In 1919 automotive pioneer Henry Ford, considered one of the "high priests" of American-style capitalism, did something that, paradoxically, undermined the institution that many people consider fundamental to the capitalist system: private property. In that year, the Dodge brothers sued Henry Ford because he changed the dividend policy of the Ford Motor Company, retaining earnings to finance corporate expansion instead of paying income out in the form of dividends. (Dodge v. Ford Motor Company, 204 Mich. 459, 170 N.W. 668. (Mich. 1919))
The court ruled, in effect, that minority shareholders are able to enjoy their full "fruits of ownership," including the right to receive any and all income generated by what is owned, only if the majority owner so agrees. That is, the majority owner(s) in the person of the Chairman of the corporate Board of Directors alone has the right to set dividend policy for a company, and does not need the consent of a minority owner or owner(s) to withhold that which belongs to the minority owner(s) by natural right.
In English, that means (according to the Michigan Supreme Court) someone who owns less than 50% of an asset doesn't really own it in the full sense of the term. Anyone who owns more than 50% of that same asset can withhold some of the rights of ownership from the minority owner or owners, consisting of the right to enjoy the income generated by the asset, at his or her discretion.
The decision by the Michigan Supreme Court thereby undermined what it means to be an owner. This struck directly at what has long been considered an inalienable right and the foundation of civil society itself. Unfortunately, many commentators have obscured the true import of the ruling by focusing on a relatively minor issue that was raised as part of the plaintiffs' case. This was whether Henry Ford had the right to lower the price of Ford automobiles in order to increase sales, retain earnings, and keep as many people as possible employed — and lower corporate earnings. As Ford declared, "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. To do this we are putting the greatest share of our profits back in the business."
The court agreed that a corporation was not to be run as a charitable enterprise, but for the benefit of the shareholders. Most conventional analyses of the case stop at this point, without realizing the import of the fact that Henry Ford did not, in fact, base his defense on his stated ambition, but on the "business judgment rule." Thus, if the individual elected by the shareholders (who happened to be Henry Ford, as he retained the majority block of shares) decided it was in the best interests of the company — and thus the shareholders — to stop payment of dividends, the minority shareholders had no recourse other than to retain their shares and take whatever the majority owner(s) chose to dish out, or exercise their "take-it-or-leave-it" right to sell their shares and wash their hands of the whole business.
What is also frequently ignored in analyses of the case is the fact that Henry Ford had previously blocked every effort of the minority shareholders to have input into decisions and exercise some degree of control over the business, such as design improvements and marketing strategy. This was particularly egregious with respect to the Dodge brothers, who owned the next largest block of shares (10%) after Henry Ford, and who were increasingly unhappy with the degree of control exercised by Henry Ford.
Consequently, prior to their lawsuit over Ford's restriction of dividend payments, the Dodge brothers began setting up their own automobile manufacturing company in secret, using their Ford dividends to finance the effort. Ford got wind of this and began withholding dividends. Ford was also suspected of wanting to reduce the price of Ford automobiles as a way of justifying the proposed reduction in dividend payouts and reducing the company value per share.
After the Michigan Supreme Court ruled in his favor, Ford threatened to set up another rival automobile manufacturing company, probably to be wholly-owned by Ford personally, apparently as a way to compel the Dodge brothers to sell their shares back to the Ford Motor Company at the reduced value per share that Ford had manipulated. In this he was successful — and thereby undermined another right of private property, that of disposal, by taking away the Dodge brothers' free choice in the matter of whether or not to sell their shares.
It was, however, a Pyrrhic victory. The Dodge brothers used the proceeds of the forced sale to complete setting up their own automobile manufacturing company. They soon designed and marketed an automobile that many car enthusiasts still consider one of the best popular vehicles ever made, the 1926 Dodge. This made the venerable Model T Ford, the basic design of which Henry Ford had resisted changing for almost twenty years (1908-1927), obsolete. Henry Ford was forced to invest vast sums in developing a competitor to the Dodge product, and spent millions more retooling his factories to produce the Model A in 1928. His refusal to share power and pay dividends to minority shareholders cost Henry Ford a huge fortune, and ensured that his company lost its throne as the world's leading automobile manufacturer.
Restoration of Private Property
Aside from the personal cost to Henry Ford, the social cost of Dodge v. Ford Motor Company was enormous. It embodied the attenuation of the property rights of minority shareholders into law, economic theory, and fiscal and monetary policy — and thus into the United States Internal Revenue Code. In consequence, restoring the rights of private property as a feature of economic life will require a vast educational effort to overcome generations-old prejudices and attitudes, as well as to instruct people on what private property is and how it is to be exercised within a just social order.
First, we need to know of what private property consists. Many people believe that "property" is the thing owned. On the contrary, property is two things. One, property is the natural (inalienable) right that every single human being has to become an owner. This is the right to property. Two, property is the bundle of socially-determined rights (the rights of property) that define what an owner may own and how he or she may exercise his or her ownership. The caveat that must be kept in mind when defining how property is to be exercised is that the exercise must never be defined in such a way as to negate the underlying natural right to be an owner.
Second, we need to know why private property is so important. Pope Leo XIII may have said it best in his landmark encyclical, Rerum Novarum (1891): "Every man has by nature the right to possess property as his own. This is one of the chief points of distinction between man and the animal creation." (§ 6) In other words, it is through the acquisition and possession of material goods, especially the means of production, that the human person chiefly distinguishes his or her humanity. To deny anyone the right to be an owner, or attenuate or negate what an owner may do with what he or she owns beyond what is required by the needs and wants of the individual, other groups, and the demands of the common good is to undermine or deny the humanity of the individuals or groups so affected.
Third, as human labor is replaced by capital as the predominant factor of production, it becomes critical that workers who previously relied on the sale of their labor to generate an adequate and secure income become empowered with ownership of the means of production. Only by this means do they acquire as owners of capital the same right to the income generated by capital that they presumably enjoy as owners of labor to the income generated by labor.
Finally, we need to know what to do about this situation. This is embodied in the third pillar of an economically just society: restoration of the rights of private property, particularly in corporate equity. This leads into the fourth pillar of an economically just society, widespread direct ownership of the means of production, which we will look at in the next posting in this series.