05_979074 ch01.qxp 6/22/06 11:06 AM Page 3 1 SELLING HERSHEY A Business Fable for Our Times I think what makes a good CEO today is what will always make a good CEO and what has in the past: strong values, great personal integrity, and a willingness to make the tough calls. But it certainly requires an openness and transparency with the multiple constituents, whether it be shareholders, the board, employees, customers, or suppliers. And those characteristics don’t have a shelf life in terms of when it’s good or not good to apply them. —Rick Lenny, CEO, Hershey Foods Corporation1 Trouble in Utopia July 25, 2002, was a day like any other in the picture-perfect town of Hershey, Pennsylvania, home of the world-famous Hershey bar.2 Tourists strolled Chocolate Avenue, gawking at streetlights shaped like Hershey Kisses and shopping for candy-themed souvenirs at the dozens of gift shops. Bedazzled children and obliging parents lined up for tours of Hershey’s Chocolate World and squealed with delight onCOPYRIGHTED the ten roller coasters at MATERIALnearby Hersheypark. Those with more sedentary tastes relished a whipped cocoa bath or choco- late hydrotherapy at the Hotel Hershey’s pricey spa, or simply savored the sweet aromas from the factory whose assembly lines generated a nonstop supply of Mr. Goodbars, Reese’s Peanut Butter Cups, and Kit Kat Bars. All these pleasures had one thing that united them even more than their chocolate flavor: the steady 3 05_979074 ch01.qxp 6/22/06 11:06 AM Page 4 4 THE TRIPLE BOTTOM LINE stream of income they produced for Hershey’s twelve thousand res- idents, nearly all of whom had a connection to the company after which their town was named. It was a day like any other—until the news that turned July 25, 2002, into what the townspeople of Hershey still call Black Thurs- day. It came in a story in the Wall Street Journal, which revealed that the board of the Hershey Trust, the charitable organization that owned a controlling stake in the Hershey Foods Company and thereby in the future of everyone in town, was planning to sell the company to the highest bidder.3 The news flashed through town. The questions followed in an instant. Who might the new owners be? What would they do with the Hershey plant, the theme park, the spa and hotel and gardens, and all the other attractions that had made their town a center of tourism? What would happen to the chocolate-related jobs that drove the local economy? Would Hershey, Pennsylvania, become a ghost town? No one could say. It is a story that has been told in one company town after another all across America: corporate interests, under pressure to pursue short-term gains, decide to sacrifice the local economy, cul- ture, and tradition in pursuit of profit. And in some towns, after a period of dismay and anger, the citizens quietly accept their fate. Not in Hershey. A coalition of angry citizens formed within hours. It included former CEOs of Hershey who hated the idea of selling the company they’d nurtured; leaders and members of Chocolate Workers Local 464 of the Bakery, Confectionery, Tobacco Workers and Grain Millers International, the union that represented twenty-eight hun- dred employees at the Hershey plant; alumni of the Milton Hershey School, the remarkable educational center for orphans created by company founder Milton S. Hershey himself; and thousands of business owners and residents of central Pennsylvania who feared the death of a town they cherished. A week later, five hundred townspeople converged on Choco- latetown Square for the first protest rally in the history of bucolic, 05_979074 ch01.qxp 6/22/06 11:06 AM Page 5 SELLING HERSHEY 5 conservative Hershey. The protestors clustered under the trees in the little plaza, handed out leaflets, carried signs reading “Derail the Sale” and “Milton’s Dream Has Become a Nightmare,” and cheered a series of fiery speeches as startled tourists looked on. Former Hershey chairman and CEO Dick Zimmerman angrily denounced the sale idea as unnecessary and unwise. The president of the Hershey School Alumni Association, New York attorney Ric Fouad, appealed to Milton Hershey’s founding vision. And union leader Bruce Hummel mocked the board as sacrificing the community for profit. “You don’t sell the children to save the house,” he roared. The crowd roared back. The rally was only the start of a series of headaches for the top brass of Hershey Foods and the leaders of the trust. And it came as quite a shock. The emergence of a broad coalition of activists vow- ing to fight the sale was the last thing they had expected. How had it happened? And how on earth had Hershey’s leaders so badly mis- gauged the reaction to their plan? Patriarch of Chocolate The connection between the town of Hershey and its