituencies other than stockholders." Where legislatures had spoken, they had spoken the other way.
On 19 August 2019 the same association issued a new statement on the purpose of a corporation, signed by 181 chief executives. "We share a fundamental commitment to all of our stakeholders," it said. The accompanying release acknowledged what it was replacing: "Each version of the document issued since 1997 has endorsed principles of shareholder primacy."
The "paramount duty" was written into corporate America's account of itself in 1997 and taken out of it in 2019. No court ruled and no legislature voted on either statement. Both times, the authors were the people the rule was supposed to bind.
Whether boards have behaved differently since is another question. The statement could not touch what holds them to the shareholder line, because it had not created it.
If the law leaves the wages to the directors, something else holds the line.
In a survey conducted mostly in November 2003, the academics John Graham, Campbell Harvey and Shiva Rajgopal questioned 401 financial executives and interviewed twenty more about how they report earnings and why. "78% of the surveyed executives would give up economic value in exchange for smooth earnings," meaning steady profits from quarter to quarter. And "55% of managers would avoid initiating a very positive [net present value] project if it meant falling short of the current quarter's consensus earnings": they would pass up an investment expected to earn back much more than it costs rather than miss the analysts' average forecast for the quarter.
These are answers about what the executives would do, not records of what they did. The reason they gave was a market. One put it in a sentence: "I miss the target; I'm out of a job." Another explained why a single miss is punished out of all proportion: "if you see one cockroach, you immediately assume that there are hundreds inside the walls."
The executives said they would sacrifice an investment's expected value to meet a quarterly earnings forecast, even at shareholders' longer-term expense.
Rhee names two more enforcers: "equity-based executive compensation and the market for corporate control." Executives are paid in shares, and a company whose share price lags can be bought by someone who will replace them.
Lynn Stout, a corporate-law professor, denied the duty outright. "Contrary to what many believe, U.S. corporate law does not impose any enforceable legal duty on corporate directors or executives of public corporations to maximize profits or share price," she wrote in 2012. The strongest reply comes from the bench.
Leo Strine was Chief Justice of the Delaware Supreme Court when he wrote, in 2015, that "a clear-eyed look at the law of corporations in Delaware reveals that, within the limits of their discretion, directors must make stockholder welfare their sole end, and that other interests may be taken into consideration only as a means of promoting stockholder welfare."
The courts have enforced that limit in disputes over corporate control and company sales. The founders of craigslist had adopted a poison pill, a device to stop an unwanted investor from buying more shares, against eBay, a minority shareholder. They defended it as protecting the site's habit of running itself "as a community service." In 2010 Delaware's Court of Chancery, the state's specialist business court, found that justification unproven, struck the pill down, and wrote: "Having chosen a for-profit corporate form, the craigslist directors are bound by the fiduciary duties and standards that accompany that form. Those standards include acting to promote the value of the corporation for the benefit of its stockholders. The 'Inc.' after the company name has to mean at least that." When a company is up for sale, the Delaware Supreme Court's 1986 decision in Revlon requires the board to seek the best price for the stockholders.
Shareholder primacy has judges behind it, then, and in takeovers and sales the courts enforce it. The objection is right about that.
What the rule requires of ordinary decisions is narrow. Strine concedes that directors "are generally empowered to manage the corporation in a way that is not dictated by what will best maximize the corporation's current stock price." The duty concerns ends. Wages are means, as the 1919 court itself said.
And means are protected. Courts presume that a board's good-faith business decisions are sound and decline to second-guess them, a doctrine called the business judgment rule. The craigslist opinion, the one the objection relies on, puts higher pay among those decisions. Under that rule, the court wrote, it "will not question rational judgments about how promoting non-stockholder interests ... ultimately promote stockholder value," and the interests it listed include "paying employees higher salaries and benefits."
In 1968 an Illinois court heard a shareholder allege that Philip K. Wrigley, president of the Chicago Cubs and owner of about 80 percent of the stock, refused to put lights in Wrigley Field because night games would hurt the neighborhood, and that he was not interested in whether the club would gain financially. The court itself supplied a business reason: "the long run interest of the corporation in its property value at Wrigley Field might demand all efforts to keep the neighborhood from deteriorating." Then it stepped back: whether the decision was correct, it said, was "beyond our jurisdiction and ability." Mark Roe, writing on Dodge in 2021, observed that a charitable motive of the kind Ford voiced "today could be readily justified in court with the business judgment rule."
Courts generally defer to good-faith operating decisions, including decisions about wages, when directors can connect them to shareholder benefit.
Strine himself supplies the clearest evidence that the force lies elsewhere. Many states have passed laws expressly allowing directors to weigh the interests of workers and communities. Those laws, he writes, "have done little, if anything, to make corporations more socially responsible or more respectful of their workers' or communities' interests." Strine's own account of why is about power, not duty: Delaware's corporation statute focuses managers on stockholder welfare "by allocating power only to a single constituency, the stockholders." Only they elect the directors.
Rhee, the most careful of the scholars who argue that shareholder primacy is law, describes the same machinery. The judges' embrace of it, he writes, "has legitimized shareholder primacy and given it a cloak of legal authority." Pay in shares, the threat of takeover, and "legal uncertainty and litigation risk" do the rest. "The incentive, then, is to comply with the obligation as the path of least resistance even though the rule is unenforceable as an independent duty."
Pressed, the objection shifts from duty to power. The courts lend the rule its authority and enforce it when a company is sold. On wages, what binds the board is the people who elect it, the market that prices its shares, and the pay that rides on both.
A rule that a legislature enacted, a legislature can repeal. A rule that a court laid down, a higher court can overrule. On wages, the rule that holds a board to the shareholder line is neither. No statute commands it, and the courts leave the means to the directors. What holds it in place is what boards are paid to hit, and who can replace them.
The court's next sentence put the wages, the hours and the conditions of the work in the directors' hands, to be decided in good faith. They still are.
The ideas, the argument and the conclusions in this essay are mine. I develop each essay in conversation with an AI assistant: I set the question and the direction, it turns my thoughts into prose, and I review and rework every draft until it has the shape and form I want. Every figure is sourced, and the sources are listed below.