“Mr. Hershey can not estimate the good that will result from his tremendous gift. Neither he nor anyone else can have more than a faint conception of the influence that this school will exert on the lives of its inmates, on the communities in which they will become a part, on the State, the nation, and posterity.”—editorial in Troy (N.Y.) Times (1923)
Last year, Dauphin County Orphans Court in Harrisburg, Pa. was the setting for an exceptionally heated battle over donor intent. At stake was this question: Was the Hershey Trust, acting as agent for the Milton Hershey School, fulfilling the wishes of chocolate magnate Milton S. Hershey in selling the school’s controlling interest in Hershey Foods for up to $12 billion?
Ultimately, the court did not have to address this issue, as the Hershey School’s board voted 10-7 against the sale. The seven board members who supported the sale, as well as Hershey School president William S. Lepley, resigned.
But the controversy showed that the richest prep school in America was not some prestigious New England establishment, but was an orphanage. How well-endowed is the Hershey School? Harrisburg Patriot-News reporter Ford Turner provides some useful comparisons. In 2002, Phillips Andover Academy, whose alumni include President George H.W. Bush and President George W. Bush, recently successfully completed a five-year $209 million capital campaign. That’s a larger fund-raising drive than any other prep school. Milton Hershey School, by contrast, is in the middle of a five-year, $228 million building campaign–and it doesn’t have to ask its alumni for a penny. The Hershey School is funding the entire project out of its $570 million rainy day fund.
Here’s another way to show the wealth of the Hershey School. Look at how much they spend per student. Phillips Andover spends about $49,000 per student. The Hershey School, in the 2000-01 school year, spent $111 million for food, clothing, and education for its 1,150 students. That amounts to $96,000 per student–nearly ten times as much as the average public school spends.
So the story of the Milton Hershey School poses two questions. First, what happens when a donor sets up a perpetual trust for a single purpose–and the trust has too much money? Second, what does the Milton Hershey School story say about the success or failure of orphanages in America?
To understand how the Milton Hershey School arrived at its present predicament, we need to turn the clock back a century and study what the school’s founder tried to do.
Milton S. Hershey (1857-1945) was one of America’s greatest entrepreneurs. Born in Hockenville, Pennsylvania, in the heart of Pennsylvania Dutch farm country, Hershey was the son of a mother who did not want her children to have an education and a father who wanted his children to go to school. Because the Hershey family was poor, they were constantly moving to flee creditors. As a result, Milton Hershey went to seven schools in eight years, and emerged with the equivalent of a fourth-grade education.
Young Milton started working when he was 14 and never stopped. He first worked for a confectioner in Lancaster, Pennsylvania, and then went into the candy business with his father, starting a taffy company, which was undercapitalized and ultimately failed. Hershey then started a cough drop company, which also failed.
In 1882, Hershey tried a third time, this time with caramels. Previous caramel makers made their products chewy by using paraffin. But Hershey was the first to figure out that milk could perform the same function, at far less cost. He created Lancaster Caramel, which was quite successful.
By 1895, Lancaster Caramel had three plants, and was doing a million dollars of business a year. Hershey was a success, and his wealth enabled him to attract–and marry–Catherine Sweeney in 1898.
Hershey could have stayed a caramel maker all his life, but changed his mind during a visit to the Columbian Exposition in 1893, where he saw some German chocolate-making equipment and decided that being a chocolate manufacturer was his ultimate ambition. In 1900, Hershey sold Lancaster Caramel for $1 million and used the proceeds to fund an around-the-world trip. The Hersheys made it as far as Mexico City when Milton Hershey announced that he was bored, and the couple turned around and headed for home.
Hershey first made chocolates in a wing of the Lancaster Caramel plant, and, as with the caramels, his great secret was that he figured out how to make milk chocolate in large quantities. Before Hershey began making chocolates, chocolate was an expensive treat. Hershey’s success ensured that everyone could enjoy a nickel bar of Hershey’s Chocolate (introduced in 1900) or Hershey’s Chocolate with Almonds (introduced in 1908) for lunch.
