[Review] 'The Chocolate Trust: Deception, Indenture and Secrets at the $12 Billion Milton Hershey School'
June 02, 2015
Would you be concerned if you knew there was a charity that served only a couple of thousand children each year even though its asset base was the same size as the Ford Foundation's? Would you wonder what that charity, three times the size of the largest U.S. community foundation, did with the money it accumulates and doesn't spend each year? Would you wonder who benefits from it?
Bob Fernandez, a reporter for The Philadelphia Inquirer, wondered all that and more about the $12 billion Hershey School and decided to do some digging. The result is The Chocolate Trust (Camino Books, 256 pages; $24.95/paper, $9.99/ebook).
The book is important not simply for what it reveals about the trust, about those who have profited from its sometimes questionable practices over decades, and about the kids who have been neglected as a result of those practices. The Chocolate Trust also is a cautionary tale for anyone who thinks nonprofits can self-regulate or rely on local and state government authorities who too often are ethically compromised and politically constrained to keep them on the straight and narrow.
First, a little history. In 1909, Milton Hershey, who had started a chocolate company and set out to build a town for its workers, established the nonprofit Hershey Industrial School, a residential facility to serve young, fatherless, white boys. In 1918, a few years after Hershey's wife, Kitty, died – they never had children and had no heirs – Hershey transferred his land and other assets to his "orphanage," making it a very wealthy entity indeed.
Hershey stipulated that those assets were to be managed by the Hershey Trust, part of a for-profit bank, and he retained a significant measure of control over the school's operations by reserving to the bank the right to appoint its board members. In simple terms, the bank controlled the school's assets and operations, and Hershey owned the bank – the reverse of standard operating procedure in the charity world, where donated assets typically are controlled by the charity to which they have been donated.
Fernandez highlights the history of these enterprises through a series of journalistically styled and somewhat independent chapters. It is through his reporting of more recent board and executive actions, however, that readers begin to really understand the shortcomings of the structure set up Hershey and his advisors a century ago.
Take the greed (there's no other word for it) of certain board members, one of whom drew more than $500,000 a year for his service on various Hershey boards, even as the majority of nonprofit trustees and directors nationally receive absolutely nothing for their service. But that act of selfishness pales in comparison to the board-approved high-stakes use of the school's assets over the years.
Although Hershey himself directed that surplus funds from the operations of the Chocolate Company and other donated assets were to be "exclusively devoted" to the school, executives of the company subsequently asked its lawyers to find a way to break that directive. In 1963, through a series of complicated maneuvers – intentionally kept secret from the public and even some of their associates – members of the trust's board arranged to divert a significant portion of the trust's assets to a local development scheme and secured hush-hush promises of endorsement from certain judges and the state's attorney general before the deal was announced.
In a ruling subsequently criticized by a different judge, the judge presiding over the case – the same one who had agreed to a gutting of the trust's conflict-of-interest clause – sanctioned the transfer of over half the trust's surplus and some of its farmlands for a new Penn State University medical center. The development and continuing operation of the center proved to be a boon for local business owners and power brokers, including some of the trust's and school's board members and political cronies. In fact, the university named the initiator of the scheme, one of its "distinguished alums," to its own board.
As Fernandez reports, that $50 million transfer was just the beginning of a series of questionable actions, including a court-rejected 1999 effort to divert significant funds earmarked for the school to other purposes. The court's action in that case didn't stop the trust from paying $12 million – two or three times its appraised value – for a troubled golf course owned by a board member and other local investors and then pay for construction of a $5 million clubhouse.
In the years since, the school has had the original 1909 restrictions removed so that it now serves both boys and girls, regardless of race. But despite its large endowment, it remains tied to Dauphin County, where, according to many, it doesn't spend enough to serve disadvantaged children, having earlier been sanctioned for discriminating against those with disabilities and castigated for failing to attend adequately to the mental health needs of its own students (one of whom committed suicide after not being allowed to graduate because of a history of severe depressive episodes). Critics also argue it could spend more to reduce its troubling push-out/drop-out rate.
A representative of the Hershey School, who spoke compellingly and with passion about the good it does for many children, declined to counter Fernandez's reporting of specific events, saying she didn't want to rehash contested incidents or violate students' confidentiality. She also claimed his book was rife with inaccuracies but was willing to cite only the fact that she provided the author with data – which he didn't include in a chart – on improved student retention after 1999, the last year for which data is provided in the book (although Fernandez does reference an exchange with her about the retention issue in his narrative).
The school spokesperson also noted that its peculiar governance structure has served it well and that school officials aren't eager to change it. She further indicated that the school receives all it needs from the trust, and that once it reaches its desired enrollment of twenty-three hundred, school officials will focus on what to do with surplus funds, but until that time it's counterproductive to discuss specific options.
Given its growing endowment, that response is unlikely to appease the trust's critics, who argue that, among other things, it should urge the Hershey Company to stop dragging its feet and certify that its supply chains are free of the child exploitation and slavery that characterizes too much of the African cocoa trade. It also could push for authority to go beyond the parochial interests of board members who are happy to see the trust's assets benefit Dauphin County alone.
That kind of self-interested behavior has not gone unchallenged, Fernandez writes. Protect the Hershey's Children, an advocacy group founded by Hershey School graduate Ric Fouad and other alums, brought court action against the school but was found, after an initial victory, not to have legal standing. And neither, apparently, do the many other people who have shared their carefully documented concerns about the Hershey Trust and School.
The regulators who do have authority to intervene seem to have exercised it with exquisite sensitivity to political pressure; twice now a state attorney general has proposed significant modifications to the governance structure of the various Hershey entities, only to back away from the proposals at the last minute, leaving minor changes in place (such as a ceiling, albeit a very generous one, on board compensation). Similarly, neither the Internal Revenue Service nor the local court with jurisdiction has done much to challenge the organizational structure or sanction the behavior of board members.
That should not come as a surprise. Regulatory authorities with charity oversight responsibility are either too hard-pressed or simply disinclined to pursue even the most egregious abuses by the nonprofits they are supposed to regulate. It is telling, for instance, that in the most recent high-profile case of alleged charity fraud, it was the Federal Trade Commission, in cooperation with the attorneys general of all fifty states and the District of Columbia, that took action, not the under-resourced and much-harried IRS.
As Pablo Eisenberg – who is credited by Fernandez – has argued in the pages of the Chronicle of Philanthropy, we desperately need more robust and tougher regulation aimed at correcting abusive practices by nonprofit and philanthropic organizations. And that requires a Congress willing to allocate more funds to protect the public interest.
Perhaps the only immediate solution to Hershey's inverted benefit pyramid is, as Fernandez suggests at the close of his book, to sever the interlocking board relationships, dissolve the trust itself, and place its assets under the control of a truly independent board of directors whose charge is to protect and advance the best interests of the nonprofit school. Such an outcome, however, requires the participation of those in authority who truly have the public interest at heart. Unfortunately, to Fernandez's dismay, they seem to be hard to find in central Pennsylvania.
The Chocolate Trust isn't a perfect book; it would have been strengthened by, among other things, timelines, schematic illustrations, and a good index. That said, Bob Fernandez has performed a great public service and, in the process, has helped us understand a simple truth: Milton Hershey got it backward, and it is kids who continue to pay the price for his mistake.
Mark Rosenman is a professor emeritus at the Union Institute & University. In his last post for PhilanTopic, he argued that we do society no good when we give a pass to nonprofit leaders who promote a corporate funder's agenda at the expense of the public good.