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Back-Stabbing and Threats of a ‘Suicide Parachute’ at Hershey

HERSHEY, Pa. — One toasty afternoon in mid-July, four 10-year-old boys gave a tour of their home at the Milton Hershey School, a boarding school for at-risk children and one of many gifts bequeathed by the chocolate magnate to the community that bears his name.

In the kitchen, a plate of brownies sat unattended. The boys yearned and stared — but kept their hands to themselves. This seemed so improbable that someone asked, Why aren't you guys grabbing dessert?

"We're mature enough not to take stuff without asking," said Jayce, a blond-haired boy with a dimpled chin. "But if we were to ask," he added, raising a hopeful forefinger, "we would ask like this: 'May I please take a brownie?'"

Given this show of discipline, it may come as a surprise to learn that in recent years, some serious behavioral issues have convulsed the Milton Hershey School. But the problem isn't the students. The problem is the adults in charge.

Hershey's
Daniel Acker | Bloomberg | Getty Images

Thanks to a historic gift by M.H.S.'s founder, the Hershey Trust Company has an endowment of $12.3 billion and an ownership stake in Hershey Company, giving it control of the candy dynasty behind Kit Kat, Reese's and Hershey's Kisses, to name a few.

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With Hershey now the subject of a $23 billion takeover bid, the trust is enduring one of its periodic turns in the klieg lights, and the timing is hardly ideal. A leaked internal memo has revealed back-stabbing, allegations of insider trading and the threat of something called a "suicide parachute."

All of this is happening as a dubious deal to buy a golf course continues to reverberate and as critics charge that members of the trust's board are more interested in earning hundreds of thousands of dollars on Hershey-related boards than in helping needy children.

In the last 12 months the trust has spent more than $4 million on lawyers to investigate charges of misconduct that board members have lodged against one another. In one instance, Robert F. Cavanaugh, then the board's chairman, was accused of improperly securing a summer job for his son with JKMilne Asset Management, one of the trust's outside investment companies.

In a sharp escalation, Mr. Cavanaugh, an M.H.S. alumnus who worked in real estate finance, accused two board members of trading Hershey stock on privileged information, which is basically the corporate version of crying "Murder!"

After a small fortune in billable hours, all three board members were given a clean bill of ethical health. But this group operated in what was apparently a toxic atmosphere. Four board members have quit since late 2015, one after serving a mere three months.

The Pennsylvania Office of Attorney General sent a letter to the trust in February that gave the board until July 31 to adopt some changes or face possible legal action. On Friday, the attorney general announced a deal with the trust, unveiling an agreement that establishes term limits for board members and sets base compensation at $110,000 a year, before add-ons. Three trustees who have already served more than a decade will step down by the end of December. Two other long-timers, including the chairwoman, Velma A. Redmond, will stick around through 2017 to provide institutional memory.

To the board's detractors — and there are many, in academia and in an alumni group called Protect the Hersheys' Children — the agreement is only the latest attempt at a tummy tuck for an institution that, they say, needs a heart transplant.

This might be a strictly local story but for that multibillion-dollar fortune and the takeover bid by the food giant Mondelez International. The chocolate company's board batted away the offer in early July. A Hershey Company representative declined to comment, citing the quiet period before an earnings report, but it's unlikely the company said anything about the bid without consulting the trust's board.

"They are the power behind the throne," said Bob Fernandez, author of "The Chocolate Trust," a book about the board published last year. "Almost no one knows their names, and they aren't in the public much, but they are the ones behind the scenes who control what will happen to the largest chocolate company in the country."

Perhaps it is naïve to expect that a treasure as immense as $12.3 billion could sit anywhere without producing at least some acrimony and intrigue. In a way, this is a tale about human nature, and how great gobs of cash evince both the best and worst of it. While the money is earmarked explicitly for disadvantaged children, its fate is decided by grown-ups. And while they may care deeply about the school, at the same time some are being enriched financially, and others — mostly elected officials — have shown motivations more political and economic than scholastic.

During a recent interview at the Hershey Trust office, which operates out of the 22-room home that was once Mr. Hershey's, Ms. Redmond played down the internal squabbles. She and her colleagues were devoted to the school, she said, and ready to embrace change.

"This is a new day," she said, as negotiations over the deal announced on Friday were unfolding. "We do have a heightened sensitivity to issues that have been brought up in the past, in terms of compensation, in terms of board collaboration. We are committed to a future in which we are more transparent and no longer carrying the baggage of the past."

This is precisely the kind of reset that has been promised for years, said Frederic Fouad, an M.H.S. alumnus and a Protect the Hershey's Children co-founder. He said the agreement changed nothing of substance and failed to address the systemic issues that have long plagued the trust.

He and Pablo Eisenberg, a senior fellow at the McCourt School of Public Policy at Georgetown, contend that it's absurd that board members are paid at all, other than to cover expenses. They say the school is more interested in bricks-and-mortar projects that help local vendors and the economy — more than $1 billion has been spent on upgrades and new construction in the last 20 years — than in expanding the student population.

