Jonathan Klick of the Florida State University College of Law and Robert H. Sitkoff of Harvard Law School just published an outstanding article entitled Agency Costs, Charitable Trusts, and Corporate Control: Evidence from Hershey’s Kiss-Off. What this article does well is "crunch the numbers" to answer the sort of open-ended question trusts-and-estates litigators face all the time:
Is a particular investment strategy in the "best interests" of the trust’s beneficiaries?
Crunching the Numbers:
Being non-math types, lawyers and judges often shy away from the type of quantitative, objectively-verifiable, empirical analyses employed in this article. Whether you agree or disagree with the findings, the value of this approach to any contested trust proceeding should be self evident. Rather than relying on the judge’s gut to figure out if a "prudent investor" would invest trust assets in a certain way under the terms of a specific trust agreement within the context of a specific class of trust beneficiaries, hire a finance whiz to crunch the numbers and demonstrate, in an objectively-verifiable and quantitative manner, which option results in the best overall economic benefit for the trust’s beneficiaries. Once the legal wrangling over how to define the operative terms is done, everyone should step back and let the finance gurus quantitatively fill in the blanks.
Trustees Lose PR Battle:
The controversy surrounding the Hershey School Trust’s decision to diversify its trust holdings by attempting to sell its controlling stake in the Hershey Company (thus potentially putting a lot of people in Hershey, Pennsylvania out of work) and subsequently backing out of the deal (thus depriving the trust’s beneficiaries of a control-premium windfall profit estimated to be as high as $1 billion) is often cited as a terrible example of "politics" trumping sound sound fiduciary decision making. For more on the political back-story of this case read The Hershey Power Play in Trusts & Estates Magazine by Pennsylvania attorney Christopher H. Gadsden, and Daniel Gross’s piece in Slate entitled Hershey Barred, whose subtitle says it all: How Pennsylvania officials screwed poor kids out of $1 billion by stopping the sale of the candy-maker.
However, blaming the politicians is way too easy. They were (not surprisingly) simply responding to legitimate concerns raised by their constituents. The board of directors of the Hershey School Trust deserves equal blame. The general public holds non-profit entities to a higher civic standard than for-profit companies, which means trustees of high-profile charitable trusts need to address any potential contested proceeding with two sets of professionals: lawyers and litigation-public-relations experts [click here, here]. It’s obvious the board of directors of the Hershey School Trust was blindsided by the "politics" of this deal, and bungled it terribly . . . to the detriment of the poor children they have a fiduciary duty to serve.
If someone from the trust’s board of directors had reached out to the key political players from the start, involved local civic groups in the decision-making process, and preempted any local bad press with a smart PR campaign using quantitatively-verifiable facts developed using the analytical tools employed in the linked-to law review article, the end result might have been very different. For example, if the Hershey School Trust’s upside from the deal was going to be around $1 billion, its board of directors could have easily set aside $100 million (or some other mind boggling large figure) for worker retraining, community redevelopment, generous termination packages for all fired employees (not just the top brass), etc. The trustees would have come out looking like heroes, and still vastly improved the economic well-being of trust’s beneficiaries. That would have been a good deal for everyone.