Henry Ford, ruthless business manipulator

C O L O U R K E 'Y

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Henry’s overwhelming vision was to produce a basic motor vehicle en masse and, by so doing, relieve drudgery while making himself rich. He achieved this beyond measure. Ford was involved in two start-ups before the serious company got under way. Most manufacturers of the time were concerned with small production and quality; Ford was concerned with mass production.

Ford started the Ford Motor Company with several other investors, but as these others became a nuisance to him, Ford connived and contrived to remove them. This document chronicles Ford’s method of consolidating his holdings and, later, ensuring minimal loses through taxation.

original shareholding of the nascent Ford motor company

[Nevins vol. 1, p.272 on ,324, 329, 330 on]

Ford wanted to make cheap cars in large quantities, whereas Malcomson, supported by Bennett, Fry and Woodall, wanted to build quality cars; so Ford set about forcing them out of the company. Ford did this by setting up another company to manufacture engines and selling them the original company at a rate so high that he kept the shareholders receiving very little return on their holdings.

After forcing Malcomson and his supporters out, the new shareholdings were as follows:

So, now having 58.5% of the shares, Ford was more firmly in control.

[Lewis; pp. 99-102]

1916 to 1917 found Henry Ford involved in a lawsuit with two of the company’s stockholders, the brothers John F. and Horace Dodge.

background to the lawsuit

By 1915, Ford had decided to double the size of the plant at Highland Park by building a blast furnace and a foundry ten miles away on the Rouge River. To raise the finance, he determined to suspend all but nominal dividends; that is, dividends of 5 percent per month on a ridiculously low company book capitalisation of $2,000,000 until the yet named date for completion of the expansion programme. Ford believed that he had to increase his productive capacity and output, or risk falling behind rapidly growing competitors in the low-priced field.

The Dodges owned 10 percent of the Ford Company’s stock and had been using the millions of dollars of Ford profits, in the form of special dividends, to launch their own car production. They wished to continue that process but, in addition to withholding special dividends, Ford wanted to plough back into the business $58,000,000 of accumulated profits.

As well as suspending special dividends, Ford also slashed prices on the Model T an average of $66. The Ford Company had been able to sell all the cars it could make, so at one sweep, by this price reduction; Ford removed about $40,000,000 of profits from company income. The Dodge brothers were not well pleased.

Over time, Ford had become inclined to regard stockholders as ‘parasites’ who had contributed nothing to the company but money, and he was probably already cooking plans to free himself of these annoyances.

the Dodge’s lawsuit

The Dodge brothers filed suit against the Ford Motor Company and Henry Ford, asking that the latter distribute as dividends 75% of the company’s cash surplus, or about $39,000,000. At the same time, the Dodge brothers obtained a court restraining order that forbade the use of funds for plant expansion.

Ford went public with his usual nose for opportunity, saying in an interview published in the Detroit News that his only aims in life were to

“enable a large number of people to buy and enjoy the use of a car” and to give “a larger number of men employment at good wages”.

Ford continued by saying,

“And let me say right here that I do not believe that we should make such an awful profit on our cars. A reasonable profit is right, but not too much. So it has been my policy to force the price of the car down as fast as production would permit, and give benefits to users and labourers.”

Such statements, probably never before expressed in business, won over the American public.

On the witness stand, Ford presented his idealistic yet profitable vision. In 1959, Father R. L. Bruckberger, a French priest, commented on Ford’s remarks in court,

“In all the world’s universities all young people seeking some knowledge of political economy should be required to learn this remarkable dialogue by heart. It is as important in economics as the Declaration of Independence is in politics”.

He further asserted that the trial demonstrated the capitalist economic system as described by Adam Smith, Ricardo, and Marx, to be, “not only obsolete but absurd and unsuited to America”. Bruckberger concluded that the case itself “should be as celebrated in political economy as the trial of Socrates in philosophy or that of Galileo in astronomy”, and that historians “may well decide that it was the most extraordinary trial of the century.”

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the court exchange – the remarkable dialogue!

“Now,” said Elliott G. Stevenson, the Dodges’ truculent attorney, “I will ask you again, do you still think that those profits were ‘awful profits’?”

“Well, I guess I do, yes,” replied Ford.

“And for that reason you were not satisfied to continue to make such awful profits?” the lawyer inquired.

“We don’t seem to be able to keep the profits down,” apologised Ford.

“...Are you trying to keep them down? What is the Ford Motor Company organized for except profits, will you tell me, Mr. Ford?”

“Organized to do as much good as we can, everywhere, for everybody concerned.”

The dumbfounded attorney quit for the day. However, in his need to prove that a business firm’s primary responsibility is to its stockholders, he returned to the attack. “What,” he asked Ford, “is the purpose of the [Ford] company?”

“To do as much as possible for everybody concerned,” responded Ford, “to make money and use it, give employment, and send out the car where the people can use it... and incidentally to make money.... Business is a service not a bonanza.”

“Incidentally make money?” queried the attorney.

“Yes, sir.”

“But your controlling feature...is to employ a great army of men at high wages, to reduce the selling price of your car, so that a lot of people can buy it at a cheap price, and give everybody a car that wants one.”

“If you give all that,” replied Ford, who must have felt that Stevenson had admirably stated his policies, “the money will fall into your hands; you can’t get out of it.”

In October 1917, the Ford Company was ordered to give up most of its Rouge expansion plans, on the narrow ground that it exceeded the powers expressly granted the firm in its charter, and to declare a special dividend of $19,275,385. Henry Ford appealed. In February 1919, a state superior court held that the Ford Company could go forward with its Rouge plans, but had to pay the dividend recommended by the lower court.

