Dodge v. Ford: What Happened and Why?

Abstract

Behind Henry Ford’s business decisions that led to the widely taught, famous-in-law-school Dodge v. Ford shareholder primacy decision were three relevant industrial organization structures that put Ford in a difficult business position. First, Ford Motor had a highly profitable monopoly and was starting a major expansion—Ford’s River Rouge facility was reported to be the world’s largest factory when completed. Second, to stymie union organizers and to motivate his new assembly line workers, Henry Ford raised worker pay greatly; Ford could not maintain his monopoly without sufficient worker acquiescence. And, third, if Ford pursued monopoly profit in an explicit way, the Ford brand would have been damaged with both his workforce and the company’s consumers. The transactions underlying Dodge v. Ford should be reconceptualized as Ford Motor Company and its auto workers splitting the “monopoly rectangle” that Ford Motor’s assembly-line produced, with Ford’s business requiring tremendous cash expenditures to keep and expand that monopoly. Hence, a common interpretation of the litigation setting—that Ford let slip his charitable purpose when he could have won with a business judgment defense—should be reconsidered. Ford had a true business purpose—spending on labor and a vertically-integrated factory to solidify his monopoly profit and splitting that profit with labor—but he would have jeopardized the strategy’s effectiveness by articulating it. The existing main interpretations of the corporate law decision and its realpolitik remain relevant—such as Ford seeking to squeeze out the Dodge brothers to deny the Dodge brothers cash for their own car company. But they must take a second-tier, as none fully encompasses the industrial setting—of monopoly, incipient union-organizing, and a restless workforce. Without accounting for Ford Motor’s monopoly, the River Rouge expansion, and the related labor tensions, 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 and was true for Ford Motor Company in the 1910s.