"I don't think I've seen a greater nonprofit scandal in the last 30 or 40 years," said Mr. Eisenberg, who has studied the trust and found its leadership and structure wanting. "The whole board needs to be replaced."

Bitter Rivalries

The warm, avuncular face of Milton Hershey beams from photographs hung just about everywhere here, the kind of ubiquity once associated mainly with communist nations and their maximum leaders. But Mr. Hershey, as everyone here calls him, more than 70 years after his death, is a kind of anti-Mao. The presence of his image seems like a token of heartfelt gratitude from locals who understand that the "sweetest place on earth," as it bills itself, would not exist without this mustachioed man and his chocolate fortune.

He and his wife, Catherine, never had children of their own. In 1909 they founded the school, originally open only to white orphaned boys. Over the years, the criteria for students expanded and the student body now includes girls as well as children of all races, as long as they come from families at or near the poverty level.

Lately, though, some of the biggest beneficiaries of the school are the members of its board. This stems from the odd structure that results when a nonprofit entity (the school) owns for-profit companies (the Hershey Trust Company, which is the source of the board members' salaries; the Hershey Company; and the Hershey Entertainment and Resorts Company, which operates Hersheypark and other attractions).

For years, three members of the trust board have sat on the board of the Hershey Company and one member has sat on the board of Hershey Entertainment. This makes a seat on the trust, which has paid about $100,000, a ticket to a perch on more lucrative boards: A Hershey Company board member is paid about $250,000.

Trust watchers say the rancor may have originated with the extended tenure of people like Mr. Cavanaugh, who has served on the trust's board since 2003 and landed one of the trust's three Hershey Company board seats the same year. According to Hershey's most recent annual report to shareholders, Mr. Cavanaugh currently has $3.6 million in a deferred compensation account with the company.

Historically, tenure on a board seat has had an informal 10-year limit. A few members elected in the early 2000s, including Mr. Cavanaugh, have stayed longer.

When Mr. Cavanaugh learned last September that board members had apparently been conspiring behind his back, he expressed outrage, according to an internal memo that leaked to the news media.

The memo, dated Sept. 30, 2015, and written by the former chief compliance officer of the trust, Marc Woolley, described a phone conversation in which Mr. Cavanaugh told Mr. Woolley he wanted to "take out" members of the board who had run a "smear campaign" against him. Mr. Cavanaugh also told Mr. Woolley that he was aware of a letter sent by four board members to every other member except for him.

If that sounds high school, the tone of the conversation then took a dark turn. Mr. Cavanaugh threatened to deploy something he called a "suicide parachute," though exactly what he meant is unclear. He also told Mr. Woolley, according to the memo, that he had "a timeline mapped out" of trades in Hershey stock by two board members, Joan Steel and James Nevels, implying that they were made improperly.

"He stated," wrote Mr. Woolley in his memo, "that if I thought that the investigation into his dealings with J. K. Milne were long and expensive," that "I had not seen anything yet."

In this conversation, Mr. Cavanaugh also articulated his theory that a trust employee named John Estey was responsible for the friction on the board. Why he thought that, Mr. Cavanaugh did not say, but he told Mr. Woolley that "John had better just continue to do work for the board."

As it happens, Mr. Estey's work for the board would soon end, though for reasons that had nothing to do with Hershey. A former state lobbyist, Mr. Estey had been caught in his former job in a 2011 sting by F.B.I. agents who were posing as favor-seeking executives of a fictional company. The "executives" provided Mr. Estey with $20,000 to give to lawmakers, a violation of state laws barring lobbyists from acting as conduits for corporate donations.

But Mr. Estey handed over $7,000 to state politicians. The rest he kept. In May, he pleaded guilty to wire fraud. At that time, he was earning a salary from the trust of more than $900,000 a year.

Mr. Woolley did not last at the trust much longer. In June, he was put on administrative leave. A few weeks ago, according to a spokesman for the trust, he was fired.

The reason? "The trust considered Woolley a 'disgruntled employee,'" said a spokesman, Kent Jarrell, in an email. As evidence, Mr. Jarrell pointed to a letter, which Mr. Woolley helped write in November, in which he supposedly complained about the board.

Reached by phone last week, Mr. Woolley said, "I am anything but disgruntled. I'm disappointed about the board and their issues, but I'm passionate about the kids and the mission."

In the Rough

The public was largely unaware of the trust's mission, and the huge sum that Mr. Hershey had sunk in it, until 1923, when The New York Times ran a front-page article with the headline "M.S. Hershey Gives $60,000,000 Trust for an Orphanage." By then, Mr. Hershey had become one of his era's richest men, having found a way to turn milk chocolate, a luxury item in the 19th century, into an affordable treat for the masses.

A former farm boy, Mr. Hershey made chores a part of daily life for his orphans. Later, M.H.S. became known as one of the country's finest blue-collar vocational schools, with training in auto-body repair, carpentry, construction, printing and more. In an era without child welfare, it was a vast improvement over the alternative, which was destitution.

Even during Mr. Hershey's time, money from the trust was used to develop the town's infrastructure and attractions. Usually these deals cause few ripples. But a 2006 purchase became a public relations disaster.

