Milton Hershey made lots of chocolate, and money.
Sep 4, 2006, Vol. 11, No. 47 • By MARTIN MORSE WOOSTER
Like most probate courts, the Dauphin County Orphans' Court in Harrisburg, Pennsylvania, mostly fills its docket with small-scale disputes over wills and trusts. But in the fall of 2002 the court had to decide the fate of one of America's oldest and best-loved corporations. At issue was this question: Was the Hershey Trust Company, acting as agent for the Milton Hershey School, acting in the best interest of its client by selling a controlling interest in Hershey Foods to the William Wrigley Company?
This transaction, which outside observers estimated could increase the Milton Hershey School's endowment from $5 billion to as much as $12 billion, was deemed necessary by the Hershey School board in order to make sure that the school's endowment was not lopsidedly invested in one company's stock. But the notion of Hershey being sold to benefit an orphanage was an appealing one to journalists, who flooded the streets of Hershey, Pennsylvania to file countless stories about how a lovely small town was about to be destroyed because of the pitiless forces of rapacious capitalism.
The board's opponents, which included many disgruntled alumni of the school and Pennsylvania attorney general Mike Fisher, a Republican who was campaigning for governor (ultimately losing to Democrat Ed Rendell), gave numerous interviews to the press about how the sale would dishonor the philanthropic legacy of the chocolate tycoon. The Hershey School board mostly remained silent.
After considerable pressure, the board reversed itself. The school's president and most of its board resigned, to be succeeded by a smaller board. Over the past two years, this board has quietly sold about $2 billion of common stock back to the Hershey Company (which changed its name from Hershey Foods in 2005), diluting its holdings in the Hershey Company to a narrow majority of the shares.
The debate over the future of Hershey Foods and the Hershey School is yet another skirmish in what philanthropists call "donor intent." Donor intent is important because it is at the core of why donors give. Why start a foundation if your successors will ignore your ideas in favor of their own agenda? The worst violators of donor intent are large liberal foundations, such as the Ford Foundation, the John D. and Catherine T. MacArthur Foundation, and the Pew Charitable Trusts, whose conservative founders either left no restrictions on what their foundations were supposed to do or (in the case of Pew) where explicit instructions were resolutely ignored.
The Hershey case presents a somewhat different problem. What happens when a donor leaves explicit instructions--and far too much money to fulfill his wishes?
Anyone who is interested in studying the life and legacy of Milton S. Hershey finds there is surprisingly little information about the man. While a few of Hershey's friends left memoirs, there's been no biography of Hershey in nearly 50 years, although several chapters of Joël Glenn Brenner's The Emperors of Chocolate (1999) are about Hershey's life. Michael D'Antonio's Hershey is thus an important book. D'Antonio is a good writer and is mostly fair in his judgments about Hershey and his family, with one glaring exception. Hershey's wife Catherine died in 1915 at age 42 of a mysterious paralysis called "locomotor ataxia." But it's far from clear what Catherine Hershey suffered from. Based on a vague statement given in an interview by one of Catherine Hershey's friends 40 years after her death, D'Antonio confidently accuses her of suffering from syphilis. D'Antonio, who admits there's no evidence that Catherine Hershey was syphilitic, should have resisted his urge to defame the dead.
Milton Hershey was born in Hockersville, Pennsylvania in 1857. His parents were poor, and moved from town to town to avoid creditors. Hershey went to seven schools in eight years, emerging with the equivalent of a fourth-grade education. He began working in 1871, at the age of 14, and never stopped. After starting and failing several times, Hershey created the Lancaster Caramel Company. By the turn of the century, Lancaster Caramel had three plants and was a million-dollar a year enterprise.
But Hershey saw that the future was in chocolate, not in caramels. At the 1893 Columbian Exposition in Chicago, he was impressed with a booth of the German manufacturer J.H. Lehmann, which turned cocoa beans into chocolate bars while fairgoers watched. Hershey bought Lehmann's equipment and began experiments in making chocolate.
In 1900, Hershey sold his caramel company and decided to build a large chocolate factory. He bought land about 20 miles from Lancaster, and decided to build a magnificent city for his employees. He held a nationwide contest to come up with a suitable name for the town. The winning name was "Hersheykoko." The Post Office rejected the name as too commercial, but said "Hershey" was fine.
As a manufacturer, Hershey made his big breakthrough in 1903. Milk chocolate was hard to make, since watery milk and fatty cacao butter don't mix very well. But engineer John Schmalbach discovered that cooking low fat milk for several hours produced a condensed product that was easily combined with cacao and sugar to produce milk chocolate. As D'Antonio observes, one consequence of Schmalbach's process was that the milk fat fermented slightly, leaving "a slight, faintly sour note." Ever since then, Americans have found this slightly sour chocolate delightful, while Europeans think our chocolate tastes funny.
In 1908, Hershey incorporated his chocolate company. One year later he created his orphanage, funded with most of the shares of Hershey Chocolate. Hershey gave his most detailed explanation of his intentions in an interview with the New York Times's James C. Young in 1923: "My business has been far more successful than I ever expected it to be," he said. "If I should drop out, what should become of the business, the capital, and the earnings? . . . Well, I have no heirs, so I have decided to make the orphan boys of the United States my heirs."
"We do not intend to turn out a race of professors," Hershey added. "The thing that a poor boy needs is knowledge of a trade, a way to make a living. We will provide him with the groundwork. Of what use is Latin when a fellow has to hoe a patch or run a lathe?"
But by leaving control of Hershey Chocolate in the hands of a nonprofit, Hershey created a powerful "poison pill" that made sure that the company would not be sold. William A. McGarry explained the connections between the corporation and the school in a 1940 article in Nation's Business: "The plant is now owned in trust by the home," McGarry wrote. "The business supports the boys and the boys supply labor and executives for the business when they grow up."
But the flaw in this scheme was that Hershey Chocolate, with an annual growth rate that averaged 17 percent, was too successful for Hershey's purpose. The Milton Hershey School board struggled to deal with the flood of cash. In 1963, $50 million (or 20 percent) of the endowment was given to Penn State to create the university's medical school in Hershey, several hundred miles away from the school's main campus in State College. This was an acceptable diversion, since the residents of Hershey could use a good hospital.
The board decided to create a pharaonic building campaign. They built Founders' Hall, which one writer in 1973 observed, "looks like a recently added addition to the Strip in Las Vegas." A Philadelphia Inquirer article in 1982 noted that students had their meals in the Camelot Room, "a dining hall with a King Arthur motif that could be a $100-a-meal restaurant." The school also has largely ceased to be an orphanage; only 10 percent of the students are true orphans. Most are "social orphans" with one, or even two, parents.
The Milton Hershey School board has never explained why they need their multibillion-dollar endowment, given Hershey's intentions to provide a modest education for pupils benefiting from his charity. Nor have they explained why it is so vital that the Hershey School endowment be spent in Hershey.
Courts enforce donor intent by an ancient legal doctrine called cy pres, or "as close as possible." The most productive way to preserve Hershey's legacy is to franchise the Hershey School concept across America, in much the same way that Girls and Boys Town has become a national institution with branches in many states. In that sense, the Milton Hershey School board has a choice: Will they use their billions to help tens of thousands of struggling children enmeshed in foster care? Or will they continue to provide a gold-plated education for the fortunate few?
Martin Morse Wooster, a senior fellow at the Capital Research Center, is the author of The Great Philanthropists and the Problem of Donor Intent.