The Law of Unintended Consequences for Hershey

According to Wikipedia the law of unintended consequences, “dates to the Scottish Enlightenment and consequentialism, or judging by results. In the twentieth century, sociologist Robert K. Merton once again popularized the concept, sometimes referred to as the Law of Unforeseen Consequences. Merton (1936) spoke of the “unanticipated consequences” of “purposive social action,” emphasizing that his term “purposive action… [is exclusively] concerned with ‘conduct’ as distinct from ‘behavior’. In any case, the law was mightily fulfilled by Pennsylvania Attorney General D. Michael Fisher. The controlling interest in Hershey is owned by a charitable trust; likely set up by old Milton himself, and possibly benefiting the school he established. (By the way, Hershey’s story is a very interesting one for any student of growing businesses). It turns out that the trust was looking into selling its controlling interest and diversifying. That’s where AG Fisher comes in. Fisher was afraid that, following a sale, Hershey, PA would fold, ‘kisses’ street lights, amusement park, and all, and that jobs would be moved out of the state. He pressured the trust not to sell and it backed down. Now, law professors Jonathan Klick (Harvard), and Robert Sitkoff (Florida State), argue in a law review article in the Columbia Law Review that AG Fisher’s actions left Hershey in a “suboptimal ownership structure” and have destroyed $2.7 billion in shareholder value. Fisher, now a federal appeals court judge, defends his actions as “beneficial at the time.” Sounds to the Buzz like this judge doesn’t know his law... “of unintended consequences” at least. Also sounds to us like a good example of the arrogance of those who think they know best, but actually know very little.

--Paul Marotta

Proxy Compensation Discussion Redux

The SEC has examined the new Compensation Discussion and Analysis section of the Proxy Statements for 350 public companies. The CD&A was new this year and, to its credit, the SEC is trying to figure out if the objectives were met and what might be changed to make it better. No rule changes are expected for 2008, but some might be offered in later years. The SEC thought that two principal themes emerged. First, the SEC thought that the Compensation Discussion and Analysis generally needed to be focused on how and why a company chose specific executive compensation decisions and policies. The SEC said that the focus should be on helping the reader understand the basis and the context for granting different types and amounts of executive compensation. Second, the SEC thought that the manner of presentation matters. In particular the SEC thought that using plain English and organizing tabular and graphical information in a way that helps the reader understand a company’s disclosure, were best. They added that techniques such as providing an executive summary, or creating tables or charts tailored to a company’s particular executive compensation program, can make the disclosure more useful and meaningful. None of its comments meant that the SEC thought more text was needed; rather it opined that a shorter, crisper, and clearer discussion would often be better. We’re sure that, as with anything, both good and bad practices will arise and both will likely become ubiquitous. The SEC will try to correct the bad practices. The Buzz believes that intelligent focus by boards on incenting for the right targets and avoiding perverse incentives is time well spent, and will certainly make any compensation plan more useful, not to mention writing a CD&A easier.

See http://sec.gov/divisions/corpfin/guidance/execcompdisclosure.htm

--Paul Marotta