A Matter of Trust Using May’s Ethical Practices to Evaluate Complex Stakeholder Communication between Hershey Company and Hershey Trust Company.
This case explores the communication between a Fortune 500 Company and the charitable trust that controls 80% of its voting stock
This case does not illustrate the effect of unethical corporate behavior on consumers or the public. On the contrary, the case is meant to explore the complex communication expectations that occur when stakeholders of a corporation produce competing ethical obligations.
The case explores the actions of The Hershey Company in its obligations to a major stakeholder, the Hershey Trust Company
I use the framework of Stephen May’s ethical practice components including alignment, dialogic communication, participation, transparency, accountability, and courageous to analyze the case.
The Hershey Company (Hershey Co.) is a public, Fortune 500 company with over $4 billion in annual revenue
The company was founded by Milton S. Hershey in the late 1800’s.
Milton built the first plant in the middle of a cornfield and the town grew around the plant. The whole area is now a tourist attraction and nicknamed “Chocolatetown, USA”.
Milton Hershey had no children and started a residential school and orphanage in 1909 called The Milton Hershey School
When he died he left 80% of the voting stock to a charitable trust, The Hershey Trust Company, to benefit the orphanage.
The Hershey Trust
The value of the Trust is between $6 to $7 billion.
The proceeds support the Milton Hershey School, a residential school/orphanage for 1600 students
The Trust can place 5/6ths of the Board of Directors on the Hershey Co. board.
This whole complex arrangement is situated in the town of Hershey, PA, which Milton Hershey built with his first (and primary) chocolate plant.
Hershey Trust Entities Retrieved from www.hersheytrust.com
2002 Wrigley Proposed Sale
A 2001 audit by the Pennsylvania Attorney General (AG) leads to comments that the Trust has too much money in one asset (Hershey Co. stock).
With the collapse of Enron, WorldCom, and Adelphia the PA AG recommends diversification (The PA AG is charged with protecting the beneficiaries of charitable trusts).
Trust Directors entertain offers to sell the stock as a block, essentially selling the whole company.
Wm. Wrigley Jr. Co., makers of gum and candy, enters into an agreement with the Trust to purchase the company for a bid of $12.5 billion.
The proposed sale is met with stiff resistance from the community, local politicians, and the company itself.
The company and its executive management is blindsided by the announcement. The Hershey Company’s executive team, led by CEO Richard Lenny, has not been consulted up to this point.
Wrigley Sale Collapses
The pressure of the community, a clarification from the PA Attorney General, and the outrage of employees and unions leads the Trust to cancel the sale.
By this point, Rich Lenny, Hershey CEO is engulfed in merger details with Wm. Wrigley Company.
Trust CEO Robert Vowler calls CEO Lenny and asks him to inform Wm. Wrigley Co. that the deal is cancelled.
According to the Wall St. Journal, things between Trust CEO Vowler and Hershey CEO Lenny were “cool for years” after this incident (Jargon).
Stakeholder theory derives from R. Edward Freeman in the book Strategic Management: A Stakeholder Approach (1984). The stakeholder approach to communication and satisfaction employed by Hershey Company was especially important during the period following the 2002 proposed Wrigley sale for the following reasons:
The community of Hershey, PA has a unique relationship to the company
A significant amount of Hershey Company shares (and voting) benefit a children’s orphanage
A bitter strike in 2002 at Hershey Company arose from union disagreement with the CEO’s cost cutting measures
Hershey Co. is under tremendous pressure to capitalize on global markets to increase market share
The community felt betrayed by the proposed sale
Complexity of Hershey Co. Stakeholders Individual Consumers The Hershey Trust Co. (Robert Vowler, CEO) Unions Memory and Spirit of Milton S. Hershey Shareholders outside of the Hershey Trust Co. Large Customers (Retailers) Employees The Community & Local Government The Financial Community Hershey Co. CEO Richard Lenny (Former)
2007 Cadbury Proposal
In 2007 Hershey Co. is still under pressure to improve global market performance.
