Let the Word Go Forth from Hershey, Pennsylvania That Americans Believe That Corporate Rights Come with Corporate Obligations...

By Robert Hinkley, August 5th, 2002

This is a speech I gave this past Friday in Hershey, Pennsylvania in connection with the proposed sale of Hershey Foods Company.
If any of you have ever been to Hershey, Pennsylvania, you know what a special place it is. The town's economy is anchored by the Hershey Foods Company, by far its largest employer. The street lights are in the shape of Hershey Kisses. Even the pollution smells like chocolate.

Hershey Foods was founded by the late Milton Hershey. In addition to being a savvy businessman, he was a philanthropist and citizen. Before he died in 1945, he put all of his shares in Hershey Foods in a trust for the benefit of a school for orphans, The Milton Hershey School in Hershey. Today, that trust has more than $5 billion in assets, including the majority voting interest in Hershey Foods.

The people of Hershey speak only with reverence of Milton Hershey, his company and the things he did. Until just recently, no one worried about Hershey Foods being the subject of a takeover because it was assumed that the Trust would never sell and the relationship between the town, the company and the school would stay in place forever (as Mr. Hershey would have wanted).

Eleven days ago, the Trust decided to put the company up for sale citing their fiduciary obligation to protect the value of the Trust through diversification. Leaving aside the question of whether this means they have been in breech of their obligations for the past 50 years, their decision to sell has created much anxiety in the town Milton Hershey built and loved.

Bob Hinkley
Brooklin, Maine

11:30 A.M. August 3, 2002
Hershey, Pennsylvania

How many of you think that being a citizen involves obligations as well as rights? Raise your hands.

How many of you think that citizenship only involves rights? Raise your hands.

Thank you for inviting me here today. I am honored to be asked to speak at a gathering where matters as serious as the future of Hershey Foods and this beautiful community are at stake.

I have been a corporate lawyer for more than 20 years.

Until June of 2000, I was a partner in the largest law firm in the world--the same law firm that I understand has been retained by the Board of Managers in connection with the proposed sale of your company.

I left that firm more than two years ago because I realized America's most powerful citizens, its large corporations, have all the rights of citizenship, but bear none of the obligations that come with being a citizen.

This lack of obligations results in the pollution of our environment, employees being treated without respect, deadly products in the marketplace and most importantly damage to our communities.

I thought I could do something to change that. This is what I want to talk to you about today.

Citizenship is not just about rights, it comes with obligations too. Each citizen has an obligation to act in a manner that respects the environment, the rights of other citizens and the well being of our communities. In a nutshell it is behaving with conscience in a manner that goes beyond merely obeying the law.

Large corporations, especially large public corporations, often find these obligations of citizenship very difficult.

By law they are established for one purpose--to maximize profits. Company managers take this purpose very seriously. Failure to achieve this purpose can result in their stock price decreasing and their company being taken over or broken up. Worse, it can get them sued.

Recent events have shown just how hard it is for corporations to be good citizens:

American companies have moved their site of incorporation offshore to avoid US taxes. They have bilked electricity consumers in California of billions of dollars. They have closed factories in America while opening them in third world countries. They have eliminated hundreds of thousands of good paying jobs in order to increase stock prices on Wall Street.

Corporate focus on the bottom line treats citizenship as if it is irrelevant. Instead of acting out of conscience, corporate behavior tends towards meeting the minimum requirements set by law and no more.

The result of this is that corporations benefit while people, our communities and the environment suffer. Though recent events may make it look like these problems are new, they have been with us as long as we have had corporations.

Both Thomas Jefferson and Abraham Lincoln expressed concern for what could happen to their country by the unrestricted pursuit of corporate profit. Teddy Roosevelt devoted a large portion of his presidency to getting corporate behavior under control. President Eisenhower worried about the "military industrial complex".

In the past 25 years the problem of uncitizenlike corporate behavior has become exacerbated by a new phenomenon that has gripped American business. This phenomenon is the mergers and acquisitions game. It is this game that brings us here today.

At the end of this game one company owns another. The acquiring company often is burdened with significant debt incurred to pay the sellers' shareholders for their stock. The interest costs associated with such debt puts even greater pressure on managers to find ways to reduce costs. Too often, these costs are reduced by closing factories and laying off people.

Every year closures and layoffs caused by the mergers and acquisitions game result in hardship for hundreds of thousands of Americans and the communities in which they live. Factory closures can rip the life blood out of a community. In addition to unemployment and welfare rolls increasing, follow on effects include local suppliers having to close their doors and property values decreasing.

Word of a company being put up for sale raises the anxiety level of everyone in the company and the community (with the possible exception of senior management whose loyalty can sometimes be bought with long term contracts and so called golden parachutes).

Until last week, these were prospects that the Hershey community never had to consider. More than 100 years ago, Milton Hershey founded Hershey Foods. Under his stewardship the company became an American icon.

More than just a good businessman, Milton Hershey helped build this community and in it he founded the Milton Hershey School. He recognized that the success of each of the company, the school and the town, depended upon the success of the other two.

When he died, the majority interest in the company came under the ownership of the Milton Hershey School Trust. Mr. Hershey counted on the Trust, the company and the town continuing to support each other so that each would continue to thrive long after he was gone.

