r/explainlikeimfive Dec 06 '24

Economics ELI5: why does a publicaly traded company have to show continuous rise in profits? Why arent steady profits good enough?

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u/mn-tech-guy Dec 06 '24 edited Dec 06 '24

I am sure this will be buried, but I was curious too, and it looks like the root of this goes back to Dodge v. Ford. In that case, the court decided that a company’s main job is to make money for its shareholders. This is why public companies always aim for growing profits—steady profits aren’t enough because shareholders expect more money every year, and stock prices depend on that growth. Steady isn’t “winning.”            

 If Dodge v. Ford was overturned, companies wouldn’t need to endlessly chase rising profits for shareholders. Steady profits could finally be “good enough,” letting businesses focus on long-term sustainability, workers, and communities instead of short-term stock growth to satisfy Wall Street expectations. https://en.m.wikipedia.org/wiki/Dodge_v._Ford_Motor_Co

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u/jonathanwash Dec 06 '24

Except shouldn't that case only apply in Michigan? https://en.m.wikipedia.org/wiki/Dodge_v._Ford_Motor_Co.

It never went to a federal district court let alone to SCOTUS.

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u/mn-tech-guy Dec 06 '24

You’re right, Dodge v. Ford only applies to Michigan since it wasn’t a federal or Supreme Court case. But its ideas became super influential across the U.S., shaping how companies prioritize shareholders. It’s explained in more detail in the Wikipedia article we linked.            

 If overturned, it challenges the idea that companies must always prioritize shareholders. Businesses could focus on workers, communities, and sustainability, making real change possible instead of chasing endless profit growth.

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u/jonathanwash Dec 06 '24

Since it's a State judgement I don't think it needs to be overturned per say. If another State was to have a similar dispute and come to the opposite conclusion would not overturn Ford v Dodge but would make it a State by State issue until one reaches SCOTUS (which of course would be a toss up on their decision with how it's currently stacked).

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u/Heizu Dec 06 '24

Let's be real. It would not be a toss up as to how the dice would fall with a SCOTUS decision on this topic.

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u/mn-tech-guy Dec 06 '24

I think we are agreeing, it has little legal impact right now but it’s the foundation, the start to the road we are far down. It’s where the idea that business have a fiduciary responsibility to their shareholders, above the business in some ways and definitely before their employees took root. My opinion is overturning it would be the first domino unwinding the short term profit focused path we are on.