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Ford – will patient capital pay?

Melanie Stern is section editor of Families in Business.

Performance at autos giant Ford is at its nadir under CEO Bill Ford. Shareholders are demanding a return on their investment and accusing the family CEO of failing the firm. Is family owner-managership damaging Ford's bottom line, asks Melanie Stern

Another year, another turnaround strategy: Ford's 'Way Forward' plan, in which the troubled company will shed 30,000 jobs and 14 plants by 2012, is aimed at reducing the sprawling dynasty left behind when the tide went out on the autos boom. It is the second restructuring in four years. The last one – CEO Bill Ford promised shareholders the firm would make $7 billion profit by 2006 – was all but forgotten by the time the company reported first quarter losses of $1.2 billion, and so was the fact that Ford was briefly profitable in 2003 and 2004.

Ford's shares have lost more than half their value under Bill's five-year tenure, which is up in 2007. Shareholders are beginning to lose patience with the firm and with Bill, the fourth generation of the Ford family to lead it. At the 2006 annual shareholder meeting in May, the CEO was "visibly shaken", according to some reports, after some angry attendees accused him of failing the firm. One shareholder and former Ford employee, who claimed he had lost almost $1 million since investing most of his retirement funds in Ford stock in 1999, said he thought Ford was "a failure". He has put shareholders and the company at bankruptcy's door. "Mr Ford knows he is not qualified – that he is in over his head." However, the definition of performance is in the statistics: while Ford's shareholders have certainly had a rough deal, the shares have still, over the last five years, outperformed their S&P 500 peers, such as General Motors, and just crept to out-performance of the index itself.
 
But for the shareholders, this is little compensation. They want to see a return on their investment now. Holders of Ford B stock, however have a different agenda (the Ford family, who with 40% of all issued stock and with 16 votes per share remain the single largest shareholder in the listed firm). Their philosophy is that of 'patient capital': the concept that wealth is being created for the long-term, rather than by the quarter, and that weathering downturns is just par for the course. "The family has been through up and down cycles over the last 100 years – they understand these things well," Craig Aronoff, a family business consultant, tells Families in Business. "Most shareholders are just hoping their $6 stock will turn into a $10 stock, but because Ford is a public company and a family business, you're seeing normal shareholder expectations and, at the same time, family expectations and family views of expectations clash. But the family remains the dominant force at Ford, and they are going to remain patient."

Patient capital is a concept that has become popular again, but was last a buzzword when the 1990s tech bubble burst and battered investors pondered the fallout of such a cut-throat philosophy. "Investors in Nasdaq or more mature stock exchanges need to recognise that the patient capital mind-set which was common in the 1970s and 1980s will characterise the rest of this decade as well," says technology newspaper EE Times' Loring Wirbel of patient capital's future. One might even argue that family businesses are doing their bit for society by operating in the long-term and thinking in patient capital terms, laying the foundations for a future generation of Ford employees and owning family descendents – it may be in a state of serious disarray today, but what no one can deny is that Ford is still here. So, taking a view on its history, it could well be here tomorrow. And this has long been one of the hallmarks of a multi-generational family business – contributing in ways longer lasting than lining the pockets of shareholders by the quarter. That's something increasingly difficult to maintain in a short-term driven world.

That said, perhaps the Ford family can afford to wait. Bill may have kept to his pledge not to take a salary until the firm's automotive business turns a profit, but that seems something of an empty sacrifice since the chief executive earned around $13.3 million through stocks in the firm. But while there have been no calls for his resignation yet, shareholders are beginning to tighten the screws on the Bill's position in more subtle ways. Item ten on the agenda at May's shareholder meeting was a motion to separate the chairman and CEO roles, both held by Bill since non-family chief Jacques Nasser was ousted in 2001. The motion suggested that Bill relinquish the CEO job to focus on being chairman – the role given to focusing on shareholder interests and a move that shareholders believe would "promote greater management accountability to shareholders and lead a more objective evaluation of the CEO". Over 80% of votes cast were against the change. But the link between governance, particularly at family firms like Ford, and share performance gets stronger by the day. So why did shareholders not press their position when returns are so bad? Perhaps shareholders know they won't get far with a firm that remains tightly under familiar control – and under the control of patient capital? "I think there will be calls for him to quit from the media, and perhaps some of those from Wall Street, but it's irrelevant because he has his family standing right behind him," Aronoff believes. "The only calls for Bill's demise that count are those from his board and family." Is  this why item five at the meeting was a motion for cumulative voting, a system that gives minority shareholders more power by allowing them to cast all their board of director votes for a single candidate (as opposed to regular or statutory voting in which shareholders must vote for a different candidate for each available seat)? But such a proposal would have the potential to eschew the vote of the many for the vote of the few, or in this case could dilute the power of the Ford family. A total of 86% voted against the motion; nothing changes and the family remains in control of a troubled company.
 
While for many, this will raise the question of whether any shareholder in a listed family firm can really have any say in anything, others still believe in family management and patient capital winning through. Earlier this year, both GM and Ford saw their paper and bonds downgraded to junk status, but word is that GM's rating downgrade was more severe because analysts took confidence from the fact that a family stood behind Ford and have too much at stake to let it go to the wall. GM's ratings were raised as Families in Business went to press, on news that the firm has negotiated with unions to buy time on employee benefit payments, despite the upgrade coinciding with the firm restating its first-quarter results to a $445 million profit from a $323 million loss. By contrast, some believe Bill Ford's performance is as much about his inheritance of massive union burdens that take years to unravel, as it is about the firm's handling of globalisation.
 
Aronoff believes Bill was passed something of a poisoned chalice. "Ford is a global player so I don't even think globalisation is an issue," he says. "I think it is the structure of the US auto industry over the last 50 years, particularly in regard to the industry's relationship with the trade unions, that has really put Ford in such a difficult position." Since the Ford family is well used to the ebb and flow of business, all shareholders can do is hope that patience ­really does pay dividends.

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