Hershey’s two largest competitors, Mars and Nestle, have both extended their global brands.
Todd Stitzer, CEO of Cadbury Schweppes, a global company with U.K. based operations, proposes a merger plan to Hershey CEO Lenny.
Lenny begins negotiation with Stitzer, who brings a 30 page proposal to a meeting in Florida in January of 2007.
Lenny takes the proposal back to Hershey and raises it to the board at the end of the February 2007 Hershey Co. board meeting. Some attendees claim it was a brief discussion and many members did not understand the seriousness of the proposal from Cadbury.
No one, including the Hershey Co. board member, Robert Cavanaugh, who is the Trust liaison, informed the Trust or Trust CEO Vowler about the proposal.
Stakeholder Communication Problems
In March 2007, Hershey Trust CEO Robert Vowler reads a news story that Cadbury feels a Cadbury Hershey partnership would be ideal (Jargon).
Vowler speaks with Hershey CEO Lenny who admits that a proposal from Cadbury has been tendered. Vowler is upset that he wasn’t notified.
In July, the Hershey Company reports 2nd Quarter earnings that are 66% below the previous year. The Trust feels blindsided by the poor earnings report. The stock drop that results from the poor earnings wipes out almost a billion dollars in Trust assets.
CEO Lenny was not invited to a September 2007 meeting between the Trust and Cadbury Schweppes Lenny tendered his resignation from Hershey Company in October of 2007.
Stakeholder Communication Problems II
The meeting and subsequent negotiation between Hershey Trust and Cadbury Schweppes could not produce a merger between the two companies.
The Trust anticipated that the Hershey Board of Directors would nominate the Chief Operating Officer, David West, to become interim CEO. Instead, the Hershey Board appointed David West as CEO with a three year contract.
For the third time in several months the Trust claims it was blindsided by events happening within the company which were not communicated.
During this period a set of letters (Jargon) was circulating back and forth between the Trust and Hershey Company.
It should be noted that Trust offices are roughly 500 feet from the main Hershey Plant and 4 minutes from the corporate offices.
Analysis Using May’s Ethical Practices
Analysis of the communication events using May’s ethical practices
The communication between the Trust and Hershey Co. doesn’t appear to be in alignment with the stated goals of the relationship.
Hershey Co. has historically operated with high ethical standards and has been identified in literature as a model for corporate governance (Ferrell, et al; Rasberry).
In Unfolding Stakeholder Thinking, stakeholder theorist Freeman speaks to the importance of aligning stakeholder goals, “…we need to take the idea of ‘stakeholders’, ‘managing for stakeholders’, ‘stakeholder management’, ‘stakeholder dialogue’, ‘stakeholder capitalism’, etc. very seriously. We need literally to rewrite management theory and practice so that these ideas are at the centre. We need to see the executive’s job as how to get stakeholder interests to move in roughly the same direction. Of course, shareholders have to win, but customers, suppliers, employees, and communities have to win as well” (2002).
These words and the ethical conduct code of the Hershey Company itself point to important lapses that occurred when the company failed to align itself with the Trust.
The Hershey Board and CEO Lenny had a duty to shareholders, including the Trust, to maintain dialogic communication.
May notes that alignment is “best facilitated” when communication systems are “open and decentralized” (38). Several events and choices impaired the dialogic communication channels between the Trust and Hershey Co., including:
The use of a liaison between the two CEOs
The choice of letters as a primary form of communication
The backdrop of a poor relationship between the Trust and Hershey CEOs due to the failed 2002 Wrigley sale
Failure to include the Trust in strategic discussions regarding a merger with Cadbury
Stakeholder balance is more difficult in the Hershey case than other companies due to the active involvement of the Trust.
The Trust, expects Hershey Co. to maintain a presence in Hershey and support the local economy.
The competing stakeholders, including management, unions, the Trust, and outside shareholders made participation difficult for Lenny and the Hershey Co.
Unions had voiced displeasure with Lenny’s cost cutting, management had been reduced through buy-outs, and the community was still stinging from the proposed sale to Wrigley in 2002.
