How Sweet It Is!

Third Quarter 2013
Corporate Board Member
by Deborah Scally

Describing his role at The Hershey Company as the “first among equals,” Chairman Jim Nevels has a lot to smile about as he leads the board of one of the world’s most respected confectionery empires.

Jim Nevels has a sweet job—literally. As chairman of The Hershey Company, Nevels oversees the governance of one of the best-known and beloved brands in the country. It’s practically impossible to think of Hershey’s mouth-watering chocolate and not grin. But that brand speaks to more than simply good taste. Hershey’s longstanding tradition of philanthropy is in its genes—a side of the company Nevels has long been associated with through his day job at The Swarthmore Group, an institutional investment advisory firm, as well as his tenure on the board of directors of The Hershey Company. Corporate Board Member recently interviewed Nevels about what makes Hershey’s culture, approach to business, and outlook so successful and unique.

Can you begin by sharing some background on The Hershey Company? It is certainly a unique corporate model in terms of its history and ownership structure.
The greatest confectionery company in the world, The Hershey Company, was founded by a visionary and an extraordinary man named Milton Hershey more than a century ago in 1894. During the course of this incredible history, Mr. Hershey persevered and became a successful entrepreneur and a philanthropist who, with his wife in 1910, established a cost-free, private school for orphaned children, The Hershey Industrial School, now known as the Milton Hershey School. He left Milton Hershey Trust an established legacy that included a controlling interest in The Hershey Company. The Milton Hershey Trust has a 30% financial interest in the company, but by virtue of dual-class stock, voting control is held by Hershey Trust Company. The Hershey Company has had 13 CEOs, and the relationship with Hershey Trust Company has been very good. There is no divergence whatsoever between Hershey Trust Company, as the controlling shareholder, and all other shareholders, because Hershey Trust Company acts for the benefit of all shareholders.

How and when did you become involved with The Hershey Company?
My background as a lawyer and as an institutional asset manager of The Swarthmore Group, which I founded 21 years ago, were experiences that contributed to my invitation to join the board of directors of Hershey Trust Company in 2007. Then in 2008, I had the singular honor and humbling opportunity to be elected to the board of directors of The Hershey Company; and a year later, I was elected by the board to be its chairman, and I continue to serve as chairman today.

What have been the major business objectives during your chairmanship?
Since 2009, management of The Hershey Company and the board of directors have focused on three corporate objectives, the first of which is to strengthen and fortify North American operations. Historically, The Hershey Company has been a predominantly North American-centric company, and the goal is to focus on the core business, which is geographically North America. So that is the first outcome.

Second, in 2009 there was consensus between management and the board that a second matter of importance should be succession planning. Not just in respect to the C-suite, but succession planning stem to stern. There are employees in the manufacturing facilities who have long tenures with the company, and literally, when they leave the confines of a particular manufacturing facility, a tremendous amount of resources and assets are leaving the company as well. So how do you go about imbuing the culture of a company by means of succession planning? This is something that we’ve been working on very studiously.

The third matter is enhancing the company’s international footprint. We have seen the market recognize the abilities of our extraordinarily capable CEO, J.P. Bilbrey, along with his global leadership team, and the roughly 13,000 employees that comprise our Hershey family. So in his tenure, we’ve seen dramatic growth, enhanced capacity, and capability.

At The Hershey Company we have the most advanced confectionery manufacturing facilities in the world, one of which produces 72 million Hershey Kisses 24/7! It’s an incredible facility and there is no doubt that Mr. Hershey would be extremely proud. So we are continuing to execute on the fundamentals, and we are doing so around an expansiveness of these three corporate objectives for which management and the board have reached a consensus.

Talk to us a little bit about the board culture at Hershey and the directors’ working relationship with management.
Our CEO is a member of management who also serves on the company’s board. The remaining nine directors are all independent directors.

