Ford and Firestone Ethical Case Study

I. Introduction (background of this case)

In May 2000, the National Highway Traffic Safety Administration (NHTSA)

contacted Ford and Firestone about the high incidence of tire failure on several car

models that uses 15 Firestone tires. (ATX, ATXII, and Wilderness AT) These car

models include Ford Explorers, Mercury Montaineers, and Mazda Navajos. Ford and

Firestone faced an estimated three hundred lawsuits resulting from the deaths and

injuries caused by the “tread-separation” incidents.

The Ford Explorer was first introduced to the market in March 1990. However, the

internal documents from Ford showed that before the introduction of the new SUV

models to the market, the company engineers had recommended changes to the car

design after it rolled over in company tests. The test results showed that “the SUV

prototype demonstrated a rollover response…with a number of tires, tire-pressure

suspension configurations.” Also, another internal report noted that Explorer had

“relatively high engine position… prevents further significant improvement in the

Stability Index without extensive suspension, frame and sheet-metal revisions.”

(Time, 2001)

Ford began to receive complains relating to Firestone tires on its light truck models.

Since Firestone ATX, ATX II and Wilderness AT tires were the original equipment for

the Ford Explorer (1991-2000), Firestone started to investigate allegations of safety

1
problems related to its tires. The internal memos showed that “there were bubbles on

the tire shoulder.” However, Firestone company officials stated that they did not

investigate further due to the claims had not demonstrated significant patterns.

According to the Tire Recall Timeline provided by JON L. GELMAN, Attorney at

Law, in July 1998, State Farm Insurance research analyst Sam Boyden sent an e-mail

to the NHTSA reporting 21 tread separation cases involving the Firestone ATX tire.

In October 1998, Ford noted tread separation problems on Ford Explorers in

Venezuela, and set samples to Bridgestone/Firestone for analysis. At the same time, a

Ford affiliated dealer in Saudi Arabia complained about the problems in Firestone

tires. In 1999, the first fatal problem was reported in Saudi Arabia after 14 fatalities

occurred. By then, Firestone was alerted as Ford started to replace the tire through a

product recall. (Biggemann and Buttle, 2007) In 2000, a Ford Explorer accident in

Texas USA left a mother of three children brain damaged and paralyzed (Bowe,

2001). The domestic incident caused the attention from the NHTSA and other

authorities. Ford and Firestone were sued together for this incident. Yet, Ford settled

out of court agreeing to pay 6$million, thus leaving Firestone as the sole defendant in

the trial. (Biggemann and Buttle)

II. From Firestone’s Duty to Discuss the Social Responsibility and Business Ethics

The Firestone recall case clearly reminds us that ethic is the most significant

2
part in any corporations. The corporation isn’t unity of an ownership to control, so

it’s necessary to establish some minimum behavioral standards for directors of the

corporation to ensure they devote the positive attention and effort to the corporation.

On balance, directors hold a fiduciary position within the corporation, and they are

obligated to take actions with a primary fidelity to their beneficiary, the corporation or

the shareholders. There are two duties that are recognized as being owned by

directors, the duty of loyalty and the duty of care. However, the truth is that it is not

easy to impose the liability on directors. The Firestone recall case is the evidence to

prove that directors are easy to get rid of their legal and ethical liability. That is why

we see that business ethic is important.

The workers in the Firestone Decatur, IL. Plant went out on strike in 1994.

Firestone used replacement workers during this period to continue the production. As

early as 1992, Ford began receiving complaints regarding Firestone tires on its light

truck models. In the Beginning, Firestone asserted that the problem was caused by

the owner abuse. In 1997, there were more tires failures in foreign countries

including Venezuela. In fact, the defection of the tires caused hundreds of deaths and

injuries over the past several years. But most of these suits were settled with order

prohibiting any member of the suit from leaking any information to the public. Of

course, this is a kind of legal strategy. Both companies chose to withhold the

3
American public in order to protect their profit and goodwill. By the end of August,

more than 250 people had injuries in States, 88 people among them had lost their

lives. And this had led the NHTSA to make a serious investigation and leased a list of

1.4 million additional tires needed to be recalled. However, Firestone refused to

comply and respond to the problems that it was not the problem of their tires but the

design problem of the Ford Explorer. The public was infuriated about Firestone’s

reaction, since Firestone knew the problems long time ago. According to Ford and

NHTSA reports, the tire company had enough information to recall the tires earlier.

But Firestone officials claimed that they had acted as soon as they knew the

information. The company suffered a big financial lost at this event. One source

estimated that the recall and legal settlement cost Firestone $750 million in 2000. In

this incident, for example, the share price of its parent company, Bridgestone, dropped

substantially from 24 dollars to 9 dollars in the months following the recall. About

the whole issue, the board of directors of Firestone seemed not act in good faith for

the corporation. However, according to the court’s decision in Caremark, the board of

directors of Firestone had met the minimal standards which mean they are not liable

about the event.

