February 16, 2006
On Henry Ford and Google
Posted by Gordon Smith

Rich Booth has an interesting post comparing Henry Ford and the "Google Guys." Rich begins:

The pronouncement by one of the Google Guys that the company is not run for the long term value of the stockholders but rather for the long term value of the end users, is reminiscent of Henry Ford's decision in 1916 to stop paying dividends in order to improve the lot of workers and customers. Or is it? There are a couple of big differences.

Rich then discusses those differences, focusing on the fact that the Dodge brothers -- who were minority shareholders in Ford Motor Co. -- were undiversified investors. As Rich notes, diversified investors can deal with the ups and downs of company life very well, thank you:

They do not want portfolio companies that try to coddle investors by reducing risk by managing earnings, diversifying through acquisitions, hedging, and other such gimmicks. Investor diversification deals with all that – and for free. So it is a waste of investor money for portfolio companies to do it too. The bottom line is that companies that stick to their knitting – focus on their core business – and do not try to second guess the market.

Exactly right.

But I don't want you to leave with the impression that Henry Ford was showing his contempt for shareholders because he was motivated by his concern for employees and customers. When Henry Ford decided to stop paying dividends so that he could spend the company's money in other ways, he was trying to prevent the Dodge brothers from starting a competing automobile company. This was a freezeout, plain and simple. You can find an extended discussion of the case in my article, The Shareholder Primacy Norm.

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