Dodge v. Wholefoods?

Like many corporate law teachers, I have mixed views about the old chestnut of Dodge v. Ford.  On the one hand, it’s very quotable. On the other, shareholder wealth maximization is a normative goal, not a rule with teeth.  Still you go to war with the data you have.

Now we’ve more data – useful for an exam fact pattern, at least!  An alert student (thanks, C.M) found this choice quote in a recent interview of Wholefoods CEO John Mackey:

“JOHN MACKEY: I think that Whole Foods does have higher purposes. We take them very seriously. We don’t exist primarily to maximize profits.

We’re fulfilling the mission that we set for ourselves of helping people to live healthier lives, to hopefully reverse this obesity crisis we have in America. Whole Foods does feel this sense of responsibility to try to make a difference. And that filters through our team member base to our customers. We really are united around kind of our mission as an organization. That really makes a difference.”

Now, obviously this is a branding statement – which could be interpreted as a way to make money by convincing customers to pay more for fruit than they ought to.  And maybe nothing Mackey says should be taken very seriously. See, e.g., fascism & sockpuppets. Indeed, he’s certainly said CSR-like things like this before.  But it’s still striking to see a CEO say essentially what Henry Ford said (and was punished for saying) in Ford v. Dodge. In the interview, Mackey also was asked about why his perspective is rarely articulated by CEOS.  Check out his answer after the jump.

“SARAH GREEN: Why do you think that so many business people seem hesitant to come out and actually say, yes, I have a higher purpose than making money or I create value and money is a byproduct. Why are we still having this sort of shareholder value conversation?

JOHN MACKEY: That’s a good question. I think there are probably several reasons. One reason is that that’s what they’re taught. I mean, that’s what they’re taught in most business schools.

I’ve talked in dozens of business schools around the United States, and I’ve talked to students and their professors. And you look at the textbooks. The assumed purpose of business is to make money for the shareholders.

It’s not debated. It’s not discussed. It’s taken as a given. It’s the air that they breathe.

The economists have taught that for centuries. If you go back and study the history of economic thought, that was always taken to be the starting point. Again, because the ethics were taken for granted, it was thought that business was about making money. So that’s been the narrative.

Thirdly, I think for business people, they don’t want to be seen as– they may have some little bit of a macho thing. I don’t want to be seen as weak or soft headed. Business people, they want to think of themselves as kind of tough and they can make the tough decisions.

So when you start talking about purpose, some business people, a lot of business people– I think it’s changing, I think, for a good reason because a lot of women are now in business. And I think that’s helping to transform this way of thinking. But it hasn’t been thought to be good. If you’re weak, you’re going to get run over.

They’ve got a lot of war metaphors in business. Business is about crushing the competition and rolling over people. And the whole business enterprise has got war metaphors or it’s got Darwinian metaphors. Kill or be killed. Survival of the fittest. Only the paranoid survive.

So you’ve got a mythology in business where this exists. And that’s why I say we need to change the narrative. And that means, in a sense, we need to change the mythology. It no longer serves us. It’s really holding back the potential of humanity.

And it’s really holding back business’s potential to be the force– that’s why the subtitle of our book is Liberating The Heroic Spirit of Business. By changing the narrative, by changing the mythology, we can liberate business to consciously go out there and create value for all these stakeholders from a sense of higher purpose. And if more and more businesses begin to think that way, the world is going to evolve upward in a very rapid pace.”

You may also like...

3 Responses

  1. Lawrence Cunningham says:

    Mackey’s statements are more sweeping than the reality. Such statements are flatly false at any business school where the teaching includes Warren Buffett’s letters, and that means hundreds of schools. Certainly the issues are debated directly and intensively in law schools and in law books. And many companies follow the practice he’s breaching. Consider the credo of Johnson & Johnson, which lists the priority given to various constituents, starting with customers (patients, physicians), then employees, then communities, then shareholders. Mackey is not as iconoclastic as he seems to think. In any event, people who stress profits or shareholder interests likely do so for many reasons, including because they believe it is the best way to produce net positive social gains, not because they never stopped to think about it.

  2. A.J. Sutter says:

    He’s partly right. He’s right that it isn’t a legal duty, that many management textbooks and popular business books nonetheless portray it as one, and especially that in the real business world many managers do believe it is their legal duty.

    Where I think he’s mistaken is when he says “The economists have taught that for centuries. If you go back and study the history of economic thought, that was always taken to be the starting point.” Clearly not true of Aristotle, and many would argue it’s not even true of Smith. The maximization vocabulary came in with the neoclassicals, and even some of the first-generation neoclassicals like Philip Wicksteed (a Unitarian minister) were more concerned about distributive justice than about making business owners rich. Nor were businesses always run that way in the post-Dodge US: witness Gerard Swope, president of General Electric who helped to create FDR’s National Recovery Act and Social Security, and went to great lengths to avoid layoffs during the Depression. Admittedly, he wasn’t the most typical US Big Business CEO of his time, being both a Socialist and a Zionist, according to this book by a former GE exec. (One could also look outside the US, to the example of Adriano Olivetti, CEO of the Italian industrial giant bearing his family’s name.)

    Milton Friedman had been claiming that “the social responsibility of business is to increase its profits” for a while: his famous anti-CSR article of that title in the Sunday NY Times Magazine appeared in 1970. But at least outside of Chile, Friedman’s ideas weren’t yet in the popular mainstream — his article was outrageously provocative when published. He would hit his stride later, in the Reagan and Thatcher years.

    Even by Fall Term 1981, when I took Corps in law school, Dodge v. Ford wasn’t deemed worth a mention. It was Swope’s successor, Jack Welch, and the trend of granting execs stock options, that made profit maximization for shareholders part of the culture. The option-granting scheme had been proposed in a 1976 HBR article by Jensen and Mechling, and GE was among the first companies to embrace it. Now a shareholder, Welch announced the birth of the “shareholder value” movement in a speech at the Pierre Hotel in NYC just around the time my class began, in August 1981. The fact that people can point to this speech as the birth of the movement is a good indication that this hadn’t been conventional wisdom for centuries. Although the chestnut may be old, it had also been hibernating relatively unnoticed for a while.

  3. A.J. Sutter says:

    A response to Lawrence, whose comment wasn’t visible when I posted mine: Maybe your impression is formed by a few select people at the top, and by a book you participated in that is used as a text at some business schools. However, from having worked in corporate management and having corporate clients in private practice, in my experience Mackey is indeed describing the reality about many, perhaps even most, managers’ attitudes when he says that they believe they should put profits first. It’s naive to think that your, or even Warren Buffet’s, say-so is sufficient to erase this attitude. (Do I need to add that, while perhaps WB is an exception, what executives publish in their books or say to the press often isn’t exactly how they operate in real life?)

    This isn’t to say that most managers continue to believe it’s their legal duty to do so even after being told it isn’t — but that’s a distinction without a practical difference. I myself have published a couple of books and many articles, and have given a number of talks to business executives, all criticizing the Dodge/Milton Friedman position, and I’ve even spoken afterwards to people who’ve read the pieces or heard the talks. Guess what: they still believe that putting profits first is what they should do. Same with lawyers, despite all the debates when they’re in school. The reason is simple: it’s safe. Managers and lawyers know that despite all the idealistic talk, nobody’s going to fire or blame them for prioritizing shareholders and profits.