Berle-Dodd Debate

The Debate

The debate originated in the perceived problem of separation of investor ownership and management control. Adolph Berle and Gardiner C. Means, then an economics doctoral student at Columbia University, where Berle taught, argued this thesis in The Modern Corporation and Private Property. Separation effectively destroyed the traditional property rights basis for shareholder control of business decisions. The shareholder had become purely a “rentier.” Berle's proposed solution was for public policy to define a strictly fiduciary duty for management. Berle's article drew on the established legal doctrine of trusts to argue that the manager should be strictly a trustee for assets owned by investors.

Dodd replied that the business corporation had in addition a vital social service function. Dodd made three points. He drew a distinction between the equity (i.e., money) capital of investors and the “capital” of other constituencies defined in terms of their cares and concerns invested in the firm. Dodd argued that the common law had earlier treated business as a public profession; this view had subsequently been limited to businesses deemed to have some public interest. The 19th century was a judicial reversal of the previous common-law tradition. Dodd argued a case for public policy explicitly strengthening customers' and employees' rights. Dodd basically agreed with Berle that managers could not be trusted with discretion concerning multiple responsibilities.

Berle responded in a rejoinder that Dodd's position was an expression of theoretical rather than practical [Page 163]principles. Berle's concern was that weakening of a strict fiduciary duty for managers would prove dangerous in practice. Berle conceded that Dodd had won the debate (at least temporarily) in the sense that social fact and judicial decisions had over time come to support Dodd's general viewpoint against strict fiduciary duty.

Historical Background of the Debate

This debate between two legal experts had roots in the development of corporation law. In the United States, a corporation exists artificially and only in contemplation of the law, according to Chief Justice John Marshall in the 1819 U.S. Supreme Court case The Trustees of Dartmouth College v. Woodward. The Michigan Supreme Court addressed the basic elements of the Berle-Dodd debate in 1919 in the case of Dodge v. Ford Motor Co. Henry Ford had paid a double dividend for some years (i.e., a regular dividend and a special dividend). He announced his intention not to continue the special dividend in order to reduce prices to customers and increase wages to employees. The Dodge brothers filed suit in state court for continuation of the special dividend. The Michigan Supreme Court ruled that the primary purpose of the investor corporation was investor wealth and supported continuation of the special dividend. The opinion also articulated the business judgment rule, holding that managers and directors are not expected to have perfect judgment but only to exercise business acumen reasonably for the goal of profit seeking. Ford did not use a line of defense that arguably might have proven successful. He could have argued that reducing prices and increasing compensation was a reasonable strategy under the business judgment rule for increasing sales and labor productivity.

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