largest employer is more than geographic or even economic. The fate of the company and that of the community are closely entwined, and that’s the way Milton S. Hershey wanted it. The deeply religious Hershey, a member of the socially conservative Mennonite sect, wanted his wealth to be used “for a purpose of enduring good,” and he viewed his little Pennsylvania town as a Utopian community, designed and managed for the good of all its inhabitants.4 Hershey built the town in the early years of the twentieth cen- tury. Through his Hershey Improvement Company, he founded most of its leading institutions, including the local bank, depart- ment store, zoo, and public gardens modeled on those at the French royal court in Versailles. He laid out the bucolic street design, built a trolley company, and designed houses for factory workers and big- ger houses for corporate executives. He even founded a community college that local residents and company employees could attend 05_979074 ch01.qxp 6/22/06 11:06 AM Page 6 6 THE TRIPLE BOTTOM LINE free of charge. During the Great Depression, despite a 50 percent drop in chocolate sales, he kept the workers from his factory busy building a hotel, a community center, a sports arena, and public schools—all, of course, bearing the Hershey name. Milton also founded the Hershey Industrial School—now known as the Milton Hershey School—which provides free room and board, clothing, medical care, and schooling for some thirteen hundred disadvantaged children. The charitable trust that Hershey created in 1909, which owns and operates the school, also owns or controls over three-quarters of the voting shares of Hershey Foods. The result: the town of Hershey and the students and teachers at Milton Hershey School are completely dependent on and closely linked with the company Hershey founded. For decades, Hershey Foods executives managed the business accordingly. “I was always told that we had a fiduciary responsibility to the trust,” says John Dunn, who rose over the course of thirty years from a Hershey sales- man in Chicago to the company’s director of marketing. “And I was always reminded that we must never do anything that would com- promise our business or our financial success—because the Trust was relying on us.”5 Logic would dictate that, in such circumstances, the management of the company would never lose sight of the profound connections among the business, the school, and the community that houses and sustains them both. That, after all, is what Milton Hershey had made clear he wanted. But company managers were governed by neither Milton’s dreams nor simple logic. The remarkable battle for control of Hershey Foods that erupted in the summer of 2002 illustrates many of the central themes of this book and raises a host of questions that business lead- ers everywhere need to consider—questions like these: • Do the responsibilities of a business manager go beyond earn- ing the highest possible profits? If so, what are those responsi- bilities, and how should they be balanced with the pursuit of profits? 05_979074 ch01.qxp 6/22/06 11:06 AM Page 7 SELLING HERSHEY 7 • What responsibilities does a company have to its workers, their families, the community where they live, and society at large? Is it enough to pay fair wages, provide competitive benefits, and supply needed goods and services—or should a company do more? • What information should be disclosed about corporate deci- sions and activities to those who have a stake in them? How should the leaders of a company take into account the view- points and concerns of those stakeholders? And who should have a say about the fate of the company? Hershey Foods and the Hershey Trust are, by almost any mea- sure, well-run and well-meaning organizations. Their leaders, who had jointly reached the decision to sell the company, were upstand- ing citizens of the corporate world and the local community. Yet when challenged to chart a course for future decades in a rapidly changing world, they stumbled, hurting the company financially and leaving Wall Street and the American public with an abiding image of a big chocolate-covered mess. The Responsible Thing to Do To understand that meltdown, we must go back seven months to December 2001, when a deputy attorney general for the state of Pennsylvania met with the board of the Hershey Trust to probe alle- gations of mismanagement and conflicts of interest by its seventeen members. The state’s investigation would soon fizzle, but this meet- ing would be remembered for a very different reason. Mark Pacella, the deputy attorney general, warned the board members that it was high time they found ways to diversify their gigantic, $5.4 billion holdings, a full 52 percent of which were in Hershey Foods.