Milton Hershey's Trust

A cautionary tale

Hershey: Milton S. Hershey's Extraordinary Life of Wealth, Empire, and Utopian Dreams
by Michael D'Antonio
Simon & Schuster, 2006
320 pp., $25.00

In 1909 Milton Hershey had already achieved great wealth through hard work. With that wealth Hershey bought farm land near his father’s family homestead, 30 miles from Lancaster, Pennsylvania, and proceeded to have an entire town (his philanthropic “Utopian Dream”) planned and built. 
 
Hershey had failed at several confectionery businesses in Philadelphia and New York before finally launching the Lancaster factory that propelled him to success. His early financial struggles, as well as family trials—the death of his sister at the age of four, separated parents, his wife’s inability to have children—likely prompted Hershey’s decision to use his great fortune to help children in need.

Hershey and his wife decided to endow “by deed of trust . . . for the benefit of orphan children” what is now known as the Milton Hershey School. The endowment included vast acreage and eventually all of Hershey’s stock in his company. The school has always been the sole beneficiary of the Milton Hershey School Trust.

Biographer Michael D’Antonio reports that when Hershey and his wife had the deed of trust drafted, “they fashioned the deed. . .in a way that forbade changes.” They had the deed “modeled after the one created by Stephen Girard” in 1831 to endow an earlier school for orphan boys, Girard College, in Philadelphia. The provisions of Girard’s will were challenged by family members, represented by the great Daniel Webster, but that challenge failed in the U.S. Supreme Court.

Would that the Hershey Trust had fared as well as its model. That it did not, and by what means the Hershey’s deed of trust and four centuries of common and statutory law were tossed aside, provides a lesson from which all donors, and all those who benefit from the generosity of donors, need to learn.

In the 1990s, criticisms by alumni had led the Pennsylvania attorney general and the local courts to become entangled in the Hershey Trust’s management. The problems stemmed in part from the staggering, multi-billion-dollar wealth of the school—only five U.S. universities have larger endowments—and the difficulties of spending its income on one school. One Hershey Trust officer said the board feared it would suffer the same fate as the trust of Beryl Buck, which similarly ended up with larger assets than its original mission—helping poor people in California’s affluent Marin County—could absorb. The courts ended up ordering dubious diversions of Buck’s monies to ends she hadn’t intended. Hershey’s board hoped to pre-empt any such maneuver, and the school’s president went to the Orphans’ Court in 1999 to ask permission to divert $25 million to a think tank devoted to education.

This plan was opposed by the school’s alumni association and Pennsylvania Attorney General Mike Fisher. The court agreed, decreeing that it was a violation of donor intent. (One could add that it was also dubious on its face: the school at that point was so poor academically that it barely retained accreditation. It was in no position to offer other schools advice.)

The alumni continued to assail the school’s management, and the attorney general’s office continued to investigate. In December 2001, Deputy Attorney General Mark Pacella spoke to the trust’s board about several matters of possible mismanagement. He implied, according to press accounts, that the Trust should diversify its holdings. Enron and WorldCom had recently collapsed, and even though Hershey Foods was strong, state officials told the trust that it “might be taking a risk by keeping half its value in Hershey Foods,” D’Antonio writes.

Beyond mere diversification of its portfolio, the board was also advised that sale of its controlling interest in the company could bring a windfall for the trust. The board investigated and learned that sale of its interest in Hershey Foods—which then controlled about a third of the American candy market—could yield $10 billion to $12 billion. At its spring 2002 meeting, the board quietly determined to seek a buyer, despite fears an outside firm would upset the pleasant status quo of the company and the local community. Hershey Foods’ management strongly opposed the idea at first, even offering to buy back a large block of stock. But eventually CEO Richard Lenny crafted a careful deal with the William Wrigley Company, founded by Milton Hershey’s nemesis.

The Wrigley Company’s offer included changing its name to Wrigley-Hershey, promising to maintain the Hershey commitment to its namesake town, and a generous $12.5 billion offer of cash and stock. But on July 25, the Wall Street Journal broke the news that “the sweetest place on Earth may be about to lose its sugar daddy,” and panic broke out.

Scared that jobs would be lost and a way of life upset, local residents and school alumni attacked the proposed sale. These protests attracted the support of then-candidates for governor Ed Rendell (the Democratic mayor of Philadelphia) and Mike Fisher (the Republican Attorney General). Despite his own office’s earlier spurring of the sale of the company, Fisher filed suit in Orphans’ Court to block any sale, and he succeeded in winning an injunction from the court that withstood appeal to the Commonwealth Court.

Those opposed to the sale had understandable fears; the company had no doubt become less efficient than many competitors thanks to its supervision by the trust. And it was also true, as opponents of the sale argued, that Milton Hershey had intentionally brought the town, the companies, and the school “together in one place.”

Yet the trust’s board responded that they would only sell to a buyer who would “promise to keep the company in Hershey.” They also noted (1) that Milton Hershey did not, in his detailed deed of trust, stipulate that the company must not be sold; (2) that he himself considered selling the company more than once; and (3) that he had always intended his wealth to be focused first on the orphans served by his school.

A board member of the trust could reasonably come down on either side of the argument—biographer D’Antonio seems to favor the sale—and at the last minute, under intense legal and community pressure, the board nixed the sale. But what is not disputable is the outrageous way the attorney general and the courts handled the legal battle. The provisions of Hershey’s deed of trust, as well as the most fundamental principles of trust and fiduciary law, were turned upside down.

The attorney general gave a novel argument to the Orphans’ Court: because “the public is the ultimate beneficiary of all charitable trusts,” he claimed, any action taken by the directors that would have adverse consequences for the local economy is therefore a breach of the directors’ duty to the beneficiaries for whom they must faithfully act.

This is nonsense. Four centuries of settled trust law, including all of the cases the attorney general cited, make clear that the primary duties of trustees and the courts are to see that the intent of the trust’s donor is carried out and that the trust’s assets are protected, not to avoid any possible harm to a community’s economy. The same law makes clear that the public at large benefits from a charitable trust because of the nature of its mission—relief of poverty, advancement of education or scientific research, support of religion, care of the sick, etc.—even if the scope of that mission is narrowly defined by the donor. In one leading case cited by the attorney general, Barnwell’s Estate (1921), the Pennsylvania Supreme Court had held that even though a trust’s assets would assist only a single school, nonetheless the trust was charitable because it would “have a tendency ‘to promote the well-doing and well-being’. . .of an indefinite number of persons.”

Settled law also makes clear that an attorney general may only intervene in the administration of a charitable trust if he can show that the trustees are administering it contrary to the trust terms or are otherwise violating state law. Attorney General Fisher did not even make such a claim, much less prove it, yet two separate courts raised no objections.

Today’s donors can learn several important lessons from the Hershey mess. First, recognize the dangers of perpetual endowments, because there is no certain way to prevent their being hijacked to support causes you don’t intend to aid. Also, the problems you wish to address may change their circumstances over time, and your endowment may grow to an unwieldy size for its targeted beneficiary. Second, state attorneys general and courts may sometimes help to maintain your donor intent but other times may recklessly disregard both your intent and settled legal principles.

Above all, donors and charities should work urgently to ensure that the novel theories of Pennsylvania’s attorney general and courts do not spread. Otherwise, tax-exempt entities will be at the mercy of any attorney general willing to run interference for one private interest in its quarrel with another, with no need to show wrongdoing by directors.

E. Daniel Larkin practices law in Merion, Pennsylvania.

This review was originally published in the March / April 2006 issue of Philanthropy magazine.