In regard to Caremark, the shareholder of Caremark International Inc. sought

recovery from the directors for damages paid by the company for violation of federal

4
law occurring while the directors were serving terms on the board for Caremark. The

shareholder argued that the directors’ inattention to corporate’s wrongdoing and

failure to implement law compliance program was responsible for the corporate

losses. The court held that corporate directors may be held personally liable for

corporate losses stemming from illegal employee activity if the directors fail to make

a good faith effort to ensure the existence of monitoring and reporting system aimed

at detecting misconduct. According to that case, the liability for a breach of the care

may be imposed on corporate directors in two situations. One is negligence of the

directors which will be subject to review under the business judgment rule. In

Firestone case, the corporation made the decision not to recall potential faulty

products that will presumably be protected by the business judgment rule because

there is no evidence that it was not made in good faith. In fact, the business judgment

shields directors from personal liability since it assumes the decision was made in an

informed manner and in good faith. It continues to stand as a bar to judicial

intervention into the good faith and informed decision of directors. The costs of the

recall are huge. And it can result in a decline in sales of the affected products and

others made by the same company due to the loss of the consumer confidence from

the recall. The board is forced to weigh between the social benefit of the recall and

the potential financial losses. Generally, the board may determine that compensating

5
victims through lawsuit settlement is less costly because individual compensation

avoids the decline in stock and loss of consumer confidence associated with a huge

tires recall. In the end, The Bridgestone who owns the Firestone subsidiary, although

hit hard by the recall, was back on track three years after the incident. Company sales

have grown to previous levels, and profits are starting to surge. Since the incident the

company has been involved in ongoing efforts to educate and promote the tire safety

to the public.

In conclusion, companies have the minimum ethic and moral obligation to make

sure that the product they sold are secure and durable. Does that obligation conflict

with the shareholder’s benefit? As what is presented in this Firestone recall case, the

recall might cause a huge loss for the company which might influence the

corporation’s and shareholder’s benefit. On one hand, without a safe product, a

company could not make profits. On the other hand, once the consumers lose their

faith in the company, the company’s financial stability will meet the problem;

consequently, the shareholder will suffer. However, the shareholder’s primacy was

the locus of the most famous debate over corporate social responsibility (CSR). After

the Enron scandal, corporate governance emphasized on business ethic, the CSR

movement has developed the notion of corporate governance as a vehicle for asking

corporation to consider broader ethical consideration. In this moment, the corporate

6
governance is no longer merely about maximizing stock-value but rather about the

relationships of corporate social responsibility and business ethic. The Firestone

recall case is an evidence to demonstrate that social responsibility, including business

ethics, is associated with ensured the sustained profits.

III. From Ford’s Duty to Discuss the Social Responsibility and Business Ethics

Ford and Firestone began their relationship in 1906. The initial transaction started

when Henry Ford bought two thousand sets of tires from Harvey Firestone. In this

turbulent Ford and Firestone case, the ethical dilemma can be examined from

different perspectives.

In the Due Care Theory:

Manufacturers have specialized knowledge that consumers don't so that they are in a better

position to appraise risk than consumers are. Thus, they must take reasonable and

adequate steps to protect the interests of consumers. The responsibilities of a

manufacturer would include determining whether the design of a product has any

inherent risks that are unacceptable. Safety devices should be incorporated into the

design. Production should be conducted so as to eliminate any defective items and

warning labels details risks should be attached to every product.

(http://people.wku.edu/jan.garrett/ethics/rawlcont.htm)

Before Ford started its production of Explorer in 1990, the engineers listed four

options for improving the stability of the SUV, which were widening the chassis,

7
lowering the engine, lowering the tire pressure and stiffening the springs. Ford only

chose latter two for improvement. In lowering the tire pressure aspect, a tire pressure

of 26 p.s.i. (per square inch) was recommended instead of the normal 30 to 35 p.s.i.

that Firestone used in its tires to get a better “road gripping” ride. (Time, 2001) Yet,

Ford’s decision on the tire pressure lowering caused a latter disagreement and

accusations from Firestone.

An ethical dilemma we can discuss here is “Why Ford decided to launch the

Explorer” even though there were still many problems waiting to be solved before

Explorer’s exposure on the market. As Time magazine indicated,

No company sets out to design an unsafe vehicle. But creating a car always involves making

trade-offs among engineering, manufacturing, safety, sales and advertising components as well

as responding to consumer and competitive pressures. It is a widely expensive process that

takes five year or so to complete.

