Among other large institutional shareholder you find Vanguard Group Inc. (7 429 090 shares), State Street Corp. (6 926 329 shares) and Janis Capital Management LLC (5 554 881 shares). However, as the Hershey Trust Company holds class B stocks, they have the majority voting power (80 The Milton Trust Company also needs to approve any issuing of Common Stocks or other actions that would deprive the Milton Trust Company of the ability to cast a ma]orally of the votes on any matters where the class B Common Stock is entitled to vote. (Notice of annual meeting of stockholders, 2010).
This goes to show that the Hershey Trust Company eave the power to swing the votes In the directions of their desires In matters Like electing directors, selecting of independent auditors, approval of executive officers compensation etc. Even though they only hold 10,12 % of the total shares. The Hershey Trust Company also have the legal right to appoint or remove up to SIX directors (Notice of annual meeting of stockholders, 2010). The three other top four shareholders, in combined, holds 16,10 % of the shares, but that does not enable them to affect any real decisions.
The rest of the shareholders holds anything between four and 4 million shares. With 660 individual institutional shareholder. The structure of the voting power paves the way for addressing type 2 agency problems (minority vs.. Majority Investors). The Hershey Trust Company may have a different agenda and different views than the rest of the shareholders. The Hershey Trust Company’s primarily mission is to act as a trustee and manage the Hershey School, through the financial support raised though the Hershey Company.
The Hershey Company are believed to have very strong incentives to carefully monitoring the executives and company performance, because they have great interest, both as eave smaller incentives towards monitoring daily operations. The distribution of power in between the shareholders are highly concentrated, as The Hershey Trust Company controls the votes. Big shareholders with great power, may have big influence of managers (Thomson and Canyon, 2012, p. 124). Board Structure In October 2011 , the board of Hershey Trust Company demanded the resignation of several board members of The Hershey Company.
The foregoing events leading to such demands was the merger talks between The Hershey Company ‘s CEO at the time, Richard Ellen and the I-J company Catbird Speeches. Hershey Trust Company felt betrayed as, as the major shareholder, as they had not been informed about the ongoing talks. It resulted in nine board members handing in their resignations. The Hershey Trust Company announced their successors on November 1 1 . The board is a generic corporate governance mechanism and works as an intermediary between the firms executives and their shareholders.
They are the final arbiter of all major decisions made by the firm (Thomson and Canyon, 2012, p. 142). The Hershey Company ‘s board can be described as an Anglo-Saxon model, which is typically for American companies. It is a one-tier board, where the employees of the company has no direct affiliation or representatives among the directors. This may be a source of Type 3 agency problems (stakeholder vs.. Shareholders) (Thomson and Canyon, 2012, p. 20). The board is led by the companies’ CEO, Mr.. John Bilberry while other directors are in charge of different committees. Pearce and Sahara (1991) examine the relative power of the CEO and the board.
Their matrix suggest that The Hershey Company board is a Participative board as both the CEO and the board exercise a lot of power. John Bilberry has been involved with The Hershey Company in overall positions since 2003 several years and is likely to enjoy the trust and favor of the board of directors through his seniority and as the company stock has been steadily increasing throughout his period at the wheel (Thomson and Canyon, 2012, p. 172). Due to the fact that he also is on the board himself, he also get to know the board better and get better handling of them.
Another central feature of the board of directors is the question of whether the CEO is also the chairman of the board. When the CEO is also the chairman this is often referred to as “CEO duality’. In the US the CEO is often the chairman of the board. Studies have shown that the board in most cases agrees with the CEO ‘s proposals. Argument for separating the roles, is to provide an effective separation of power. Another important question is to ask whether the outside directors are independent. This is required because the outside directors act as check on any potential self-interested behavior by insiders.
Among the eleven directors on the board Mr.. James Novels, Mr.. James Mead and Mr.. Robert Caving are all representatives of the Milton Hershey School and thus cannot be regarded as independent. Also The Hershey Company’s CEO, Mr.. John Bilberry is represented as a board member and is not independent in this setting. If the outsiders are dependent then their effectiveness would be blunted. Board members are said to be independent if they have no ties to the firm and therefore no special interests apart from their responsibility as board members (Thomson and Canyon, of the Hershey Company Corporate Government Guidelines for independence.
