How Pennsylvania officials screwed poor kids out of $1 billion by stopping the sale of Hershey.

Commentary about business and finance.
Sept. 18 2002 6:48 PM

Hershey Barred

How Pennsylvania officials screwed poor kids out of $1 billion by stopping the sale of the candy-maker.

Illustration by Robert Neubecker

In the wake of the Wall Street scandals, state and federal officials have emerged as loud, if not always effective, advocates for shareholders, leading a charge to recover the billions lost to corporate chicanery. But in the case of Hershey's aborted effort to sell itself, Pennsylvania officials may have succeeding only in depriving shareholders of billions of dollars in value and undermining one of the most creative schools in the nation.

Yesterday, the Milton Hershey Trust, the charitable foundation that owns a controlling interest in Hershey Foods Corp., reversed its July decision to put the massive candy company up for sale. The trust was acceding to the demands of local officials, especially Pennsylvania Attorney General Mike Fisher, a Republican candidate for governor. The episode stands as a dismal instance in which new-style public-sector paternalism trumped old-style private-sector paternalism.

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Hershey, Pa., (population 13,000) is a quaint company town of the type that once thrived throughout the Midwest. Milton S. Hershey started making chocolate in 1903 in Derry Church, in the heart of Pennsylvania dairy country. As he grew more successful, Hershey built a planned community around his factory, complete with water, sewage, telephone systems, trolleys, libraries, a botanical garden, a theater, and an amusement park.

Hershey was one of the first practitioners of welfare capitalism, a Progressive Era practice that had its heyday in the 1920s. Large companies like Hershey took an interest in the quality of life of their employees, creating benefits programs and investing in occupational safety and health programs.

In 1909, Hershey and his wife, Catherine, who had no children, created the Hershey Industrial School, a tuition-free institution that would provide orphans with the structure and education—moral and vocational—to become productive citizens. Four boys enrolled in 1910.

In 1918, Milton Hershey gave $60 million worth of stock in still-private Hershey to the Milton Hershey School Trust. Bolstered by the endowment, the school grew quickly and expanded to serve girls as well as poor children with living parents. The school was modeled more on Jane Addams' Hull-House than on Phillips Andover. From 1910 to 1953, students signed an indenturing agreement, under which custody was officially transferred to the school and the child was required to provide labor or work in exchange for room, board, and tuition.

Today, the sprawling campus, with its state-of-the-art facilities, is equal parts The Truman Show and Boys Town. It still caters to poor children, about two-thirds of whom hail from Pennsylvania. (The average taxable income of the families whose children were admitted in 2000 was less than $5,300.) The tuition-free school still aims to act literally in loco parentis, with healthy doses of character education.

The school's 1,100 students, from kindergarten through 12th grade, are placed in simulated families. They live in one of 117 houses with several other students of different ages and a house-parent couple. Every kid has a bike, which he or she can pedal to the newly constructed Town Center, a grassy circular area modeled on "the world's timeless community gathering spaces, such as the town center of Siena, Italy, the Agora in Athens, and St. Peter's Square in Rome."

The Milton Hershey School Trust today counts assets of about $5.9 billion, about 58.6 percent of which is in Hershey's stock. But this concentration posed a dilemma for the school's trustees, who want to expand the program to accommodate 1,500 students.

Reliable, dividend-paying stocks have long been referred to as "widows and orphans" stocks. And since going public in 1927, Hershey has been a fantastic orphans stock. It has outperformed the S&P 500 over the past 15 years and still pays a dividend of about 2 percent.

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