Hershey overhaul a sign of new spotlight on boards

By Paritosh Bansal -Analysis

NEW YORK (Reuters) - A sweeping overhaul of Hershey Co.'s (HSY.N) board amid dissatisfaction with the chocolate maker's performance is a rare event, made possible because of the company's unique structure.

But the departure of most of the board points to a trend where directors, and not just management, are being held more accountable by shareholders for a company's bad performance, corporate governance experts said on Monday.

The Hershey Trust, which controls about 78 percent of Hershey's voting shares, asked six of the company's 11 directors to resign on Sunday. Two others also chose to resign, the company said. The move came weeks after Chief Executive Richard Lenny decided to leave the company.

"It very rarely happens that a major shareholder will force out directors," said Charles Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware. "Even in a proxy contest where the directors are replaced it is unusual. So this is even more unusual."

In other recent cases of officials being held accountable for a company's bad performance, the chief executives of Merrill Lynch MER.N and Citigroup (C.N) departed in the past few weeks, but there has been little sign that members of their boards will be made to pay a price as happened at Hershey.

"When the board or a major shareholder is not happy with performance, it is the chief executive who is replaced," said Howard Sherman, chief executive of GovernanceMetrics International. "It is indicative of shareholders today being more and more willing to speak up."

A big change like that is usually difficult to bring about for activist investors and had been possible in the case of Hershey in part because the trust is a controlling shareholder, the experts said.

"The question is, those dissident or those activist shareholders, how much control do they have?" said Craig Siiro, partner at Virchow Krause.

A structure like Hershey's, where that investor has a controlling stake is rare in Corporate America, experts said. For example, some media companies, such as the New York Times Co (NYT.N), have significant shareholders -- sometimes even controlling ones -- but they are often also involved in the management of the company.

"It is unusual for a company of this size where the controlling shareholders also don't control management," said Robert Hayes, partner at Cozen O'Connor.

The change in this case had been in the works. The maker of Hershey Kisses and Reese's Pieces has struggled in the past two years with rising costs and tough competition from M&Ms maker Masterfoods USA, a unit of the privately held Mars Inc. Last month, Hershey posted a 66 percent drop in quarterly profit.

The trust first voiced its displeasure with Hershey's results in a statement issued October 10. At that time, the trust was already in the process of seeking new members to serve on Hershey's board, a spokesman for the trust said on Sunday.

"Typically, you don't see a wholesale change at the board level unless there is an outside investor agitating for change," Sherman said. "It's very rare to see such a dramatic change."