A lack of participation ultimately led to a lack of transparency about circumstances in the company.
Transparency exists on several levels with The Hershey Co.
There is a transparency that occurs with all publicly traded companies in which Hershey reports earnings, discloses information to the financial community, and complies with regulatory bodies.
On another level, there is the private transparency that must occur with the Trust.
The three communication events which angered the Trust each involve the omission or withholding of information: the Cadbury proposal, poor earnings report, and contract versus interim CEO.
One suitable question is to examine whether an omission is the same as a lie.
Mark Timmons writes about the necessity for omission of certain types of acts in Kant’s philosophy, but doesn’t treat omission of information.
The transparency demanded by the financial marketplace have always been satisfied by the Hershey Co. The transparency expected by the Trust, as more than just a shareholder, appears to have been replaced by omission and withholding of information.
It would be hard to believe that the transparency problem arose from competing stakeholder interests. The trust is the largest beneficiary of adequate financial performance and the largest affected stakeholder when things go wrong.
The CEO and the BOD for Hershey Co. are accountable to a range of stakeholders.
Figure 1 in the previous section on stakeholders shows the great number of stakeholders that are influenced by Hershey Co. decisions.
In addition to financial accountability, the Hershey Co. maintains an overall accountability to the community of Hershey, the local economy, and its employees.
Hershey Company’s stakeholders are presumably even larger than most public companies due to the Trust relationship.
The size and balance of the stakeholder list in no way exonerates the withholding of information as an ethical act.
No where was it reported that the Hershey Co. withheld information from the Trust due to a conflict with another stakeholder.
None of the withholding information events appear to involve courage.
My initial examination of this case was to determine whether the Hershey Co. was acting courageously on behalf of some other stakeholder in withholding information from the Trust.
No other stakeholder has benefited from the withholding of information or the poor alignment, poor dialogic communication, and poor transparency practices that occurred.
Did the former CEO of The Hershey Company, Richard Lenny, hide negotiations with Cadbury Schweppes from the Hershey Trust?
Did Lenny’s brief discussion of the Cadbury merger at the end of a Hershey Company board meeting fulfill his obligation to inform the Trust?
If Hershey Co. and CEO Lenny hid negotiations with Cadbury, was he acting in the best interest of the shareholders?
In this age of globalization, does Hershey’s best options involve keeping a plant in Hershey and remaining headquartered in Hershey?
Does the size of the voting interest in Hershey Company by the Hershey Trust (80% voting rights) put it at odds with other shareholders?
Does Lenny have a fiduciary duty to the community and people of Hershey, PA (stakeholder theory says he does, but what if this conflicts with duty towards stockholders?)
There appears to be alignment, transparency, accountability, among other problems with the communication that took place during 2007 between the Hershey Company and the Trust.
As a postscript to this case, the fall-out from the communication failure between the Trust and Hershey Company was significant.
Former CEO Richard Lenny resigned in December 2007 from the Hershey Company.
Robert Vowler, President and CEO of Hershey Trust Co. retired in April 2008.
In November of 2007 the Hershey Trust asked for the resignation of all the Hershey Company Board members except the Trust liaison, Robert Cavanaugh.
The replacement of Hershey Co. board members, dubbed the “Sunday Massacre” by the local media, because it occurred on a Sunday evening, installed board members who the Trust felt would solve some of the problems described in this case study.
Andriof, J., Waddock S. Husted, B., Rahman S.S. (2002). Unfolding Stakeholder Thinking: Theory, Responsibility and Engagement. Greenleaf Publishing. Sheffield England
Jargon, J. (2008). How Hershey Went Sour. The Wall Street Journal. February 23, 2008. Page B1.
Jargon, J. (2008). Hershey Trust President Retires. The Wall Street Journal. April 10, 2008. Page B7.
Ferrell, O.C. and LeClair, D.T., Ferrell, L. (1998) The Federal Sentencing Guidelines for Organizations: A Framework for Ethical Compliance. Journal of Business Ethics 17: 353-363.