DODGE v. FORD:
A CASE STUDY IN AGENCY THEORY
Jeffrey J. Archambault
Marshall University
archambault@marshall.edu
Henry Ford was born in 1863 and raised on a farm in what is now Dearborn,
Michigan. He became an engineer with the Edison Illuminating Company in 1891.
Henry began experimenting with gasoline engines and automobiles. He built his first
automobile, the Ford Quadricycle, in 1896.
Henry founded the Detroit Automobile Company in 1899, with the financial
support of investors led by William H. Murphy, a Detroit lumber baron. Instead of
manufacturing a car as planned, Henry introduced a delivery wagon in January 1900.
After losing thousands of dollars, the company failed in 1901.
Henry turned to auto racing, defeating the famous Alexander Winton in a race at
Grosse Pointe. He formed the Henry Ford Company in 1901, again with the financial
support of Murphy and other investors from his first company. Henry continued to focus
on his racers, instead of production automobiles. Murphy brought Henry M. Leland into
the company and, after Henry Ford left in 1902, the name of the company was changed to
the Cadillac Automobile Company.
During 1902, Henry Ford and Tom Cooper developed two racecars. Barney
Oldfield drove the 999 to victory in October against Winton and others again in Grosse
Pointe. Ford and Alexander Y. Malcomson, a coal dealer, formed a partnership to
manufacture automobiles.
In February, 1903, John and Horace Dodge agreed to supply engines,
transmissions, and axles to Ford at the price of $250 per set. After combining the Dodge
drive train with bodies supplied by the C.R. Wilson Carriage Company, Henry Ford
planned to sell the Model A for $750.
The company ran into financial difficulties and the Dodge brothers agreed to
exchange materials worth $7,000 and $3,000 cash for 50 shares each. On June 16, 1903,
the Ford Motor Company was incorporated. Originally, Henry Ford owned 255 of the
1,000 shares. He formed the Ford Manufacturing Company in 1905 to produce
components. This led to the removal of Malcomson and reorganization in 1906.
Afterwards, the Ford Motor Company had the following shareholders:
Henry Ford
585
John Gray, banker
105
James Couzens, accountant
109
Rosetta Couzens
1
John Anderson, attorney
50
Horace Rackham, attorney
50
John Dodge
50
Horace Dodge
50
1,000
Ford introduced the Model T in 1908 at a price of $825. The Model T introduced
several technological developments, including a solid block motor and steering wheel on
the left. The Model T was designed for rough, undeveloped roads and to be driven by the
masses. The car was well suited for the day. Ford continually strived for efficiency. The
moving assembly line was introduced in 1913 and the $5 day in 1914. Ford sold 264,000
Model Ts in 1915 at a price of $440, before lowering the price to $360 in 1916.
In July 1913, the Dodge brothers gave notice that they would cease supplying
parts to Ford in one year. John Dodge resigned from the Ford Board of Directors in
August. The Dodge brothers began selling their own cars in 1914. Dodge quickly
became one of the best selling cars. By 1915, Dodge was the third largest automaker,
behind Ford and Willys-Overland.
Ford began construction of the Rouge Plant, an integrated facility that included a
steel mill, glass factory, and assembly plant. Ford eliminated special dividends (after
distributing $41 million between 1911 and 1915) and declared the policy of distributing a
monthly dividend of 5 percent of the $2 million authorized stock.
During the fiscal year ended July 31, 1916, Ford sold 508,000 cars at a profit of
nearly $60 million. The company had over $52 million in cash at year end.
The Dodge brothers disagreed with Ford policies and, after failing to reach a
compromise, sued the Ford Motor Company. The Dodges argued that Ford’s policies of
lowering price and paying high wages represented philanthropy, threatened to violate
Federal law by creating a monopoly, and were not in the best interests of the
shareholders. They demanded distribution of at least 75 percent of the cash as dividends
and that construction of the Rouge Plant be terminated.
The case was settled by the Michigan Supreme Court in February, 1919. The
court required the distribution of excess cash as dividends but did not interfere with
construction of the Rouge Plant.
At age 55, Henry Ford resigned as President on December 30, 1918. In March
1919, he threatened to start a new car company. In February, S.K. Rothschild offered
$18,000 per share to the Dodge brothers. Henry Ford bought these shares for $12,500
each. The others, except for the Couzens, also sold for $12,500. He bought the Couzens’
shares for $13,000. The Ford family owned 100 percent of the Ford Motor Company.
The investors had done well. For example, in exchange for the $10,000 the
Dodges invested in 1903, they received $9.5 million in dividends and $25 million for
their stock in 1919.
The Dodge brothers became ill with the flu while attending the 1920 National
Automobile Show in New York. John died January 14. Horace died December 10.
Chrysler acquired Dodge in 1928.
Henry Leland, long after selling Cadillac to General Motors, introduced the
Lincoln in September 1920. The Lincoln Motor Company went bankrupt in November
1921 during the economic downturn following World War I. After the court rejected the
first bid, Ford acquired Lincoln for $8 million in January 1922.
Both Ford and General Motors narrowly survived financial distress themselves.
After selling only 6,000 cars in January 1921, control of General Motors passed to the
DuPont family. Alfred Sloan became CEO in 1923 and introduced numerous modern
management techniques at GM. The Ford family avoided a liquidity crisis and
maintained 100 percent ownership of their company by selling unwanted cars to dealers.
The Model T peaked in sales in the early 1920s. The last Model T was produced
in May 1927. The Model A was introduced in December that year. In 1927, and again in
1930 onward, Chevrolet outsold Ford. During the 1930s Ford was the third largest
automaker behind General Motors and Chrysler. Ford’s fortunes began to revive after
World War II. Many people consider the 1964 Mustang to be Ford’s greatest success
since the Model T.
Discussion Questions:
1.
Identify and describe risks facing Ford Motor Company in 1916.
2.
Describe Ford’s strategy. Did Ford follow a differentiation or cost-leadership
strategy? How did their strategy help Ford manage risks?
3.
Describe the corporate governance of Ford. Did the corporate governance
satisfy the needs of all stakeholders? Did it help Ford manage risks?
4.
The Dodge brothers believed that Henry Ford was engaging in philanthropy
with pricing and labor strategies. Do you believe that a corporation should be
allowed to engage in philanthropy at the expense of profit? Can a corporation
make “too much money?”
5.
What advantages do you see to Ford’s pricing, labor, and dividend strategies?
How did these strategies help Ford manage risks? Do you believe that Ford
was maximizing short-term profits? Long-term profits? Do you agree with
Dodge, Ford, or the Michigan Supreme Court in this case?
6.
Use agency theory to model the Ford Motor Company. Identify principals
and agents. Did Ford achieve goal congruency? Identify and discuss
examples of moral hazard.
7.
In 1916, Ford was accused of philanthropy for its pricing and labor strategies.
By 1970, Ford was accused of producing an unsafe vehicle (the Pinto) to save
a few dollars in unit cost. What do you think caused this change in corporate
attitude?
8.
What would you do if you were Ford’s CEO today?