That year the trust purchased a money-losing golf course for $12 million, which an investigation by The Philadelphia Inquirer later found was two to three times its appraised value. The deal rescued several dozen investors who had built the course and who otherwise would have faced losses. Among those investors was Richard H. Lenny, who was the chief executive of the Hershey candy company and a member of the trust board when the acquisition was approved.

The trust also spent $5 million on a Scottish-inspired restaurant and bar on the premises.

After a torrent of negative publicity, the trust said that it had always planned to build student housing on the property as part of a school expansion. The original purchase announcement, though — issued well before the P.R. fiasco — stated that the acquisition "ensures the long-term future of the championship-caliber course."

Ground is now being broken, according to the trust spokesman, for student homes on what was formerly known as Hershey Links.

In 2010, Tom Corbett, then the attorney general, opened an investigation of the golf course deal. That inquiry was ultimately closed by the current attorney general, Kathleen G. Kane, soon after she took office in 2013. She found no criminal conduct and stated there was no evidence that Mr. Lenny participated in the trust's decision to buy the golf course. But she demanded reforms that were intended to curb pay, increase vigilance about conflicts of interest and hasten the recruitment of new members with backgrounds in at-risk children.

Critics said there were no teeth in the agreement struck with the trust in 2013, which is why a do-over was required on Friday.

Ms. Kane believes that the agreement simply needed an update. "I would have been pleased if we didn't have to revisit the agreement," she said in a recent interview in her office, overlooking the State Capitol in Harrisburg. "I thought at the time that what we signed in 2013 was a step forward, but times change, directors change, and you have to go back and make improvements."

Ms. Kane announced the deal at a news conference on Friday, which was a bit of a surprise to many involved. Her license to practice law was suspended last September, after she was accused of leaking grand jury material to a reporter in an effort to embarrass political enemies, and then lying about it under oath. She has denied wrongdoing. Her trial for perjury and other charges is tentatively set to begin soon.

A Suitor's Obstacle Course

What, if anything, the recent agreement and the coming turnover of members mean for the Mondelez bid is unclear. Mondelez — the maker of Oreos, Ritz crackers and an assortment of gums, chocolates and mints — has not announced that it is giving up its pursuit of the company.

On paper, the union makes a lot of strategic sense, according to Erin Lash, an analyst at Morningstar. Mondelez does not sell chocolate in the United States, and Hershey has never had a strong presence overseas.

"Mondelez has vast geographic reach," Ms. Lash said. "Only 20 percent of its sales are in the U.S. Thirty-five percent are in Europe and the rest are in emerging markets, like Brazil, China, Russia and India."

Hershey might also want to link up with a company that can quickly expand its revenue base beyond chocolate, as it has tried to do on its own, with a recent venture into beef jerky. Overall sales at Hershey fell last year for the first time in a decade.

Still, for Mondelez to succeed, it would need to mount one of the greatest charm offensives in corporate history. To understand why, consider what happened in 2002, when board members of the school decided that the trust's portfolio was dangerously overweighted in Hershey stock. The group announced it was looking to sell Hershey, preferably to a company that could pay cash.


Outrage ensued. The attorney general, who was then running for governor, opposed the sale, and obtained a preliminary injunction to block it, invoking a common-law authority, known as parens patriae, to act as a kind of public guardian for M.H.S.'s students.

It was a bold power play, possible only because it was supported by many of the people of Hershey and the Dauphin County Orphans' Court, which has jurisdiction over the trust.

The plan was soon abandoned. Ten board members resigned.

For good measure, the state legislature passed a law that year mandating that Hershey cannot be sold without the approval of the attorney general. While arguably a boon for the community, the law, according to Robert H. Sitkoff, a professor at Harvard Law School, was also indefensible.

"Imagine if the legislature of New Jersey passed a bill that said Princeton had to invest more than half of its endowment in one local company?" Mr. Sitkoff said. "That's what the Pennsylvania Legislature did in 2002. It's outrageous. The trust is supposed to be rescuing needy kids."

Mondelez seems attuned to the obstacle course it would need to navigate to win Hershey. Already, the company has reportedly promised to relocate its global chocolate headquarters to Hershey, protect local jobs and take Hershey as its name.

That's a start, said Mr. Fernandez, author of "The Chocolate Trust."

"This isn't just about a great share price," he said. "It's about absolutely boosting the local economy, which is what the trust has been doing for years."

Mondelez, he said, might try to sway opponents of any deal by promising to add chocolate-making capacity in Hershey, or by naming trust board members to the Mondelez board.

"Basically, it will have to convince politicians in Harrisburg that it won't walk away in five years," he said.

Whether a deal would be good for M.H.S. depends largely on whether the trustees properly manage the windfall. There are skeptics, such as Mr. Fouad of Protect the Hersheys' Children, who say the current members lack the kind of self-restraint demonstrated by those 10-year-old boys with that plate of brownies. But Mr. Fouad wants to see the sale anyway.

"The board is incompetent," he maintains. "But it's far better to get the billions and then let the right people pressure them to reform. Failing to would be just another triumph of local interests and jobs over needy kids. And five decades of that is enough."