The trade-offs to develop Ford Explorer include choosing the “Twin I-Beam”

suspension system that was problematic to the infamous Bronco II model sold in the

1970s. Ford Explorer was introduced to the market as a safe passenger friendly

replacement to Ford Bronco II, the former rollover king. In spite of the marketing

strategy of Ford Explorer, by implementing I-Beam suspension system, the automaker

can “build the same assembly lines as the Ranger pickup. However, this prototype

model had a tendency to “lift its wheels while turning- a possible prelude to rollovers-

8
then even the Bronco II.” (Time)

Ford indeed saved the costs by the trade-offs. However, as the leading

manufacturer in the automobile industry, Ford has the responsibility to provide

consumers a safe vehicle to drive. When a product is sold, the firm has duties to

consumers.

In Contract Theory, duties lay in four aspects, which include duty to comply, duty

of disclosure, duty not to misrepresent and duty not to coerce. Ford, examined from

the aspect of Contract Theory Duties, had not fully disclosed the problems to the

potential customers prior to its launch. Consumers should know that risk does exist,

can appraise the risk’s probability and severity. Furthermore, they can cope with the

risk and have the right to refuse to pay more to reduce the risk. However, Ford took

the position of not telling the risks to the consumers even though the internal

documents had showed that Explorer had very high risk of getting roll-overs. And this

is considered to be unethical if we look at this problem from Ford’s side.

As Briggemann and Buttle has mentioned that there are three levels in this Ford

and Firestone case. The highest level goes to the Car Industry Sector. It is explained

as followed:

For business relationships, Industrial Sector is the highest level of context. This context can be

thought of as being defined by a set of acceptable and unacceptable practices (norms) which guide

the actions of a group of companies in a defined industrial sector. It transcends the boundaries of

9
 any single organization and regulates its operation. Some norms are explicit, like the laws and

regulations, a local or international level, and some norms are implicit like a generally accepted

practice amongst entrepreneurial groups.

The duty of the Ford Company, if we put in the highest level of context from the

business relationship, is to do things according to the “norms” in the automobile

industry. According to Bradbery’s discussion on “The SUV Phenomenon,”

(http://www.citizen.org/autosafety/suvsafety/articles.cfm?ID=5445) we can see that

there is not yet a fully developed regulation on the SUVs safety standard in States.

What the government can do now is “proposing guidelines for consumer information

notice instead of a minimum stability standard.” Since there is no stability standard to

regulate the SUVs, Ford, as a responsible manufacturer, should make a proactive

effort instead of just meeting the minimum requirement in the production.

IV. Discussion (on the possible behaviors that can solve the dilemma)

From Firestone’s side

Given a choice between the profits and the ethics, it’s always a difficult decision

for any company and director. Undoubtedly, the desired goal for any corporation is to

gain revenue and make profit. However, in these years, many evidences have showed

that social responsibility, including business ethics, is associated with increased

profits.

10
 In the Firestone tires recall case, we could find some obvious events which created

conflict between the profits and the ethics side. Firestone Corporation makes the

decisions to avoid the loss. For instance, during Senate hearing into the growing

number of complaints and accidents, evidence surfaced that the company had known

about potential tread separation problems back in 1994. The company admitted that

it had increased production during this time to dilute the failure rate.

When we look at the possible behaviors that can solve the dilemma from

Firestone’s part, there are procedures Ford can take beforehand.

Firestone, when noticed that there were problems with the tires, the first reaction

is to recall the products and see what they can do to improve the manufacturing

process. Let’s say that if they found that there were bubbles on the tire shoulder,

Firestone should take the full responsibility to check where problems existed. For

instance, Firestone knew that the Decatur, IL. Plant did have the problem, and there

were questions cast from the media on the skill of the replacement worker, the

immediate approach that Firestone could take was to report the issue to their buyer.

Even by doing so may cause them a sudden lost in the revenues, the critical period

can be seen as a time to check their internal problems.

We know that Firestone faced the crisis from the “The War of ’94-‘95” strike.

Also, another problem stemmed from the quality problem of the Decatur facility. As

11
the fact showed that Decatur Plant was constructed in 1942 and was used to store

telecommunications for the U.S. armed forces for nineteen years before being

purchased by Firestone in 1962, Firestone indeed had to re evaluate their investment

on the plant construction. Supposed that the decision maker in Firestone could

foresee the consequence and changed their strategy when they took the major move,

there would not be so much effort they need to make to regain their blow out

reputation. In another words, a proactive attitude was a must if Firestone wanted to

avoid the ethical dilemma latter on.

From Ford’s side:

When we look at the possible behaviors that can solve the dilemma from Ford’s

part, there are several procedures Ford can take beforehand.

