Patalinghug – Volume 7, Issue 2 (2016) e-Journal of Social & Behavioural Research in Business Vol. 7, Iss. 2, 2016, pp: 29 – 48. ”http://www.ejsbrb.org” A Case Study of Organizational Form: Hershey versus Mars Jason C. Patalinghug Department of Economics and Finance Southern Connecticut State University 501 Crescent St. New Haven, CT 06515 Phone: (203) 392-7337 Fax: (203) 392-5254 Email: [email protected] Abstract Purpose: This study examined the history, growth and structure of two of the world’s largest confectionery makers, Hershey and Mars, to determine why these two companies chose their current organizational form. Design/method/approach: This paper starts off with an analysis of the industrial foundation which is a common organizational form in Europe but rarely found in the United States. A historical analysis is then made of both Hershey and Mars using literature from economics, law, history and management to come up with answers as to why the two corporations are organized the way they are today. Findings: The study found that Hershey adopted the industrial-foundation organizational form based on the donor-agency theory which assures donors that their donations are not redistributed as profits to residual claimants. The non-distribution constraint in the Hershey Trust Company prevents dividends (donations) from being redistributed to residual claimants, and that the non-distribution constraint makes more sense for Hershey because its founder, Milton Hershey, expressed his preference to leave a long lasting legacy. The study also found that Mars has chosen a family-controlled organizational form based on the competitive advantage theory which postulates that firm value is maximized when families retain control, benefitting both family and nonfamily shareholders. Originality/value: There have been few studies on the history and organizational evolution of the American confectionery industry. The study is unique as it addresses some gaps in the literature as it provides a historical and institutional study into that particular industry. Keywords: industrial foundation, economics of organization, corporate governance, family owned firms. JEL Classification: D02, L22, M10 PsycINFO Classification: 3660 FoR Code: 1503 ERA Journal ID#: 123340 © e-JSBRB Vol.7, Iss.2 (2016) 29 Patalinghug – Volume 7, Issue 2 (2016) Introduction The confectionery industry in the United States has evolved from one which had many small niche players to one which is dominated by a few firms with the rest operating on the fringes. This industry is therefore an oligopoly. Confectionery is a multi‐billion dollar industry in the United States. U.S. candy manufacturers offer a wide range of products and have a huge presence in the global market. However, despite its size, there has been little research on the nature of the organization in the industry. This paper is a case study of the two bigger firms in the U.S. chocolate market: Hershey Company and Mars Incorporated (hereafter referred to as Hershey and Mars). The objective of this paper is to examine the confectionery industry in the United States from an institutional viewpoint using a case study approach. The study aims to show how the two biggest players in the industry came to choose their organizational structures over the years and the developments that have made those choices possible. In addition, the study discusses the factors that have made the industry the way it is today as well as those innovations the industry had to adopt as the circumstances necessitated. This study attempts to contribute to the literature on organizational studies. The main hypothesis of this study is that certain institutional factors have made Hershey a European-style industrial foundation and Mars a tightly held family‐owned firm. These factors had given these firms the incentives to behave the way they did over the past decades. This paper argues that Hershey chose the industrial-foundation organizational form so that it can preserve the legacy of its founder, Milton Hershey. This organizational form is consistent with the donor-agency theory. The non-distribution constraint in the Hershey Trust Company prevents dividends (donations) from being redistributed to residual claimants, and that the non- distribution constraint makes more sense for Hershey because its founder, Milton Hershey, expressed his preference to leave along a lasting legacy. The non-distribution constraint thus assures donors that their funds won’t be expropriated because the founder has a preference as to where those funds should go (The Hershey School). Hershey was able to persist as an industrial foundation due to government intervention in the 1960s when it was grandfathered into the Tax Reform Act and then in 2002 when the Pennsylvania state government prevented the sale of the company. This paper also argues that Mars has chosen a family-controlled organizational form because of Mars family’s greater commitment to the company, its long-term investment horizon, and the amenity potential associated with a traditional family name. This organizational form is consistent with the competitive advantage theory of family control which postulates that families retain control when firm value is maximized benefitting both family and non-family shareholders. I will thus compare and contrast the two organizational forms and lay out the argument for why each firm chose their current form. The study draws from the literature of the new institutional economics (NIE) in attempting to explain what institutions are, how they came to be, what their purpose is, how they change, and how they evolve (Klein, 1999). The hypothesis is verified and elaborated by citing empirical studies on ownership and organizational form (Hansmann, 1987, 1988, 2006) particularly studies on the performance of foundation-owned firms (Thomsen, 1999; Herrmann and Franke, 2002, Hansmann and Thomsen, 2012) as well as studies on the performance of family-owned firms (Sraer and Thesmar, 2007; Anderson and Reeb, 2003; Villalonga and Amit, 2006, 2009, 2010). Review of Related Literature Michael Rowlinson has done extensive work in the history of Cadbury. In his 1988 paper he stated that Cadbury had begun to apply scientific management techniques at its Bournville facility well ahead of most of its British counterparts. He attributed the fact that workers did not react negatively by and large to these techniques to the welfare policies that the firm employed. These policies are generally accepted as the foundation of Cadbury’s corporate © e-JSBRB Vol.7, Iss.2 (2016) 30 Patalinghug – Volume 7, Issue 2 (2016) culture. The generally accepted view is that Cadbury’s labor management policies are an offshoot of the Cadbury family’s Quaker roots. Among those who held that view was Charles Dellheim who stated in his 1987 paper that the Quaker ethic was the cornerstone of Cadbury’s. Rowlinson and Hassard (1993) argued, however, that Cadbury’s labor policies were driven more by contemporary social pressures rather than a specific religious mindset. Cadbury’s “invented” corporate culture based on its Quaker ties gave it an air of legitimacy and moral authority. The reconstruction of Cadbury’s history has given it an identity distinct from other firms. Rowlinson (1995) argued that the Cadbury culture started to dilute in the 1960s due to increasing diversification and divisionalization. In his 2002 paper, Rowlinson took a look at Cadbury World, Cadbury’s counterpart to Hersheypark in the US, and concluded that the park, while having its own merits, presents an idealized version of the company’s history that is based on nostalgia for Britain’s industrial past. Child and Smith (1987) presented a case study of Cadbury wherein they addressed issues such as Cadbury's position within the chocolate and sugar confectionary sector, organizational change within the firm, the “firm-in-sector” perspective and the process of organizational transformation. Jones (1984) presented a case study of Cadbury’s overseas operations during the interwar years of 1918-1939. He pointed out many had asserted that British firms preferred to invest in former colonies, a so-called “Empire preference”, because that was the path of least resistance due to a lack of competition. Jones also pointed out that Cadbury faced tough competition in both Australia and Canada which were former British colonies and that Cadbury had mixed results in its overseas investments similar to other British multinationals of the period. Fitzgerald (2005) attributed Cadbury’s superior financial performance between 1922 and 1938, vis a vis Roundtree and Mackintosh, to product, marketing, and organizational innovations. Fitzgerald (2000) examined the history of Mackintosh’s, a British confectionery firm founded in the 1890s which merged with Rowntree in 1969. He argued that because the firm was dominated by a single family, its history would be intertwined with debates about the failures of British “personal capitalism”. Erikkson et al. (1996) explored the structural changes that occurred within the British and Finnish confectionery industries over the past few decades as well as the inter- organizational relationships that resulted from these changes. They also developed the sector concept to gain a better understanding of these industries. Several studies have investigated the efficacy of different forms of firm ownership. Picard and van Weezel (2008) looked at the advantages and disadvantages of private, public, nonprofit and employee