The board dynamics are consensual. In terms of board leadership, I have a fundamental belief that consensus is ultimately desired, and 99% of the time, that’s the way this board operates. I’m also a firm believer in allowing committees to do their work. We have a governance committee, an audit committee, a compensation and executive organization committee, and a finance and risk management committee. We also have a fundamental belief that every board member shares responsibility for good governance and corporate social responsibility. We don’t have a separate committee to address corporate social issues; however, the company has made great contributions and accomplished some amazing things with respect to corporate social responsibilities, for which the board of directors and senior management are very proud.

Another key ingredient is the recognition of a line of equilibrium between governance and management. Let’s assume we’re standing at a chalkboard, and you draw a line across the middle of the chalkboard. Above the line is governance; below the line is management. There are times when that horizontal line moves up and down and results in a situation where, in fact, management may be in the role of governance, and there are times when that line moves the other way, and the talents of the board are such that they can serve as able consigliore’s or able advisers to management. But management has the final call and must execute the objectives and maintain good governance standards. So that is the perfect example of the collaboration above the line and below the line.

You once referred to the chairman’s job as being a “first among equals.” Can you tell us what you mean by that?
Certainly. What I mean by that is the chairman leads through serving and the chair is the prism through which the will of the board is reflected. This requires the chairman to be very studious about collaboration and consulting with the board on an ongoing, consistent basis. The chair is the living, breathing symbol of the board. “First among equals” means exactly that—that by virtue of the consent that is earned from the body politic called the board, and those constituent members, they consent to the position and the conduct of the chair. And if you take that point of view, the chair must reflect the body called the board. The chair doesn’t have a super vote and cannot do things by fiat, but rather by persuasion. That’s philosophically the way in which I believe the chair should interact with and lead the board.

What are some of the more interesting shareholder issues that the Hershey board has had to deal with?
Well, a few years ago I had the honor of taking a trip to Ghana, one of the cocoa- growing regions, the very genesis of the supply chain for the confectionery delight called “chocolate.” It was very enlightening and interesting because we heard a lot about the issues of child labor and sustainability. Remember, this is a company in which roughly $180 million in dividends flow to the Milton Hershey School. So we have a very interesting juxtaposition in which the company takes care of children here in Hershey, but we never want to do so at the expense of children elsewhere. And, so that is one of those paradoxes of which we’re very aware and which we take very seriously—it is in the fiber of this great company.

Remember, corporate social responsibility was practiced some 100 years ago when Milton Hershey started his philanthropy, so it’s in our DNA. Our employees adopt a group home at the school, for example, and contribute in many other wonderful ways.

So back to the issues we have confronted, during the company’s recent annual meeting of stockholders, the board was very placid, but also very dynamic in that there was tremendous focus on the progress of the company, its financial success, and also on what the company is doing with respect to corporate social responsibility. We were selected to be represented on the prestigious Dow Jones Sustainability Index in 2012. We were also ranked among America’s 100 Best Corporate Citizens by Corporate Responsibility Magazine in 2013. In the 2012 Newsweek Green Rankings, we moved up 172 spots overall, and to No. 7 in the food and beverage peer set, up from No. 20 in 2011.

In addition, there’s the Bloomberg Civic 50, where we were ranked No. 29 for the “most community-minded companies” in America. Hershey was the only confectionery company and the second-highest ranking CPG (consumer-packed goods) company on this year’s list. Then there’s the Carbon Disclosure Report, where we improved our carbon disclosure score from 67 in 2011 to 80 in 2012. With regard to our corporate social responsibility reporting, the latest full CSR report [issued in 2012] is available, and we’ve been lauded for the transparency level of that report. So the social issues are front of mind for Hershey, along with the maxim of “doing well by doing good,” which was the mantra of our great founder that is instilled in all of us.

That is a lot of positive recognition in recent years. Did something internally at Hershey propel increased attention to social responsibility and sustainability issues?
I think these issues have fully evolved into front-of-mind issues with management and also within the priority of strengthening and fortifying North American operations. So they fall within that purview. Likewise they fall within the purview of increasing our international footprint. We must “do well by doing good” in all of our geographies.