As the business grew, Hershey looked around for a place to build a factory. He eventually found some land in Derry Township, Pa., about a mile from where Hershey grew up. Hershey knew the area had several advantages. There were many Pennsylvania Dutch farmers nearby, who could either work hard in his factory or supply the plant with plenty of milk. And the factory was conveniently located for shipments to East Coast distributors.
Hershey began building his factory in March 1903. But what should the place be called? In 1906, Hershey held a nationwide contest; the entries included Hustletown, Ulikit, Etabit, Qualitytells, Chocolate City, and St. Milton. The winning entry was Hersheykoko, but the post office rejected the name as being too commercial. But Hershey was acceptable to the Post Office, and so the town became Hershey.
Milton Hershey made sure that Hershey, Pa. was created according to his specifications. He designed all the houses–and tore down the ones that seemed too much like slums. Hershey workers could relax in Hershey Park, and ride carousels and watch vaudeville acts courtesy of the company. If they needed to travel outside of Hershey, the company provided a 30-mile interurban railway. If they wanted a meeting space for their clubs, the company provided a community center. (The community center also showed movies–purged, News-Week reported in 1935, of “dirty jokes and sensual dances.”)
In 1908, Hershey incorporated. One year later, Hershey decided to donate the majority of his stock to create an orphanage, or what he called the Hershey Industrial School.
Milton S. Hershey had always been charitable, and had never sought any publicity for his gifts. Hershey biographer Roy Bongartz gives some examples. One time Hershey saw a clubfooted boy walking through town, and quietly paid for the cost of the operations needed to fix the youth’s foot. In another case, a boy was severely beaten up by bullies. Again, Hershey quietly paid all the medical bills.
But the gift to the Hershey Industrial School far surpassed anything else Hershey gave away. Hershey’s best expression of his intent is provided in a 1923 article by James C. Young in the New York Times. “I am 66 years old and do not need much money,” Hershey said, My business has been far more successful than I ever expected it to be. If I should drop out, what should become of the business, the capital and the earnings?…Well, I have no heirs, so I have decided to make the orphan boys of the United States my heirs.
“The orphan boy has a harder time than anybody else, you know. There are always relatives or outsiders to take an orphan girl. Girls are useful in the home, and people are glad to get them. But boys are likely to be looked upon as a nuisance. The more spirit they have, the bigger the nuisance.”
“Our school will give a boy in its care a thorough common school education, supplemented by instruction in the useful crafts,” Hershey continued. He then enumerated some of the crafts–carpentry, blacksmithing, farming, “the rudiments of electrical work.”
“We do not intend to turn out finished artisans, but to provide a foundation on which they may build,” Hershey said. “And when they leave us at 18 we will then give them $100 each to begin life. That is more than I had.”
Young then asked if Hershey’s wealth could be used to provide “an academic training for most of the orphan boys in the United States.”
“We do not intend to turn out a race of professors,” Hershey replied. “The thing that a poor boy needs is knowledge of a trade, a way to make his living. We will provide him with the groundwork. Of what use is Latin when a fellow has to hoe a patch or run a lathe? But we expect to develop a plan under which boys of special promise in the academic branches may go to college.”
Hershey further expressed his work-oriented philosophy in his Deed of Trust, executed in 1909. Clause 17 of the deed states that “All orphans admitted to the School shall be fed with plain, wholesome food, plainly, neatly, and comfortably clothed, without distinctive dress, and fitly lodged. Due regard shall be paid to their health; their physical training shall be attended to, and they shall have suitable and proper exercise and recreation. They shall be instructed in the several branches of a sound education, agriculture, horticulture, gardening, such mechanical trades and handicrafts as the Managers may determine, and such natural and physical sciences and practical mathematics as in the opinion of the Managers it may be important for them to acquire, and such other learning and science as the tastes, capacities, and adaptability of the several scholars may merit or warrant, to fit themselves for the trades they are to learn, and a useful occupation in life…Each and every scholar shall be required to learn, and be thoroughly instructed in some occupation or mechanical trade, so that when he leaves the School on the completion of the period for which he is to remain, he may be able to support himself.”