Historically events goes to show that The Hershey Trust Company have exercised a great deal of interference with The Hershey Company’s operations. They have taken interest and proven determination in situations where they have not been satisfied with the CEO or the board of directors. As a result they now have three representatives on the board, relative to the one representative that they had earlier and thus a stronger presence. It is reasonable to assume that The Hershey Trust Company have more control over the management and the company than earlier and that they have a strong impact on the board ‘s decisions.
Governance Issues As mentioned, we might encounter type 2 agency problems (Thomson and Canyon, 2012, p. 20). The Hershey Trust Company holds all the majority voting power and Hereford can handedly undermine the votes of the minority shareholders. A good example of this is the Louisiana Municipal Police Employees’ Retirement System (from here on LAMPREY), a Hershey minority shareholder. LAMPREY sent a letter back in October 2012, requesting information on possible violations of fiduciary duty by Heresy’s board by contracting with West African cocoa farms that may utilize child labor.
When Hershey refused to hand over the documents LAMPREY filed a lawsuit, alleging that Heresy’s board breached its fiduciary duty by refusing to end its reliance on child labor farms (Morocco, 2013). The lawsuit has been rejected by one court in 2013, but the decision was overruled in March 2014, and the outcome of the case is yet to be settled (Feely, 2014). Audit on human rights, insisted on by shareholders is becoming more normal. Shareholders are worried about exposure to allegations of human rights abuse which can be hugely damaging to a company.
This is a case of adverse selection (hidden information) by the agent. I will not speculate too much in why the board decided to withhold the information. It could be because of competitive reasons, but off course it is the possibility that they actually know more bout child labor conditions with their suppliers than they would like to manifest. Critics do claim that The Hershey Company lags years behind competitors like Mars and Nestle in addressing these issues (Stevens, 2012). Employees can also play a role in corporate governance.
In some countries they are entitled to elect board members as well (Thomson and Canyon, 2012, p. 7). In the present Anglo-Saxon model however this is rarely the case. The board of directors in the case of The Hershey Company is absent the voice of the companies’ employees. In recent years The Hershey Company has moved a lot of production from North America to plants in Mexico. Such tendencies are obviously unfortunate for the employees and the local community in Hershey, Pennsylvania, where the original production plant are located.
The mere existence of the community is dependent on the plants operation. This illustrates a Type 3 agency problem between shareholders and stakeholders. The shareholder might decide to close down a factory. This can harm the welfare of the employees, local government etc. This falls under the heading of corporate social responsibility (Thomson and Canyon, 2012, p. 20). As The Hershey Company expands its global business by offspring production and acquiring new companies (the acquiring of Shanghai Golden Monkey) the uncertainty among its North American workers is likely to rise.
Concluding Remarks Hershey Company. The Hershey Trust Company maintains full control on the owner side with the majority voting power, and is thus able to turn any decision in the direction they want to. This is unfortunate for other big, yet minority investors, like for example LAMPREY who can end up suffering from adverse selection and/or moral hazardous conduct from the majority shareholders. There is many shareholders with huge multimillion value stakes in the firm, who are not able to exercise any control over the company, but are “forced” to act as inactive shareholders.
The board structure also affect stakeholders of various kind. Stakeholders, especially in commodity industries that rely on suppliers in undeveloped part of the world, such as the chocolate industry is raise a long list of extremely complex issues, which I have not discussed in this paper as I focus on the stakeholders directly affected by ownership/board structure. The stakeholders are missing a voice among the erectors, making it harder to speak their case in matters of their interests.
The pure objective of the shareholder and management to maximize profit are often not well in line with the interests of stakeholders. Large owners will have a stronger incentive to monitor managers and they will have more power to enforce their interests (Thomson and Canyon, 2012, p. 123). As the majority shareholder, The Hershey Trust Company has shown determination towards these tasks. This makes sense as the trusts existence is based on managing the revenues of The Hershey Company towards the Milton Hershey School and other Hershey entities.
As a result, however, the review of the company corporate mechanisms paints a picture of a highly centralized power distribution among the shareholders and a board of directors where the dependent representatives (representatives from The Hershey Trust Company) has a great influence. The result of the strong power centralization seems to be that one shareholders interests are accommodated in most decision makings. This can be unfortunate for The Hershey Company as it can make it less attractive for new investors.