Last week, the Board of Managers of the Trust decided to throw that plan out the window. In effect, the Trust put the company up for adoption and created the prospect of the town becoming an orphan.

One of the most amazing aspects of this story is that the Trust itself was not threatened. To the contrary, the Trust is flush with cash and the dividends from the company, together with income from the trust's other investments, is more than sufficient every year to pay the costs of and expand the school which is the Trust's only purpose.

One can only question what the Board of Managers must be thinking. Hopefully, they will be brought to their senses before it is too late and, as Ross Perot would say, the giant sucking sound we hear is jobs and money leaving this community in order to line the pockets of Nestle's, some other buyer or their bankers.

Lack of corporate citizenship has been made worse by the mergers and acquisitions game, but we must not lose sight of the fact that the problem is endemic to the corporate structure.

The problem is much more the corporate system than it is the people who manage corporations. If we are going to make corporations better citizens--citizens that respect the environment, employees and our communities--we must focus our attention on fixing the corporate system not threatening its people.

The first thing we must do in this regard is recognize that corporate profits and corporate citizenship are not mutually exclusive. We can have both. Milton Hershey knew this and his company and community thrived as a result.

We are gathered today out of fear that a new owner will not see the wisdom of continuing his plan, share in his affinity for the town or its people or that it will change Hershey Foods into a company that thinks corporate citizenship is only about rights.

Corporate citizenship should not be dependent upon the character of ownership nor the size of the marketing budget. Respect for the community should be part of the corporation's design from the day the certificate of incorporation is issued allowing the company to be organized.

We must realize that corporations would not exist if we did not have laws on the books that said they could be created and operate. These laws are passed by our elected representatives in the legislature. All corporate power comes from these laws. In effect, all corporate power comes from us, the people.

If we, the people, do not like that our existing law puts corporate profit ahead of the environment, employees, other people and our communities, we can change it.

Not only do we have the legal power to do this, I believe that the political will is there as well. Two weeks ago President Bush went to Wall Street to tell them, and I quote "In the long run, their is no capitalism without conscience." He could not have been more right.

Business Week and the Harris Poll Organization have conducted polls that show 95% of Americans believe that, rather than simply maximize profits for shareholders, corporations should sometimes sacrifice profits in order to protect the interests of employees and the communities in which they operate .

We must ask ourselves how long we are going to continue to allow companies to leave gaping holes in our communities whenever they please?

We must ask ourselves how long we are going to allow our companies to treat their employees without dignity, like commodities, or simply as "human resources"?

We must ask ourselves how long we are going to put up with companies playing communities off against each other in a rush to the bottom to get the best tax breaks or the least environmental regulatory enforcement?

We must ask ourselves how long we are willing to live under a law where the pursuit of profit takes precedence over the welfare of our people and communities?

We must decide when we are going to stop living under a law that 95% of us think is wrong?

Corporations were created to serve mankind not so mankind could serve them.

I said at the outset that I left the practice of law because I knew that corporations could be changed to make them better citizens and to serve mankind better.

In order to do that we must change the corporate law that says corporations' only obligation is to maximize profits. Too many corporations interpret this to mean that everything that isn't made specifically illegal is legal. Too often, this interpretation depends on how they determine (in the words of former president Clinton) "what the meaning of the word "is" is." There is neither conscience nor citizenship in this kind of thinking.

I suggest 28 words be added to the duty of corporations to advance the interests of shareholders--28 words that will balance the pursuit of the corporation's private interest with obligations to the public interest. I call these words the Code for Corporate Citizenship.

The Code would simply modify the duty to maximize profits with affirmative obligations that profits not come "at the expense of the environment, human rights, the public health or safety, the dignity of employees or the welfare of our communities."

Companies that violate the Code would be legally liable to the members of the public whose interest is damaged.

The Code would change the mergers and acquisition game in a profound way. Acquirers will no longer be able to devastate communities in order to pay lenders. If they decide to close factories and layoff workers, they will be forced to consider and pay for the damage that such decisions cause. The Code will take away much of the incentive of the mergers and acquisition game that today results in the detriment of communities like Hershey.

In order to make corporations better citizens, we must become better citizens ourselves. Community activists must form coalitions with other groups whose interests the corporate law now treats as subordinate to corporate profit--groups such as organized labor, environmentalists, human rights activists and consumer advocates. Together we must demand our legislators change the design of corporations to include the Code for Corporate Citizenship.

We need not be timid in expressing this view. The vast majority of Americans want corporations to behave as if they had a conscience. They want our most powerful citizens to be good citizens.

Not far from here in Gettysburg, Pennsylvania, President lincoln spoke with reverence of our government by the people, for the people and of the people. Corporations with all the rights of citizenship, but none of the obligations leads to a government by the corporations, for the corporations and of the corporations. We must change this.

In 1776, the word went forth from Philadelphia, Pennsylvania that the American colonies would no longer accept "Taxation without Representation." Today, let the word go forth from Hershey, Pennsylvania that Americans believe that corporate rights come with corporate obligations.

Thank you.

Robert C. Hinkley is a corporate lawyer and former partner in the New York law firm Skadden, Arps, Slate, Meagher & Flom LLP. He now resides in Brooklin, Maine. His e-mail address is rchinkley@media2.hypernet.com.