Milton Hershey was a very active donor. He routinely visited each of the boys in his care; and once a year, all the boys were sent to Hershey’s mansion for a special breakfast of hot cocoa and toast. Henry Keener, who, as a “house parent,” supervised the boys, told author Joel Glenn Brenner that “You didn’t know when Mr. Hershey was going to drop by unannounced. And he was the most meticulous fellow with himself. With his clothing, his mannerisms, everything. I never saw him in anything but a full-dress business suit, usually a dark suit. Never saw him in light clothing.”
Most of the boys turned out pretty well, and became productive citizens. Bill Dearden, for example, arrived at the Hershey School in 1935, as a 13-year old from the slums of Philadelphia. His mother had just died, and his father could not afford to feed his family.
Four decades later, Dearden recalled that his first day at Hershey, he was driven through Hershey’s 10,000 acres and was given his first pair of long pants He then was given the biggest meal he had ever had. “Creamed rice was the vegetable, and there was apple pie for dessert,” Dearden told the Philadelphia Inquirer. “Where I came from, creamed rice was a dessert. It was like getting two desserts in one meal!”
After he was graduated from the Hershey School, Dearden was graduated from Albright College. In 1976, he became the only Hershey School alumnus to become CEO of Hershey Foods. “I don’t know where I’d be today if it wasn’t for Mr. Hershey.”
The Hershey Trust
Hershey set up the Hershey Trust to manage the school’s assets, including the shares of Hershey Chocolate, and declared that both Hershey Trust and the Hershey Industrial School should be perpetuities. The boards of the trust, the school, and the company overlapped substantially, and the goals of the three organizations intertwined; the factory’s profits were used by the trust to fund the school, and the school would create productive young men–some of whom would end up working in the factory.
The best explanation of how the three overlapping Hershey organizations were supposed to interact is provided by Wm. A. McGarry in a 1940 article in Nation’s Business. “The plant is now owned in trust by the home,” McGarry explained. “The business supports the boys and the boys supply labor and executives for the business when they grow up.”
One consequence of this relationship is that being largely owned by a nonprofit has been what investors call a “poison pill.” Outside investors never attempted to seize control of Hershey Chocolate, because to do so they would need to control the Trust’s shares–and the Trust was unwilling to sell. Thus this interlocking directorate has ensured Hershey Chocolate’s independence.
Catherine Hershey died in 1915, and in 1918, Milton Hershey transferred control of between two-thirds and three-quarters of Hershey Chocolate stock to the Hershey Trust. Hershey managed to keep this transaction secret from the press for five years.
To have advertised his gift “to the world,” Hershey told Fortune in 1934, “would have seemed like…telling the people to eat more chocolate to aid the orphans and my competitors…would have said I was taking advantage of them.”
But when James C. Young broke the story of Hershey’s gift in November 1923, he told New York Times’ readers that, unlike other great philanthropists, Milton C. Hershey’s gift (which he estimated at $60 million) came from a fortune “unlike those given away with free hands in the past few years. It came neither from oil, steel, or finance, but from the modest chocolate bar.” (“Think of an orphan boy,” Young concluded, “having as his guardian a man who will give him as much chocolate as he can eat!”)
The press, always on the lookout for new philanthropists, saluted Hershey’s generosity. “When a man spends his fortune in that wholly unselfish fashion in his own lifetime,” the Philadelphia Public Ledger editorialized, “the world applauds, and it is lastingly imprest (sic) by the example.”
The New York American contrasted Hershey’s gift with a more inept donor who left $1,000 to his wife and $36,500 to be spent on prayers for his “poor, miserable soul.” The difference between the prayer-monger and Hershey, the newspaper said, was “all the difference between selfish barbarism and enlightened civilization.”
But not everyone applauded Hershey’s gift. Social workers were outraged. Didn’t Hershey consult…professionals? Didn’t Hershey know that orphanages were…Victorian?
Neva R. Deardorff, for example, visited the Hershey Industrial School in 1924 when she surved prominent American orphanages, including Girard College in Philadelphia and the the Fraternal Order of Moose’s Mooseheart orphanage. Writing in The Survey, the trade journal for social workers, Deardorff explained that Milton Hershey “has not been keenly aware of progressive or even contemporary thought in the field he has entered; but rather follows all too faithfully the model of his great-grandfather’s time.”