The Dodge suit was a partial legal defeat for Ford. But Henry, as 58.5 % owner of the company, pocketed the greater part of the dividends distributed.

Between the original case and the appeal, Ford started to put it about that he would resign from the Ford motor company and start up a new company in opposition, in order to obtain the freedom to act as he wished. Generating these rumours effectively forced the remaining shareholders to sell out to Ford’s agents acting under some degree of cover, such as working through nominees. Rumours of any such threat could well have undermined the value of the shareholders’s stock, for example, because the company was by then very much linked to Ford’s name and reputation.

By mid 1920, Ford was in under financial pressure, with only around $20,000,000 in the kitty. He needed:

• $25,000,000 to pay off the remainder of the $60,000,000 loan he had taken out to cover the share purchases at a cost of nearly $106,000,000;
• $25,000,000 or so in taxes soon due;
• $7,000,000 in employee bonuses promised.

However, the markets were starting to turn down at the time. In order to meet the burgeoning financial calls on the company from debt, taxes and bonuses, Ford started to pull down the hatches. He slashed prices again to shift stocks and shipped cars to dealers who were also hard pressed by the slow down, thus forcing them to borrow from their own sources to pay up front.

Thus Ford ruthlessly shifted much of the debt from himself onto others. He also cleared down stocks and sold everything he could lay hands upon and sacked any possible staff including long-term employees, collected foreign dividends and closed the plants down to a skeleton staff. By April 1921, he emerged with debts paid, cash in hand and full control, ready for the next upturn with a stronger leaner company.

[Nevin, vol.3, p.411 – 414]

Ford’s long-term business planning was stimulated by the 1935 Wealth Tax. Congress had passed a law on August 30 1935, in response to President Roosevelt’s recommendation that Federal taxes be used as a weapon against “unjust concentration of wealth and power,”. The law introduced high income taxes and high estate taxes. Thus, taxes on estates rose to 50% of the value over $4,000,000, and to 70 % of amounts over $50,000,000. Taxes on gifts were correspondingly elevated to three-quarters of those taxes on estates. The significance to Henry Ford and his enormous fortune was plain.

Before the end of 1936, Ford moved most of the company from personal ownership to trust ownership. This required various steps.

1. A block of 172,645 shares in the company owned exclusively by the Fords was converted into 3,452,500 shares, of which 95 per cent was Class A non-voting common stock, and 5 per cent was Class B voting stock.

2.The establishment, of the Ford Foundation (15 January 1936), “to receive and administer funds for scientific, educational, and charitable purposes, all for the public welfare and for no other purpose”. A simple three-page legal document ensured that Ford Motors should remain in control of the family after its creator died.

3.Wills were drawn up to distribute the two classes of stock and endow the foundation with the non-voting stock.

Henry signed a will on 3 February 1936, by which he bequeathed all his Class A stock to the Ford Foundation, and all the Class B (voting) stock in five equal parts to his son and grandchildren.
Edsel (Henry’s son) executed a similar will, leaving his Class A stock to the Foundation, and his Class B stock to his wife and children.

4.Just one vital liability to the trust assets remained against the, now, trust assets.
The two wills stipulated that taxes on the voting stock willed to the heirs should be paid from the non-voting stock received by the foundation; a provision which further protected the family control.

The result of these steps would be eventually to endow the Foundation with a 95 per cent of the equity in the Ford Motor Company (90% at the death of Henry in 1947), but to leave the management of the corporation in the Ford family.

Henry had ensured that his heirs would keep authority, while the government reaped only a minor tax harvest. He had devised the birth of the then richest philanthropic organization on the globe.

When Edsel died in 1943, the effectiveness of these preparations became clear. At that time, of the three senior members of the family, Henry had 55 per cent of the shares, Edsel 41.5 per cent, and Clara Ford (Henry’s wife) 3.5 per cent. Nobody knew the market value of these holdings, for no shares had ever been sold on an exchange.

Edsel’s will showed that he had divided his voting (Class B) stock equally among his wife, daughter, and three sons, leaving his other incidental property to his widow, but that his non-voting shares were to go, after expenses and taxes, to the Ford Foundation. A this point, great light dawned upon the world as others saw precisely what the A and B classification of stock had achieved.

The Ford family made further large gifts of non-voting stock to the Foundation when they heard rumours of government discussions to limit tax-free gifts to private foundations to $10,000,000. Though no legislation was introduced, the threat that large amounts of Ford stock might ultimately have to be sold to pay inheritance taxes was not taken lightly.

If the Foundation had not been established, and with it the mechanism that also made it a trust responsible for paying estate taxes, the Ford Motor Company would have confronted with grave financial problems and the family control would have been heavily compromised.

bibliography and notes

Much more could be said on Ford’s approach to unions, cost cutting and price cutting, his production efficiency to maintain and build market share, or indeed his expressed ideals on improving the lot of his workers and the common man. But this document is designed to concentrate on his direct business dealings.

The document is primarily abstracted, précised, coordinated and extended from several books on Henry Ford.

This document gives a comprehensive story of Ford’s business dealings, and explains events in Ford’s business history in terms of his psychology, as well as showing his determined intent to protect his family’s property for the future.

end notes

1. Model T prices [from p.44, Lewis]

fiscal year	price (touring car)	total sales
1907-8	$850	6,398
1908-9	$950	10,607
1909-10	$780	18,664
1910-11	$690	34,528
1911-12	$600	78,440
1912-13	$550	168,304
1913-14	$490	248,307
1914-15 (10 months)*	$440	221,805
1915-16	$360	472,350
* Ford changed fiscal year end from September 30 to July 31 in 1915.

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