First, Ford should redesign the Explorer. We have known that Explorer used the

I-Beam suspension system that was used in Bronco. It was not until 1995 that Ford

had finally replaced the Explorer’s I-Beam system with a short-and-long-arm

suspension. However, Explorer had more problems other than the unloved I-Beam. If

we recall the internal document that the engineers had reported before the launch of

this new model in 1990, there were still unsolved problems such as the chassis and the

engine lowering. And the above two defects were settled in 2002 when Ford tried to

regain their reputation by advertising a new Explorer model which was lower and 2

12
1/2 inch wider than the previous Explorer. Yet, supposed that Ford could have had re-

designed Explorer a decade ago before the 2001 domestic incident, things would have

turned totally different than what Ford had been through afterwards.

Second, about Ford’s pinning down the fault on Firestone’s part, the ethical

dilemma could be resolved by reaching the consensus after both side agree to take the

responsible act to face the consumers. We can see that Ford requested that Firestone

withdraw Venezuelan-made tires from the market arguing those tires had one layer

less and therefore did not satisfy regulations (El Universal, 2000b.) Also, Ford

continued its own tire recall stressing that the new tires were Goodyear, not Firestone

(El Universal, 2000a) Ford and Firestone had built long term relationship ever since

their initial transaction in 1906. However, Ford could not trust the partner fully to

take the action to solve the problem together reflects that both side somehow have

conflicts of interest when facing the major issue. Ford, as the buyer, has the right to

choose which suppliers they want to have based on the previous business partnership.

When they placed the order from Firestone, it means that Ford trusted Firestone after

the evaluation on this supplier. And we believe that Ford must have known

Firestone’s recalling history dating back in 1978. Somehow, when Ford faced the

situation of the poor design prior to the launch of Explorer, what Ford’s side could do

was to share the internal document on the lowering the tire pressure approach with

13
Firestone instead of place the accusation on Firestone latter. The severe competition

in the industry may push any business to change their strategies at any time. Yet, we

believe that in order to build a solid background to do the business, it is essential to

evaluate the stakeholder’s right as well.

V. Conclusion

After taking a through look at the both sides, we have found that Ford and Firestone

deceived the consumers in a way of not fully disclosing the truth in the very

beginning. No matter what stance both companies took, the trade-offs should not

sacrifice the consumers’ right in order to bring a big profit for the company.

From Firestone’s part, once they notice that there are problems with the tires

they’ve produced, the immediate action is to recall the tires and take the full

responsibility to solve the problems. From Ford’s part, they should improve the

design, the troublesome I-Beam Suspension System before they started to sell the

Explorer to customers. In another word, the blame game that Ford and Firestone

played to pin the mistakes on the other party was not taking the stakeholders’ rights

into consideration, let alone practicing the social responsibility. As we can see,

business ethics includes standards, norms, and expectations that display what key

stakeholders concern. The four steps of the social responsibility include the

“economic” step to maximize stakeholders’ wealth and value, the “legal” step to abide

14
all laws and government regulation, the “ethical” step to follow standard of acceptable

behavior as judged by stakeholders, to the further “philanthropic” step, to give back to

society. However, none is being concerned when we look at the Ford and Firestone

case in the beginning part of the story.

F&F case was not the single case. We can also see the relevant case from the

recently Toyota recall action on technical fix for its sticky gas pedal. The approach

that Toyota took was completely different from the F&F case. As Connor writes in

the Toyota Recall: Five Critical Lessons, (http://business-

ethics.com/2010/01/31/2123-toyota-recall-five-critical-lessons/)

the five lessons are “Aggressive growth can create unmanageable risk, Get the facts

quickly and manage your risks aggressively, You supply chain is only as strong as

your weakest link, Accept responsibility, and Take the long view.” Corporations that

aim to run a long term business, when facing the internal or external risks, should not

be near sighted. Instead, accepting the full responsibility to meet the standard from

the different stakeholders’ needs is a must in the long run.

Reference

Bowe, C. (2001, 1 September). Ford Firestone escape trial. Financial Times.

Biggemann, S., & Buttle, F. (2007). The Ford Explorer - Firestone Tires Crisis: a
Rules TheoryAnalysis of Relationships. Paper presented at the 23rd Industrial
Marketing and Purchasing Group Conference. Exploiting the B2B Knowledge

15
 Network: New Perspectives and Core Concepts, Manchester.

El Universal. (2000a, 29 Octubre). Ford cambia 95% de los cauchos. El Universal.

El Universal. (2000b, 29 August). Ford solicita retirar cauchos nacionales. El

Universal.

Ferrell, O.C., Fraedrich, J., & Ferrell, L. (2008). Business ethics: Ethical decision
making and cases. (7th ed.). Mason, OH: South-Western.

Greenwald, J. (2001, 29 May). Inside the Ford/Firestone Fight. Time Magazine.

Maignan, I. (1997). “Antecedents and Benefits of Corporate Citizenship: A

Comparison of U.S. and French Business.” PhD diss., University of Memphis.

16