Dodge v. Ford: What Happened and Why?

Mark J. Roe is David Berg Professor of Business Law at Harvard Law School. This post is based on his recent paper. Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance (discussed on the Forum here) and Will Corporations Deliver to All Stakeholders?, both by Lucian A. Bebchuk and Roberto Tallarita; For Whom Corporate Leaders Bargain by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita (discussed on the Forum here); and Corporate Purpose and Corporate Competition, by Mark J. Roe (discussed on the Forum here).

Dodge v. Ford is one corporate law’s iconic decisions, regularly taught in law school and regularly cited as one of corporate law’s core shareholder primacy decisions. Ford Motor slashed its dividend in 1916 and minority stockholders—the Dodge brothers—successfully sued Ford Motor Company for a big dividend payout. Ford had justified skipping the dividend because he sought to do well for employees and America’s car buyers, with corporate profits a secondary motivation. The court largely rejected Ford’s justifications for holding back the dividend.

Ford’s slashing of the dividend is frequently attributed to his seeking to squeeze out the Dodge brothers from the company and to squelch the Dodges own start-up car company by turning off the dividend spigot. But, several transactional aspects undercut the squeeze-out motivation as being the sole, or even central, motivation: at the start of the dispute, the Dodge brothers offered to sell their stock to Ford for a price not much more than Ford eventually paid them; Ford could have conducted the litigation in a way more likely to make the squeeze-out succeed; and Ford Motor’s underlying expenses that led to the dividend cut were several multiples of Ford’s savings from Dodge brothers’ original sellout offer.

Ford seemed to be doing more than squeezing out the Dodge brothers. Behind Henry Ford’s business decisions that led to the litigation was, first, the brute fact that Ford’s successful build-out of the assembly line in 1913 yielded Ford Motor a very valuable monopoly. Profits at the company were tremendous and its market share was huge—it then made nearly all of the popularly-priced cars in the United States. Yet to keep that monopoly Ford needed to spend much cash on labor and on expanding physical capacity. Once the basic assembly line succeeded in 1913, Ford planned to build a very large vertically-integrated factory along the River Rouge, one that would begin the manufacturing process by smelting the steel that would turn into Model T cars rolling off the assembly line at the end of the River Rouge factory. The River Rouge complex was said when completed to be the largest factory on the planet.

Second, if Ford could not obtain substantial labor buy-in to the assembly line and the planned River Rouge complex, he probably could not keep that monopoly. That is, Ford had a monopoly but he also had a dire labor problem. Just as the assembly line succeeded, a radical union—the Wobblies—sought to organize the Ford Motor workers. Ford sought to turn back the union organizers, who were taken seriously by Detroit’s industrialists, and to keep labor motivated on the assembly line, by raising worker pay greatly.

Consider the timing: The assembly line succeeded in 1913 and the union was then seeking to organize Ford Motor’s assembly-line workers; in January 1914 Ford Motor doubled assembly-line workers’ wage rate—the famous $5/day; and, lastly, in 1915 Ford Motor declared its last large voluntary dividend of the decade. The explanation for the wage hike was simple: Ford could not maintain his monopoly without sufficient worker buy-in to the assembly-line and its tedium, nor did he relish a unionized factory at Highland Park or along the River Rouge. And for River Rouge to succeed, further worker buy-in to the ambitious factory was necessary. If Ford could not induce labor to acquiesce and adapt to the assembly line and River Rouge, he could not keep his popular-car auto monopoly. The resulting labor-friendly strategy and the River Rouge expansion both cost much cash, and redirecting the cash from Ford Motor’s operations to construction and to labor buy-in meant that (in those days of more primitive financing choices) less, or none, was available for dividends.

Hence, I combine existing insights from the underlying industrial structure and the labor literature to better explain the foundational transactions that led to the well-known corporate litigation. And this background—monopoly and labor tension—plausibly shaped Henry Ford’s litigation defense strategy, because if Ford explicitly justified his acts as in pursuit of monopoly profit and to manipulate labor, the Ford brand would have been damaged with both his workforce and his grateful car buyers.

Thus Ford’s $5/day wage, the company’s pricing strategy for its automobiles, and the River Rouge construction—the business facts that triggered the Dodges’ lawsuit—should be reinterpreted as an uneasy labor-owner coalition that was splitting a monopoly profit and aiming to keep that monopoly, both for Ford Motor’s owners and for its employees. To keep his assembly-line monopoly, Ford’s business required tremendous cash expenditures to get labor buy-in and to expand production, via River Rouge. Ford was in effect splitting the “monopoly rectangle” with labor.

The existing main interpretations of the corporate law decision and its realpolitik remain relevant. But those interpretations, such as the squeeze-out, must take a back seat, as none fully encompasses the industrial setting. Without accounting for Ford Motor’s monopoly, the River Rouge construction, and a restless workforce, we cannot fully understand the Dodge v. Ford controversy. Stakeholder pressure can more readily succeed in a firm having significant economic rents—a setting that seems common today (with rents larger and wider than before, with those rents having a corporate impact that I discuss elsewhere, in Corporate Purpose and Corporate Competition). That setting—of large, contestable rents—was foundational for Ford Motor Company in the 1910s.

The complete paper is available for download here.

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One Comment

  1. Erich Schanze
    Posted Wednesday, December 1, 2021 at 10:33 am | Permalink

    Most insightful paper – hopefully putting the boring (objective) corporate purpose debate to an end!

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