Dodge V. Ford - a Case Study in Agency Theory

DODGE v. FORD:

A CASE STUDY IN AGENCY THEORY

1. Identify and describe risks facing Ford Motor Company in 1916.

On November 2, 1916, the day after his son Edsel’s wedding, Henry Ford received a copy of the complaint that instigated one of the most famous lawsuits in the history of American corporate law. The case, Dodge v. Ford Motor Companywas about minority shareholders’ ability to challenge the authority of the board of directors to make business decisions that were alleged to be serving interests other than maximizing the value of plaintiffs’ shares. The plaintiffs, John and Horace Dodge, were not strangers to Henry Ford: they were his longest and most important business partners, they were fellow board members for over a decade (1903 to 1913), and they had celebrated together at Edsel’s wedding the night before. The Dodges, who had recently founded their own firm to compete with Ford, objected to a decision by the board to withhold special dividends and spend the millions of dollars to build the world’s largest auto manufacturing facility. Their claim was that the decision was based on Henry Ford’s idiosyncratic preferences about doing social good for workers and customers as opposed to making the most money for shareholders.

2. Describe Ford’s strategy. Did Ford follow a differentiation or cost-leadershipstrategy? How did their strategy help Ford manage risks?

Ford follow cost leadership strategy. It is all about having the lowest prices possible in order to wipe out the competition. However, in order to capitalize on this strategy Ford also has a low cost of production. The strategy didn’t help a lot and 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 oflowering price and paying high wages represented philanthropy, threatened to violateFederal law by creating a monopoly, and were not in the best interests of theshareholders. They demanded distribution of at least 75 percent of the cash as dividendsand that construction of the Rouge Plant is terminated.

3. Describe the corporate governance of Ford. Did the corporate governancesatisfy the needs of all stakeholders? Did it help Ford manage risks?

Corporate governance is the system of rules, practices and processes by which a company is directed and controlled. Corporate governance essentially involves balancing the interests of the many stakeholders in a company - these include its shareholders, management, customers, suppliers, financiers, government and the community. Since corporate governance also provides the framework