Deardorff saw a school where many telling pieces of evidence–home-canned peaches, double-decker beds, low salaries for teachers–”bespeak an ambition to save on every corner.” She was also critical of the interlocking directorate that ran the school and the company. “One cannot quite decide whether the school is a vestibule or a cupola to the business,” she wrote.
But the Hershey Industrial School managers, Deardorff wrote, could make the school “one of the great experimental stations in relating life and work to education.”
Similar criticisms were made by an anonymous Fortune writer in 1934. Like most Fortune articles of the 1930s, the piece was well-written, extremely thorough, and told from a left-wing perspective. Fortune said that nearly all of the boys in the school had their mothers still living, and that for the $1,000 they spent on educating a child, Hershey funds could educate three children at home. “For normal children,” Fortune said, “it is pretty well agreed that a normal home environment is better than the best possible institutional settings.”
Moreover, Fortune charged, the Hershey School refused to admit boys who weren’t smart enough to keep up with class work, were “unfit companions for others,” or who were bedwetters. But the writer said that “in the light of modern theories about the care of children,” the Hershey School was “taking out of the home precisely the children who should be allowed to remain there, and it is excluding just the children that an institution might really help.”
Fortune was on sounder ground when it attacked the Hershey philanthropies for being perpetuities. The author noted that the wealth created by Hershey Chocolate “must always be used to keep up an orphan asylum and for no other purpose.” He commended the policies of the great philanthropist Julius Rosenwald, who willed that the Rosenwald Fund spend itself out within 20 years of the donor’s death.
“There are some indications,” the Fortune writer concluded, that Milton Hershey “is now considering a modification of the perpetuity provision.” This did not happen. In fact, since 1945, there have been only two major modifications to the Deed of Trust.
Straying from the Donor’s Intent
The first of these took place in 1963, when the Hershey Trust, under pressure from Hershey Chocolate CEO Samuel F. Hinkle, convinced the Dauphin County Orphans Court to transfer $50 million–or 20 percent–of the trust’s assets to Pennsylvania State University so that the university could create the Milton S. Hershey Medical Center. The center, which is located in Hershey, serves as the Penn State medical school, even though the center is one hundred miles away from Penn State’s main campus in State College, Pa.
Because this medical center is located in Hershey, the diversion of funds is justifiable. It’s clear that Hershey wanted his wealth to aid the community, which could certainly use a good hospital. (Had the hospital been located in State College, the diversion would have been far more questionable.)
The Hershey School began to admit blacks in 1968 and girls in 1976. As courts have repeatedly struck down restrictions by race and gender in other educational institutions, it’s clear that had the Hershey School fought to preserve these restrictions, they would have been sued and lost.
The Milton Hershey School now admits any qualified applicant from a low-income, single-parent household, as well as “social orphans” from two-parent households that can’t afford to take care of children. Today, only 10 percent of Milton Hershey students are true orphans who have one or more dead parents.
But the Hershey School is straying from Milton Hershey’s intentions in more important ways. The school remains an orphanage, albeit an exceptionally well-endowed one. But it no longer emphasizes Milton Hershey’s idea of giving poor children a practical education.
Part of the drift comes from the corporate side of the Hershey philanthropies. Hershey Chocolate became Hershey Foods in 1968, and gradually expanded into pasta and other food products. As it changed, the company became far less paternal. The community center was reclaimed by the company and turned into corporate offices. Hersheypark became fenced in and was transformed into a more conventional amusement park. (The park is owned by Hershey Resorts and Entertainment, a wholly-owned subsidiary of the Hershey Trust, so all its profits flow to the Hershey School.)
As for the Hershey School, it changed as Hershey Foods’ stock prospered. For nearly 30 years, Hershey Foods averaged annual returns of 17 percent. The Hershey School was rolling in cash. The school’s managers chose to spend much of this wealth on a pharaonic building campaign.
“The orphanage has accumulated so much money that it doesn’t know how to spend it,” Roy Bongartz observed in 1973. He noted that the school had spent millions on Founder’s Hall, a lavish tribute to Milton Hershey “that looks like a recently added addition to the Strip in Las Vegas.” Bongartz quoted an unnamed Hershey School executive as saying that the fancy buildings were necessary because “if a boy is presented with a bright, clean wall, he won’t make a mark on it.”