Turning to the international priority you mentioned, what have been some of the challenges for Hershey, a company that has had a very rich, domestic history in Pennsylvania for so many years?
It is quite difficult, but we’re doing it prudently and deliberately. Our CEO, J.P. Bilbrey, says it best: “We will do it at a measured pace.” And that is precisely what we’re doing. We’ve had the good fortune to acquire a company  in Canada called Brookside Foods and to date, the integration of this company has been successful. Our footprint in Mexico and into South America puts us in a wonderful position to be the candy company of the Americas from the Hudson Bay to the Straits of Magellan.

As you may know, this has been a very interesting period recently for us in that we introduced our first global brand, Lancaster (named after Mr. Hershey’s hometown), which will be sold outside the United States, in China. The board made a historic trip last October and held a board meeting in Shanghai. In addition, we opened an international research and development center in Shanghai. This has been an incredible statement to both the enterprise and, quite frankly, the world, that the company is very serious about creating an international footprint.

I am sure these new global initiatives also introduce new risks as well. Has overseeing FCPA risk and compliance become a critical issue for the board?
You bet, and therein lies the other element. The board [made a good decision to establish] a finance and risk management committee in 2009, in which finance and risk management functions were separated from functions of the audit committee (given the bone-crushing workload that the audit committee bears). [This was especially prudent] given the liability, as
well as the opportunity it provides to enhance the internal audit function as we expand abroad. When you look at all the work that audit has to do, enterprise risk is a very serious business and being attentive to those issues will keep a group of very talented people on the board rather occupied.

One of the hot topics from investors lately is the push toward having a separate CEO and chairman, which Hershey already has in place. Do you believe that is the proper structure as a standard of governance?
The Hershey Company has utilized both structures from time to time, and certain situations can dictate a separation of these positions.

I frankly believe there is little difference between the role of the lead director and the non-executive chair. As to my personal opinion in respect to that, I have to answer: It depends. I think there are times that absolutely warrant the two (positions) being one person, and then I think there are other times when it does not, and in that regard, it will depend on the collective facts and circumstances. I will say this: When the CEO and chair roles are separate, it is incredibly important for those two parties to observe the equilibrium line that I described earlier. I do not have an executive role in this company. What I do have is the role and function to manage the board and to be the prism through which the board’s views are reflected and to be a wise counselor to the CEO. That’s essentially my role.

You mentioned that there have been 13 CEOs in Hershey’s history. How does the board approach succession planning?
Succession planning is one of the corporate focus points that the board believes is very important. J.P. Bilbrey has been charged to move forward with this focus and has cultivated a number of potential successors internally. He is giving the board full view of how those people conduct themselves, though, of course, his successor may not be within the company today. He has been very studious about giving the board the opportunity to see the fulsome talent at this great company.

So you have put the responsibility to cultivate talent on him?
Yes, and the board’s charge falls with its compensation and executive organization committee. And that’s where the review of the organization falls. The very capable chairman of this committee, Robert Cavanaugh, has the longest tenure on the board, and he’s also a graduate of the Milton Hershey School.

Jim, it sounds like you have an enlightened board and a relationship with management that is based on mutual respect. Add that to being in the business of making something that people love, and it must make this job an enjoyable endeavor.
Yes, and one of the things that is so unique about this company as a brand is this: As a student of business and as a lawyer, I oftentimes wondered when I looked at a balance sheet: “What does the term goodwill mean?” After serving on The Hershey Company board of directors, I now have a better understanding. It is that look on an individual’s face when I say, “Hershey”—because invariably, they smile! Now that’s goodwill.

Indeed! I’m smiling right now.
Right. This is really illustrative of what goodwill is, and it’s also illustrative of our company’s values, which encompasses goodwill to children, families, and (the public’s) happiness. And we’re all here—the board, J.P., the global leadership team, and the 13,000 dedicated employees—that’s the reason we come to work.

 

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