July 19, 2016

Charity and Children Suffer as Hershey’s Board Fends Off Lucrative Merger Bid

Mark Peterson/Redux

In 1970, the Hershey Trust, which controls the Milton Hershey School, was valued at just under $200 million, and the school served 1,600 children. Today, the endowment is $12 billion bigger, but school serves only 400 additional children.

When Mondelez International made an offer last month to acquire the Hershey Company at a share price 10 percent higher than market, everyone assumed it would be considered in earnest. After all, the world’s second-largest candy manufacturer acquiring the fifth-largest to create the first-largest would yield great benefits for both. An immediate spike in each company’s share price reflected this.

Indeed, the charity that controls the Hershey Company stands to gain billions from the deal, which would flow to needy children. This entity, the Hershey Trust, was established in 1909 by the candy magnate Milton Hershey as a place of rescue for orphan boys. It has since expanded its mission to girls, too, as well as to needy children with living parents. Mondelez’s offer, if the price had been right, would have allowed Hershey to serve vastly more of these children.

While the initial bid may have been inadequate due to its cash and stock mix and potentially limited dividends, it was certainly sufficient to start talks and see how high Mondelez — or another giant drawn by the news — would go.

Yet the Hershey Company board — controlled by the charity — unanimously rejected the bid, declining to provide reasons.

Sadly, this mechanical rejection is virtually predetermined, regardless of the financial loss to needy children and Hershey Company equity holders. That is because the Hershey Trust is supervised by Pennsylvania officials who have allowed it to subordinate the interests of needy children to the local economy.

Local Economy Favored

Second-class status for poor children at the school dates to 1963, shortly after Milton Hershey died, when the state attorney general and the charity’s board diverted $50 million of orphanage money and 543 acres of land to build a medical school at Pennsylvania State University. This trampling of charitable-trust law brought some 10,000 new jobs to the area and is still celebrated today.

Money and land were also siphoned to build an entertainment and resort empire that pumped billions into the local economy and added a few thousand more jobs. That yielded no benefit to needy children. On the contrary, it squandered their resources and forced them into a centralized compound, as they were relocated from their spacious and communitywide residences to make room for development.

How stark is the charity’s officially encouraged disfavoring of needy children? In 1970, when the trust was valued at just under $200 million, the charity served 1,600 children. Today, it has added nearly $12 billion to its endowment but expanded the school by only 400 children.

No Sale

Reaffirming this gross inversion of priorities, the state attorney general and local Orphans’ Court reacted ferociously 14 years ago, when the charity’s board sought to diversify its portfolio. The move would have entailed selling the Hershey Company at a premium, bringing in billions for needy kids and shareholders.

But some feared it might also have negative consequences for the local economy. The mere possibility of this led Attorney General Mike Fisher to race to court seeking an injunction.

Mr. Fisher — then running for governor and eager to ingratiate himself with voters — had no legal basis for his request. It was nonetheless granted by local Orphans’ Court Judge Warren Morgan. Mr. Fisher and Judge Morgan then removed from the charity’s board all 10 trustees who had voted for the sale, replacing them with individuals committed to a now openly expressed mandate: Put the local economy first.

The new board delivered.

It also jacked up board compensation, hired questionable leaders to manage the school, and made numerous dubious decisions, shielded from accountability by Pennsylvania courts and the state Office of Attorney General.

For instance, the board spent $21 million to buy, renovate, and subsidize an insolvent local golf course favored by board members. Another $70 million was used to upgrade a luxury hotel where the board members stay during meetings — which a whistle-blower suit alleged was merely to allow the trustees to "enjoy their stays."

Disturbing problems at the school funded by the charity also proliferated. For example:

  • $41 million was squandered on an almost immediately abandoned experimental intake facility where bedrooms housed as many as 20 students.
  • The administrator in charge of training houseparents went to prison for possession of child pornography.
  • The Department of Justice sanctioned the school for refusing to enroll children with HIV and is now reportedly pursuing a separate investigation of other discrimination.
  • Senior school leaders have been arrested on charges of driving while intoxicated; one was discovered to have falsified his academic credentials; another made an off-color joke in front of students at the expense of a girl who had been the subject of a sex video; and one was named interim school president while under indictment for bribing elected officials.

Indeed, on the day that the Mondelez offer became public, two federal lawsuits were filed against the school, one involving the death of a 14-year-old girl.

High Pay for Insiders

Despite these problems, the charity’s insular board has declined to add even one child-welfare professional to its ranks. Instead, the self-selecting group takes pains to distribute high-pay positions to connected insiders from both political parties. These individuals then reinforce a status quo that is lucrative for all involved.

Those insiders include former Republican Governor Tom Ridge — now serving on the Hershey Company board — and two members of former Democratic Gov. Ed Rendell’s cabinet. Another was Governor Rendell’s former chief of staff and law partner, John Estey, currently awaiting sentencing for wire fraud.

The board’s abysmal record has not prevented its members from amassing millions of dollars in pay from their part-time positions — while spending $4.2 million in the past year alone to investigate itself, as board members traded nasty accusations. Indeed, the last three in-house lawyers have accused the board of breach of fiduciary duty and asserted whistle-blower claims, after which the board fired all three.

This embarrassing spectacle has forced current Attorney General Kathleen Kane — herself under indictment in a separate matter — to demonstrate that she is taking official action. This theater will not alter the politically rewarding status quo or help needy children at all. Instead, it will simply create the illusion of improvement, as has happened in every past instance of attorney-general activity.

In sum, when it comes to understanding the Hershey Trust, evaluating acquisition offers from such companies as Mondelez, or predicting the actions of state oversight officials, ask not what it’s in it for needy kids and shareholders but what it’s in it for Pennsylvania politicians, their cronies, and those they have placed in charge of this woefully mismanaged charity.

Milton Hershey would weep at what has become of his magnificent philanthropy.

Ric Fouad spent seven years at the Milton Hershey School as a child. He is a past president of the school’s alumni association, a lawyer, and an adjunct law professor and has led alumni groups that for 17 years have pushed for changes at Hershey. He also serves on the boards of Foster Care Alumni of America and Protect the Hersheys’ Children.