The Dumbest Business Idea in History

Remove your personal information from the web at and use code HMW for 20% off Sign up for my FREE newsletter! - Support me on Patreon - ----- My Other Channel: @HowHistoryWorks Edited By: Andrew Gonzales Music Courtesy of: Epidemic Sound Select Footage Courtesy of: Getty Images For sponsorship inquiries, please contact sponsors@ Sign up for my newsletter 👈 All materials in these videos are for educational purposes only and fall within the guidelines of fair use. No copyright infringement intended. This video does not provide investment or financial advice of any kind. #business #investing #finance ---- Business decisions made in the interest of “maximising shareholder value” have caused mass layoffs, environmental catastrophes, an endless list of corporate frauds, and record inequality in the workplace. The very same CEO who made millions of dollars by being the first champion of “maximising shareholder value” in the 60’s called it the dumbest idea in the world, and something that could rot capitalism to its core. But worst of all! Maximising shareholder value… isn’t even good for the shareholders… If you hate your job here is a history lesson for you that might make it start to make sense. In 1916 the Ford Motor company had revolutionized the automobile industry with the ford Model T. Henry ford the founded and majority stockholder of the company wanted to use the surplus cash they had accumulated to build additional plants and hire even more workers to build even more cars. Ford had also famously, and controversially raised factory workers wages significantly and offered benefits like the forty-hour work week. In press interviews Ford spoke about his plans for the company. “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.” This angered minority shareholders in the company that just wanted him to lower wages again, raise the price of the model t and keep paying them a regular dividend. Since Ford was the majority shareholder in the company though their options were limited, so they took him to court, where the court sided with the minority shareholders. Ford was forced to consider the best interests of shareholders above his other business ambitions. This was a case that set the precedent for “shareholder primacy” in America, meaning the board of directors and executives in a company must always try to maximise shareholder value to the best of their ability. Some have mistaken this ruling to mean that CEOs and the boards that appoint them have a LEGAL MANDATE to maximise shareholder value, but the reality is that this simply isn’t true. The case was awarded in favour of the minority shareholders, but it upheld the business judgement rule which means that executives can do what they believe is in the best interest of the company, even if it doesn’t make the number on a stock chart go up. Ford himself wasn’t paying his workers more and making new jobs because he wanted to be nice… he was a ruthless businessman who wanted to control a larger share of the growing automobile market. By paying his workers better and offering them higher wages he was denying his competitors a workforce, and by pricing his Model T’s just above cost he made it almost impossible for any other manufacturer to sell a profitable budget automobile. The biggest irony of all is that the minority shareholders that took Ford to court were John and Horace Dodge. They owned about 10% of the company and used their special dividends to fund the growth of their own company, Dodge, a car maker that would eventually become one of Ford Motors biggest rivals. So, this court ruling was bad for the company’s leader, bad for workers, bad for the country, AND bad for the shareholders in Ford who sacrificed market dominance for a quick payday, BUT there are three reasons why people still believe in maximizing shareholder value and three reasons why companies that operate this way are almost guaranteed to fail. Corporate America didn’t always have the dangerous obsession with shareholder value that it does today, and even after the landmark Dodge V Ford case of 1919 companies were slow to change. Between the mid 1960’s and 1970’s American stock markets traded mostly sideways. Corporate CEOs still had a duty to do what was best for the company, but they were paid a normal salary and a small bonus just like every other normal employee. So it’s time to learn How Money Works to find out how the worst business idea in history became the new normal for Corporate America.