On assignment for the Philadelphia Inquirer Magazine in 1982, Bill Ecenbarger noted that the Hershey School was offering even more perks, such as free braces for those who needed them and meals served in the Camelot Room, “a dining hall with a King Arthur motif that could be a $100-a-meal restaurant.” Students were still subject to some disciplinary restrictions, including mandatory chores including cow-milking at 5:30 A.M. and a rule barring juniors and seniors from leaving campus more than one night a week.
More dramatic changes began to take place in 1989, when the Milton Hershey School launched a program called the “21st Century Alternative” which eliminated many of the vocational programs Milton Hershey cherished. The print shop became a “communications center,” the auto shop became a “energy, power, and transportation center,” and the carpentry shop became a “construction center.” Even physical education classes were re-named “wellness classes.” The morning chores at the barns also ceased, as Hershey staff feared that farm work would be too much for the inner-city children who were now a majority of the students. Long time Milton Hershey School employees–some with over 20 years tenure at the school–were dismissed.
The Milton S. Hershey Alumni Association, a vigorous supporter of Milton Hershey’s donor intent, began to complain to the Pennsylvania Attorney General’s office that Hershey’s wishes were being violated. They further complained as new Hershey School president William Lepley (who had been Iowa’s state school superintendent) led an effort which cut back the number of acres the Hershey School owned by two-thirds and further slashed the vocational programs. Alumni also complained that the school was less inclined to bring in poor kids in trouble and more likely to bring in middle-class children who did not need the extra help Hershey provides. Under Lepley’s guidance, the Hershey School had not completely transformed itself into a conventional prep school, but it was well on the way to catering to the “race of professors” the donor despised.
The courts did not try to block this drift towards academia since the alumni association could not show a violation of donor intent. However, in 1999 Lepley tried a major diversion. He asked the Dauphin County Orphans Court for permission to divert $25 million to start an education think-tank which would have been called the Catherine Hershey Institute for Learning and Development. Lepley promised that this think tank, which was projected to have an annual budget of $25 million by 2004, would never have a budget higher than half the Hershey School budget.
In creating this think tank, Hershey Trust CEO Robert Vowler told the Wall Street Journal, the Hershey board was worried that the school would suffer the fate of the Buck Trust. In that case, oil heiress Beryl Buck left a $300 million estate to be used to care for poor people in Marin County, California. Her administrators tried to divert the fortune to serve the entire Bay Area, but after a titanic mid-1980s legal battle (dubbed “the Super Bowl of probate” by legal commentators) the courts ordered the creation of several national nonprofits (an institute on aging, an anti-alcoholism organization) even though there was no evidence that Beryl Buck was interested in these causes. But because these nonprofits are based in Marin County, the courts declared that their creation fulfilled Beryl Buck’s wishes.
Vowler explained that the Hershey Trust and the Hershey School feared a similar court-ordered diversion, so they attempted to divert the money themselves. “I’m painfully aware of the Buck Trust case,” Vowler said. “That one’s a little scary.”
The Alumni Association and Pennsylvania Attorney General Mike Fisher protested the plans for the institute. In December 1999, Orphans Court Senior Judge Warren G. Morgan agreed, ruling that “the proposed Institute does not approximate the Hersheys’ express intention for the Milton Hershey School and would do violence to it.” The diversion plan was dead.
The standoff between the Hershey Alumni Association and the Hershey School continued. In 1999, the alumni association issued a report stating numerous violations of Hershey’s wishes. The school responded by hiring former U.S. Attorney General Dick Thornburgh to investigate. Thornburgh found that the school had done nothing illegal, but he did not address the issue of donor intent.
In July 2002, Attorney General Fisher announced that the interlocking directorate between the Hershey Trust, Hershey School, and Hershey Foods was ending. From now on, no one can be a director of more than one organization.
Shortly after General Fisher’s decision, the Hershey School announced that it was looking for a buyer for its shares (42 percent of the common stock, 76 percent of the preferred) of Hershey Foods. However, the school’s board made a major mistake when it decided not to explain why it supported the sale. Hershey Trust president Vowler initially made a few statements about how the board thought it was necessary to diversify the school’s endowment. But then he–and all other supporters of the sale–refused to talk to the press.
