A Hershey's chocolate bar in Encinitas, California on January 29, 2015.
Mike Blake — Reuters
By Reuters
August 10, 2016

The board of the $12 billion charitable trust that controls Hershey Co. will meet this week to discuss appointing new members, a spokesman for the trust’s board said, as it embarks on its biggest overhaul in more than a decade.

Under a reform agreement announced last month with the Pennsylvania attorney general’s office, its sole overseer, the trust will appoint up to nine new board members by the end of 2017. The agreement dictates that the trust must try to recruit members with training and experience in financial investments, in addition to education and social care—a requirement that could influence its stance on any renewed bid by Mondelez International (mdlz) for Hershey (hsy).

Hershey rejected Mondelez’s $23 billion bid in June without providing a reason publicly, though sources familiar with the deliberations said Hershey’s board deemed the price offered to be too low for the trust to seriously consider it.

With two-thirds of the trust’s investment comprising of Hershey stock, some financial experts say it should consider opportunities to diversify its holdings and reduce its exposure to risks such as a major fall in commodities prices.

“If the trust is bringing financial people on board, I would expect that they would look at it primarily from a financial standpoint. And that is to say if [a deal] makes good financial sense, let’s at least pursue a very good offer,” said Bill Brill, a former member of the alumni board of the Milton Hershey School, which the trust funds and operates.

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The reform agreement calls for the trust’s board to be expanded from 10 members to 13, and for five members to resign in order for 10-year terms to be enforced. One trustee resigned last month, leaving a total of nine openings.

The attorney general’s office has to be given 30 days notice under the agreement to review new trust appointments.

The trust is working with executive recruitment firm Heidrick & Struggles International Inc to identify and hire new trustees, sources familiar with the situation said, asking not to be identified because the deliberations are confidential. Heidrick & Struggles declined to comment.

The attorney general’s office pushed for the reform agreement to improve the trust’s governance amid allegations of profligacy, self-dealing, and disregard for term limits.

 

Feasting on Hershey Co.

The trust was set up more than a century ago by Hershey’s founder Milton Hershey with a mandate to run a school for underprivileged children “in perpetuity”, with the remainder in assets such as mutual funds and real estate.

Feasting on Hershey stock has paid off handsomely for the trust thus far. The shares have returned a 384% gain for the trust, including dividends. The S&P 500 Index, by comparison, has posted a 133% total return.

However, some experts argue that more trustees with an asset management background are likely to express concern that a commodities shock or a sharp consumer shift to healthier food options could deal the trust a serious blow.

Hershey’s growth has already slowed in the last two years as competitors such as Mars expand their offerings and premium players such as Chocoladefabriken Lindt & Spruengli entered the U.S. market.

“What’s wrong with the Hershey Trust is that it has a breathtaking concentration in the stock of a single company,” said Robert Sitkoff, a Harvard Law School professor specializing in wills, trusts, estates, and fiduciary administration.

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Mondelez’s offer was half in cash and half in stock, sources have said. This means the new board members of the trust, whose approval is needed for a sale of Hershey, could use such a transaction to substantially reduce its exposure.

“The (trust’s) board is satisfied that the asset portfolio is being managed in a responsible manner,” said Kent Jarrell, the spokesman for the trust’s board. Hershey declined to comment.

Even if the trust does decide to explore a sale of Hershey, it can still be overruled. In 2002, the trust put Hershey up for sale, citing a need to diversify its holdings. At the last minute, it pulled the plug on a sale to chewing gum maker Wm. Wrigley Jr. Co for $12.5 billion, after the attorney general’s office successfully petitioned a court to block the offer amid local community protests.

Pennsylvania state senator John Rafferty, the Republican candidate for attorney general in the upcoming November election, has said he does not think diversification is always necessary, and has expressed “serious reservations” about a potential sale to Mondelez.

Democrat candidate Josh Shapiro has said he will “vigorously protect Hershey’s continued success in Pennsylvania” and protect it from “multi-national corporations and Wall Street investors willing to destroy Pennsylvania jobs for their own profit.”

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