The Hershey’s debacle

Posted by Marc Hodak on November 11, 2007 under Invisible trade-offs | 2 Comments to Read

Hershey’s, the renown candy company, is controlled by the Hershey Trust, a school for disadvantaged kids. The Chairman of the Hershey Trust is former Pennsylvania Attorney General, LeRoy S. Zimmerman. Says Zimmerman:

The Hershey Trust, which is obligated to manage its assets solely for the benefit of Milton Hershey School, a school for children in need, has made clear it has not been satisfied with the Company’s recent results.

This comment is difficult to take seriously from a man who was swept in on a promise not to maximize the value of the company for the trust.

Zimmerman became chairman after a previous group of trustees in 2002 voted to sell the Hershey’s company to Wrigley’s for $12.5 billion. Local Pennsylvania politicians vehemently opposed that takeover, and successfully thwarted it. The trustees that had voted for the takeover were kicked off the board, leaving the trust firmly under the control of people with strong ties to the local community, but without any direct interest in the trust or the company. And now, Zimmerman insists that that trust’s “resolve to retain its controlling interest (is) an obligation both of our stewardship, and of Pennsylvania law.”

I would think that one’s stewardship might involve some concern about the 25 percent premium that Hershey’s shares commanded as a result of Wrigley’s takeover bid, then lost and never recovered after the bid was scuttled. That’s about $3 billion, about $1.2 billion of which is no longer available to those children in need.

Beyond that, Zimmerman’s comment is a lie. Trust experts say that Hershey’s documents do not stipulate how its assets are to be invested. Basic portfolio theory says that being invested in a single company is just about the least prudent management for the funds of any school. In fact, if they had sold out at any time during or after the Wrigley’s bid, for about the next year, and reinvested the proceeds in the S&P 500, the trust would today have been over 50 percentage points better off than with their investment concentrated in Hershey’s.

Even before the Wrigley’s bid, a Pennsylvania law exempted the Hershey Trust from any duty to diversify its investments. After the failure of that bid, the state passed additional legislation requiring a trust to take into account “the special relationship” and the “economic impact” of any business asset sale “on the community”.

Thus, Pennsylvania politicians who effectively control the Hershey trust have proven themselves willing to sacrifice the interests of needy children for the sake of local politics. And now, they get to act outraged about the poor performance of a company they can’t manage, but upon whom they all depend.