Why Bill Ford couldn't hack it as CEO of his family's company.

Commentary about business and finance.
Sept. 6 2006 5:13 PM

Have You Driven Out a Ford, Lately?

Why Bill Ford couldn't hack it as CEO of the family company.

Yesterday, Ford Motor Co. announced that Boeing executive Alan Mulally would replace William Clay Ford Jr. as CEO. While Ford, the great-grandson of founder Henry Ford, will remain as chairman, the family is effectively handing over the keys to the sputtering jalopy to an outsider, bringing to an end Ford's quirky, historic, and ultimately disappointing five-year run as CEO of America's second-largest auto company. Analysts will no doubt note that Ford failed largely because of macro trends: the high price of gasoline, which tamped down demand for profitable SUVs and pickups; the legacy of high benefit and labor costs, which make it difficult for American companies to compete with Toyota and Honda; and rising interest rates, which eroded the huge profits racked up by Ford's financing arm.

But these explanations ignore Bill Ford's own failures, which were significant. Ford had plenty going for him as CEO. Perhaps his greatest asset was his name. Many CEOs are insecure about their job tenures and behave accordingly. They demand and take huge compensation packages because they figure they may be around for only a few years. They focus on meeting quarterly results and worry less about the long term. They have a tendency to make big deals and acquisitions instead of relying on organic growth and product development.

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In theory, CEOs of family-controlled companies are different. The book Managing for the Long Run: Lessons in Competitive Advantage from Great Family Businesses argues that many family businesses outperform precisely because of the job security enjoyed by top executives who are family members. Such CEOs aren't pressured to meet short-term earnings goals. When multiple generations of family-owners rely on the steady payment of dividends and a rising stock to live in the style to which they have become accustomed, CEOs have great incentive to invest and plan for the long term. And it's very rare for family-controlled public firms to immolate in accounting scandals (with the notable exception of cable company Adelphia).

Bill Ford, who became chairman of the board in 1999 and CEO in the fall of 2001, had ample reason to be secure in his post. As Ford's proxy notes, the Ford family, through its ownership of Class B stock, controls about 40 percent of the voting stock, even though it owns only a small chunk of the company. (Each Class B share carries 16.911 votes, compared with one vote for a common share.) He could have afforded to engage in the type of long-term investments and initiatives that could have changed Ford's trajectory. He wouldn't have lost his job. And Bill Ford even had the instincts to propose such long-term reforms, but he lacked the fortitude and stubbornness to see them through. As a result, he came off as more trendy than visionary.

Bill Ford foresaw that energy efficiency and environmental friendliness would be crucial to the auto industry in this decade. But beyond the expensive eco-friendly makeover of the River Rouge plant, he didn't deliver much. The firm staked its near-term future on selling more and more gas-gulping SUVs and pickup trucks. In 2000, he said Ford would boost the fuel economy of its SUVs by 25 percent by 2005. In 2003, he stepped back from that promise. Last fall, he said the company would ramp up capacity so that it could produce 250,000 hybrids a year by the end of the decade. But by June 2006, he'd backtracked, telling employees that Ford would focus on ethanol and other alternative fuels. (And, by the way, the notion of an automaker selling a quarter-million hybrids in the United States by 2010 doesn't seem particularly visionary. Last month alone, Toyota sold 25,994 hybrids.) Ford also overpromised and underdelivered on profits. In 2002, he said the company could report $7 billion in pre-tax profits for 2006. Through the first six months of this year, the company instead notched a $2.325 billion pretax loss.

Yes, the company under Bill Ford continually rolled out new models, drew up new concept cars, and introduced hybrids. But its basic business model—riding the high-margin big trucks and SUVs for all they were worth—never changed. Bill Ford continually promised long-term, game-changing business initiatives—the type you would expect from a bold, secure, forward-looking family CEO—but, like hired-gun executives, he was quick to scale back ambitions when short-term results didn't go his way. If Ford had put resources, reputation, and effort into fuel-efficiency and hybrid production, it's likely the company's results would have been even worse during the past few years. But Ford would surely be better positioned for today's environment—and for tomorrow.

Instead, its future looks grim. Under Bill Ford's leadership, the company lost market share and lost value. Here's a five-year chart of Ford vs. General Motors and the S&P 500. Indeed, the highly bureaucratic General Motors has acted more decisively to deal with long-term issues, thanks largely to the efforts of an aggressive, impatient instigator, Kirk Kerkorian. GM moved to sell its financing arm, halved its quarterly dividend from 50 cents to 25 cents, and has made far-reaching efforts to reduce employment and benefit liabilities. Here, again, Ford has seemed more like a follower than a leader. In July, the company cut the quarterly dividend from 10 cents to 5 cents, thus reducing the Ford family's annual dividend take from about $28 million to about $14 million. Last month, it announced big production cuts.

As CEO, Bill Ford didn't have the stomach to drive long-term change. But he has also avoided the default solution that so many short-term-oriented CEOs pursue. The easiest thing to do would have been for Ford to auction off its most valuable units. But while it is selling some baubles—in August, Ford announced it might sell the Aston-Martin unit—Ford seems to be focused on the long-term. And the Ford family, too, is looking ahead. Family members clearly want to hold on to their stock and think they would be foolish to sell at this low point. Bill Ford hired Mulally as his successor in part because the Boeing executive helped lead a successful turnaround at the aviation giant. Bill Ford is betting that an outsider can do a better job at preserving his family's fortune than he can.

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