As a result, when the world’s financial journalists descended on Hershey, they found numerous foes of the sale eager to talk to them, including members of the alumni association, Hershey Foods employees fearing a loss of jobs, and Attorney General Fisher, who was the Republican candidate for governor of Pennsylvania. (He lost to Democrat Ed Rendell.) In addition, five former members of the Hershey School board and three former Hershey Foods CEOs announced their opposition to the sale.
But no one from the board explained what the Hershey School would do with $12 billion that they were not already doing with $5 billion. Nor did anyone explain why, if diversification of the school’s endowment was the key to the sale, it would be better for the school to accept a lucrative offer by the William Wrigley chewing gum company to own 36 percent of “Wrigley Hershey” common rather than what they already owned.
In September 2002, Senior Judge Morgan put a temporary block on the sale to allow the court further time to investigate. Two weeks later, the school’s board, after an eleven-hour meeting in Valley Forge, Pa., voted 10-7 to stop the sale. William Lepley, who announced that he was retiring in June 2003, suddenly decided to retire nine months early. Ten members of the Hershey School board, including the seven who voted for the sale, resigned, and the board was cut from seventeen to 10 members. To temporarily replace Lepley as school president, the school hired John O’Brien, a financial consultant who was an alumnus from the class of 1961.
What Would Milton Do?
Even though the controversy is temporarily over, the Milton Hershey School still has a major problem. What is the best way to fulfill Milton Hershey’s donor intent? If the school continues as it is has in the past, it will serve 1,500 poor children a year and give them lavish clothes, fancy equipment, and tuition, room, and board at the university of their choice. But such a scheme does nothing to help the several hundred thousand children trapped in foster-care programs or in hellish homes.
Perhaps the most reasonable way to use the surplus wealth of the Milton Hershey School is for the courts to allow the school to set up satellite orphanages across the US and perhaps overseas. These orphanages should be along the lines of Hershey’s Deed of Trust–simple places, where children could learn useful trades. There will always be a need for competent electricians and plumbers, and Hershey alumni can provide them. It’s quite possible that Senior Judge Morgan or his successor would approve this plan, as long as the diverted funds are used for poverty-fighting, and not for consultants or studies.
Hershey Alumni Association president Ric Fouad concurs with such a vision. The Hershey School, he told CNBC’s “Business Center” show in September, is “the single-largest resource on Earth for taking care of dependent and at-risk children, and it’s still being grossly underutilized and misused….The money they have now is plenty to utilize the resources of Hershey to add more children and to serve them well.”
Moreover, in the 1990s, orphanages have become more common as America’s foster-care has suffered from an increased number of children in the system and a steadily declining number of parents. Given the number of bad parents out there–many drug addicted–it’s clear that a troubled family (particularly a single-parent household) is not necessarily the best place to raise a child.
In 1998, for example, Minnesota Republican Governor Arne Carlson convinced the Democratic-controlled legislature to authorize the building of three “residential academies” that were designed to be all-day boarding schools for troubled 9-18 year olds. Other orphanages are being built by nonprofits, some Christian. S.O.S. Villages USA built three of them in the past five years. Other orphanages have recently appeared in San Diego, Estes Park, Colorado, and New Jersey.
Writing in Insight, Heidi Goldsmith, director of the Center for Residential Education, says that alternatives to orphanages, such as “returning abused and neglected children to their drug-abusing biological parents,” are not necessarily the best solution for troubled children. “What looks like a family isn’t necessarily what children need,” Goldsmith writes. “Children need a living setting which behaves like a family, providing them consistent love from caring adults, stability and satisfaction of their physiological needs. They need living environments which provide structure, values, a place they feel they belong and matter and where dreams are encouraged.”
Should orphanages be the first place troubled children are sent? Perhaps not. But given the failure of foster care and social work, America–and, perhaps, the world–could certainly use more orphanages. An enlightened Milton Hershey School board could use its vast wealth to ensure that orphanages become more common. Such a bold move would be the best way to adapt Milton Hershey’s ideas to a new century.