What Hershey Teaches Family Businesses
There were tears. People who thought of themselves as closely allied and sharing goals and values found themselves on opposite sides of rancorous arguments. All parties had excellent intentions, seeking to do what would be best for the long-term health and viability of their unique and cherished enterprise---but that didn’t stop the impassioned debate or the lawsuits.
While not exactly a family business, Hershey Foods remains true to the vision and values of founder Milton Hershey, generations after he died in 1945. Hershey’s vision encompassed not only the creation of the largest U.S. candy company, but the development of a very special Pennsylvania town---also named Hershey---and a school for disadvantaged children in that town. The school is richly funded as the beneficiary of a trust holding 77% of the company’s stock.
For generations, the enviable margins of a business that makes and sells chocolate bars and foil-wrapped kisses funded what the New York Times called “a paternalistic yet profitable sanctuary in the tooth and claw world of American commerce.” Kathleen Lewis, 70, lifelong Hershey resident, put it simply: “Mr. Hershey gave us everything.” Indeed, Mr. Hershey planned and provided the town’s every detail over a century ago---from utilities, libraries and swimming pools to the chocolate-kiss streetlamps.
The 17 trustees thought only of protecting the school that was their responsibility by seeking to diversify their portfolio. Their stake in the chocolate company represented 56% of the trust’s assets. The company’s current profitability, they reasoned, would allow them an excellent premium for their controlling stake. Their plan was financially prudent, but failed to account for the non-financial aspects of the Hershey vision.
What would happen to the community if outsiders controlled the company? What would happen to the school were it not embedded in the Hershey community? The financial models of Wall Street could not account for these values.
The trust received rich bids from outstanding companies for its chocolate treasure. Ultimately, the fourth generation family-controlled Wm. Wrigley Jr. Company proposed a $12.5 billion merger, exceeding the trust’s asking price and addressing the community’s concerns about jobs and ongoing company support. Still, the trustees could not agree to accept the offer and took the company off the block. Mr. Hershey’s legacy was not to be sold. Given that the company continues to produce excellent profits with a conservative financial structure, the issue was not to maximize shareholder value but to fund the vision and values encompassed in the extended Hershey “family” consisting of a business, a community and a school. Since it would not be a seller, the trust’s goals would have to be accounted for in ways other than Hershey’s share price. Realizing that Hershey would not be playing the game consistent with its expectations, Wall Street knocked down Hershey’s publicly traded shares by 12% on the day when the “for sale” sign came down.
The debate between financially prudent portfolio diversification requiring sale of family business shares and a family’s ongoing commitment to controlling its business so as to achieve a mix of financial and non-financial goals is common in well-developed family firms. The resolution of the Hershey situation in favor of those committed to values beyond finance, should comfort those who take similar positions in their family business debates. No doubt, the Hershey trust will continue to seek prudent diversification while providing ownership oversight to assure continued performance of Hershey Foods. Diversification will simply be achieved more slowly through investment of dividend income beyond that required to run the school.
But the trustees clearly have been reminded that they hold responsibility for the totality of Mr. Hershey’s legacy---encompassing both financial and non-financial values. Finding and maintaining that balance across generations is precisely the challenge confronting the best family businesses. The task is not a simple one and sometimes evokes periods of conflict within the family. It is that balance, however, that allows uniquely satisfying results with positive effects stretching across generations.
Hershey---the school, the town and the candy company---prove that balance.
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