DATELINE: October 5, 2010, Chicago
The Milton S. Hershey School has certainly generated its share of litigation over the years. If the Pennsylvania Attorney General is on the ball, the trust will once again be entering the legal arena. According to an article by Bob Fernandez in the October 3, 2010 edition of the Philadelphia Inquirer, the trust purchased the Wren Dale Golf Club in 2003. Hershey Deal: $12M Profited Club, ex-CEO. In 2006, the school claimed it purchased the club as “buffer land” to protect the school’s students.
Turns out there may have been other reasons for the purchase. The club had turned into a losing proposition for its investors, which according to the Inquirer, included one...
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Richard H. Lenny. Mr. Lenny just so happened to be Hershey Company’s CEO at the time of the purchase. More important for present purposes, Mr. Lenny was also a member of the school’s board of trustees. That is a clear-cut conflict of interest, and it doesn’t look like a good one to us.
Now you might think the school would have simply held the land if it were seeking nothing more than a buffer zone, but you would be wrong. The school sank an additional $5 million into the club to build a new clubhouse that contains a bar and restaurant. The new facility is open to the public, which means the school is profiting from people who are consuming alcoholic beverages in the buffer zone.
According to the Inquirer article, the decision to buy the club was made by a three-member executive committee. Lenny apparently wasn’t involved in the decision to acquire the club, but the Inquirer points out that his name was listed in mortgage loan documents. Knowing something about human affairs, we find it hard to believe that someone on the board or executive committee didn’t have some inkling about Lenny’s interest, particularly because the Inquirer reports that one member of the executive committee was an avid golfer. Turns out that this member is a former Pennsylvania Attorney General.
The economics of the deal may exacerbate the problem if the Pennsylvania Attorney General decides to intervene. The investors in the club apparently converted what would most likely have been a $75,000 loss per investor into at least a $15,000 profit per investor. Moreover, the executive committee authorized a purchase price that exceeded the property’s appraised value. One report placed the appraised value at $4 million. The school purchased the the golf club for $12 million.
The school claims that if it didn’t buy the land, a developer might have bought that land for high-density housing. We aren’t sure why that requires a buffer zone. There are plenty of private elementary and high schools located in residential areas.
It would seem that financing the new club house violates the terms of the trust, which provides that, “All revenues must be spent directly on the care and education of the children. No monies are allowed to be or are spent for any other purpose; there are no grants to other organizations or non- MHS related spending.” Of course, the trustees will argue that the need for a buffer zone is a permitted use of the trust’s assets. Even conceding the need for a buffer zone, we have trouble buying that argument. The purchase may be legitimate, but using the land for a golf course that is open to the public is not. It might have helped the trustee's case if the school had a golf team, but according to the Inquirer, it doesn't, which raises the further question of why the school owns directly or indirectly four golf courses.
Who knows whether the Pennsylvania Attorney General has the political will to intervene given the various connections and powerful people involved. For that reason, we urge the Internal Revenue Service to examine the transaction under the intermediate sanctions.
According to the most recent Form 990 for the school, it has a conflicts of interest policy in place and it monitors compliance with the policy. That doesn’t mean that necessarily was the case in prior years, but we are willing to bet that a policy was in place. If there was a policy in place, this once again demonstrates why having a policy doesn’t necessarily eliminate conflicts of interest or even ensure that conflicts are handled properly. An effective policy would have required notification of the full board regarding the acquisition, with each board member being required to disclose any conflicts. Given the history of the Wren Dale golf club, we would have asked each board member if they were an investor had we been on the executive committee that approved the transaction.
As 2010 comes to a close, we are beginning to take nominations for the nonprofit governance case of the year. The Hershey Trust's acquisition of the Wren Dale golf course certainly is in the running.
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