Pennsylvania’s newly inaugurated Attorney General, less than five months after taking office, has entered into a “reform agreement” with the trustees of the Hershey School Trust, absolving them of charges of breach of fiduciary duty but requiring a range of different practices in the future.  Attorney General Kathleen Kane has issued a statement in connection with filing a notice of no objection to confirmation of the trust account in the Dauphin County Orphans’ Court.  (Re: Trust under deed of Milton and Catherine S. Hershey, No. 712 of 1963.)

The Hershey School Trust holds an endowment of about $10 billion, making the Milton S. Hershey School the best endowed secondary school in the nation.  The school, which has been the subject of multiple suits in recent years, operates a boarding school for about 1800 students.  (See Nonprofit Issues® 12/1/06) Robert Reese, a former member of the charity’s board, had leveled a series of charges of financial irregularity against the board in 2011, but had withdrawn the charges when not retained on the board.  The Attorney General’s office continued the investigation without public hearings.

The AG imposed no penalties but required some changes in operations.  The settlement limits the compensation of Hershey Trust trustees and the number of positions on affiliated entities one can hold.  LeRoy S. Zimmerman, a former state Attorney General and politically powerful person, had reportedly received about $500,000 a year by serving on three related boards.

Under the settlement, a Hershey Trust trustee will be compensated at the “low end” of a compensation study. The trustees may earn $30,000, plus $10,000 for the chair, $5,000 for a committee chair, and $4,500 for in-person attendance at a board meeting of more than four hours. No more than three Hershey Trust trustees may serve on the board of The Hershey Company (the chocolate company) and no more than one on the board of Hershey Entertainment and Resorts Company. No trustee of the Trust may serve as director of both The Hershey Company and Hershey Entertainment.  The agreement calls for a compensation study by a firm acceptable to the AG every other year before compensation may be increased.

The agreement also requires the trustees to adopt a travel and reimbursement policy that would limit more lavish expenditures for travel, such as first class flying and limousine service at local destinations.

Responding in part to charges of the Hershey School Alumni Association that the trustees were not knowledgeable about educational issues, the settlement agreement requires the managers of the School and the trustees of the Trust to “use their best efforts to identify for election to their Boards individuals whose education, training and experience reflect the full range of the Board’s responsibilities, including, but not limited to: at-risk dependent children, residential childhood education, financial and business investment  and real estate management.”

It requires the School to admit only children who are deemed “poor” as set forth in the deed of trust and who are not receiving “adequate care from one of their natural parents.”  The School is also required to admit students “with a wide variety of potential for scholastic achievement ..., including those who are likely to benefit from the vocational educational program of the School.”  The School is also required to provide a “year-round program” for its students.

The School is required to file an annual report with the AG describing the economic and academic characteristics of the children admitted to the School, the programs in place and in development, programs to increase student safety, and any other information or materials that the AG requests.

One of Reese’s charges was that the Trust bought an adjacent golf course in which several of the trustees held an interest at several multiples of its appraised value.  The AG concluded, however, that the price was reasonable “in light of the School’s intended long term use of the property.”  The School will be required to provide the AG with at least 30 days notice of any real estate transaction involving a lease of three years or more or a purchase of $250,000 or more.

The AG dismissed Reese’s conflict of interest charges and the charges that the trustees received excessive perks such as free golf course passes and hotel accommodations.  She attributed the Trust’s payment of a $15,000 sponsorship of a Republican State Committee political event to an “invoicing error” that was corrected when brought to the Trust’s attention.

She also required the Trust to adopt a new conflict of interest policy which prohibits trustees and their family members from accepting personal favors with a value over $100 from any vendor of goods or services to any of the Hershey entities and prohibits them from engaging in personal transactions with any such vendor except on terms generally available to the public.

The conflict policy also prohibits board members or members of their families from making political contributions, “directly or indirectly,” to any candidate for state Attorney General or Dauphin County Orphans’ Court judge, or to any incumbent in either office seeking re-election, retention, or election to any other office.  

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The settlement has been criticized by some observers as a “whitewash” and a “lost opportunity” to make individuals accountable for gross mismanagement and personal gain.  For others it is the end of an era and a chance to move on constructively with the education of students at the school.  The Alumni Association called it a “positive” development.  Traditionally the Pennsylvania Attorney General’s office has approached charitable scandals more focused on protecting the charitable mission of the organization than punishing those who have failed to uphold it.  This type of non-punitive settlement seems to continue the tradition.