Henry Ford
Funny thing about Henry Ford's heirs: their stake in Ford Motor has never been smaller, yet it is worth 10 times more than it was two years ago, and the family's influence over the company remains as strong as ever.
The relative size of the founding family's stake has shrunk, particularly during the past few years, as Ford has issued new common shares to raise capital and preserve its liquidity through the worst industry crisis in decades.
Today the Fords collectively own less than 2% of the automaker, but --as in 1956, when the company went public -- they remain firmly in control with 40% of the voting power through a special class of stock.
Is that such a bad thing?
The family's desire to preserve its corporate legacy no doubt helped keep Ford out of bankruptcy in 2009, as both General Motors and Chrysler succumbed to the crisis. While its rivals were dealing with government bailouts, Ford grabbed more than two points of market share, returned to profitability and began repairing its heavily leveraged balance sheet.
Now all shareholders are reaping the benefits, with Ford stock climbing from $1.58 in February 2009, at the depths of the industry crisis, to about $16.50 a share. Ford Motor today is worth $57 billion, up from $4.8 billion less than two years ago. The value of the family's stake has grown, too, from a mere $133 million in early 2009 to $1.2 billion today.
But corporate watchdogs worry any time there are two unequal classes of stock, and they're particularly concerned when a founding family like the Fords wields so much clout despite owning such a tiny piece of the company.
"At 2% why should they be calling the shots?" said Prof. Charles M. Elson, head of the University of Delaware's Center for Corporate Governance. "Given their economic interest at this point, why should they be standing in front of the other 98%?"
"It's like having a monarchy instead of a democracy," added Nell Minow, co-founder of The Corporate Library, which specializes in corporate governance issues. Lately, she admits, things seem to be going well for Ford, whose chairman, William C. Ford Jr., fired himself as chief executive in 2006 to hire an outsider, Alan Mulally. "But I would argue the (dual-class) system has not always worked well at this company."
Ford declined to comment, but referred to a previously issued statement in response to a shareholder proposal to eliminate the dual-class structure. "The Ford family’s involvement with the Company has greatly benefited all shareholders, and the long history of Ford family involvement in and with the Ford Motor Company has been one of its greatest strengths."
The family’s super-voting rights were established long before Ford went public in 1956. In the mid 1930s, Henry Ford and his son, Edsel, set up the two-class structure as part of their estate planning: the charitable Ford Foundation received most of the shares, but they kept a small block of Class B shares that had voting rights, thus assuring family control. Two decades later, when the Foundation pushed for a public stock offering, the family kept its 12 % ownership, but insisted on 40% voting control.
How did they wind up with just 2% today? The dilution happened gradually at first, but accelerated over the last decade. In 2000, shortly after Bill Ford became chairman, the company underwent a complex recapitalization that included a $10 billion special dividend and the issuance of some 600 million new common shares. The move diluted the family's holdings from 5.9% to 3.9% at the time, but cemented their grip on the company by protecting their Class B stock from dilution.
Then, in 2006, as it tried to mount a turnaround, Ford began a series of efforts to raise capital, including convertible debt offers and the issuance of new stock and warrants. Ford began printing stock certificates faster than the U.S. government prints money: 286 million new shares in 2007, 217 million shares the following year and 925 million shares in 2009. This week, Ford issued another 274 million common shares as part of a $1.9 billion debt conversion. As the number of outstanding shares increased, the family's relative stake declined.
Today, 86 extended family members hold all 71 million Class B shares, plus a negligible amount of common stock. Ford's total common shares outstanding, including the Class B shares, is approximately 3.8 billion.
Dilution aside, all those extra shares helped save the company. With the extra liquidity, Ford was able to reduce its debt by $12.8 billion this year, lowering its annualized interest costs by nearly $1 billion. A healthier balance sheet in turn helped drive up Ford's stock price.
Given what happened to GM's previous shareholders in bankruptcy, investors are likely to overlook any distaste for the fact that their shares are being diluted while the family remains firmly entrenched, said Patrick McGurn, special counsel for Institutional Shareholder Services.
"It's one thing to see your ownership diluted over time," he said. "It's another thing to see it wiped out altogether."
