Charity Trusts and the Shareholder vs. Stakeholder Debate.

Author:Stern, Michael J.
  1. INTRODUCTION II. BACKGROUND A. Charity Trusts: A General Background B. Background of Shareholder and Stakeholder Approach 1. Shareholder Approach 2. Stakeholder Approach C. Laws Governing Charity Trusts 1. Power of State Attorneys General 2. Congressional Act Requiring Diversification D. Hershey Trust and the 2002 Saga 1. Hershey and the Hershey Trust 2. The Hershey Conundrum 3. The Community's Reaction 4. The Pennsylvania Government Gets Involved 5. End of the 2002 Saga E. Hershey's Recent Sale F. The Recent Trend III. ANALYSIS. A. Role the Theories Play with Charity Trusts B. Benefits and Disadvantages of Taking a Shareholder Approach 1. Benefits of Taking a Shareholder Approach 2. Disadvantages of Taking a Shareholder Approach 3. Shareholder Theory Analysis of Whether to Relocate Business C. Benefits and Disadvantages of Taking a Stakeholder Approach 1. Benefits of Taking a Stakeholder Approach 2. Disadvantages of Taking a Stakeholder Approach 3. Stakeholder Theory Analysis of Whether to Re-locate Business D. Hershey Trust: How Shareholder and Stakeholder Theory Played a Role 1. Hershey Trust's Historical Approach 2. The 2002 Conundrum Approach 3. Hershey Trust: Going Forward E. Charity Trusts: Shareholder vs. Stakeholder IV. RECOMMENDATION A. Should It Be Left to the States? B. Should Congress Get Involved to Regulate Charity Trusts? V. CONCLUSION I. INTRODUCTION

    In recent years, charity trusts have grown in both donations received and the benefits bestowed. (1) This is also accompanied by the recent trend of the extremely wealthy to pledge the vast majority of their wealth to charity upon their death. (2) This increased philanthropy has obvious benefits; however, it brings a concern about how the charity trusts should operate. When the charity trusts are using their new wealth, they are faced with the decision of following a shareholder or stakeholder approach. As it turns out, this decision may not be left to charity trusts.

    In 2002, the Hershey Trust--the charitable trust associated with Hershey Foods-- attempted to sell its majority stake in Hershey Foods. The Pennsylvania government intervened and decided that the Hershey Trust could not sell its shares in Hershey Food due to the potential effect on the community. Situations like these present the question of whether state governments should be allowed to interfere with the decisions of other expansive charity trusts--such as the Bill & Melinda Gates Foundation--and dictate what type of approach is followed as charity trusts continue to grow. This Note seeks to address this question.

    To accomplish this task, Part II will lay out the necessary background information. This Part will cover the basics of charity trust and the history and fundamentals of the shareholder and stakeholder theories. Then, Part II will proceed to discuss some of the relevant laws governing charity trusts--both state and federal. Furthermore, it will proceed to delve into the facts and results of the 2002 Hershey Trust conundrum. Finally, Part II will set the stage for the potential conflict as charity trusts continue to grow in size.

    In Part III, the benefits and disadvantages of the shareholder and stakeholder theory will be weighed and analyzed to see how these two approaches affect charity trusts and which approach would be best for charity trusts to follow. Finally, Part IV assesses how this question should be answered--either by sticking to the current path and letting the states dictate the outcome, or congress stepping in and legislating the approach for charity trusts to follow.


    This Part lays out a general background of charity trusts, the shareholder and stakeholder approach, and the general steps taken by states and Congress. It also summarizes the Hershey Trust events and the current trend of charity trusts.

    1. Charity Trusts: A General Background

      A charitable trust is a private foundation that devotes all unexpired interests to one or more charitable purposes. (4) However, even though a charitable trust is created to fund one or more charitable purposes, the trust does not receive a tax-exempt status and is treated exactly like every other private foundation. (5) The charitable purposes a trust may seek to benefit are also limited by the Internal Revenue Service (IRS) to "religious, charitable, scientific, literary, or educational purposes" and further limited by state law defining what a charitable purpose can be. (6) Despite these limitations, contributions to a charity trust can generate significant income and estate tax benefits. (7) For these reasons (as well as general goodwill), many wealthy individuals have set up or donated to charitable trusts because those donations "may translate into hundreds of thousands of dollars in estate and income tax savings." (8) Furthermore, the general rule is that "outright gifts to charity at death are deductible without limit and reduce the taxable estate." (9) For these reasons, charity trusts have begun to increase in size (10) and that poses the question of whether charity trusts should follow a stakeholder or shareholder approach.

    2. Background of Shareholder and Stakeholder Approach

      There are two main competing theories that address how a corporation should be run: the shareholder approach and the stakeholder approach.

      1. Shareholder Approach

        The ideals that have shaped the shareholder theory were established over 200 years ago in Adam West's The Wealth of Nations (11) The shareholder theory is primarily based on the idea that the main purpose of a business is generating profits and increasing shareholder wealth. (12) The shareholder theory heavily relies on the fiduciary duty between the company's directors and the company's shareholders. (13) However, this profits first mentality does not promote companies to act "unethically, immorally, or illegally." (14)

        The United States' version of the modern shareholder approach picked up steam in 1970 with Milton Friedman's article, The Social Responsibility of Business is to Increase its Profits (15) Friedman laid out that "there is one and only one social responsibility of business--to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game.... " (16) This view takes the approach that "solving social problems is the responsibility of the state." (17) Followers of this theory believe that if businesses use wealth for social and moral developments it "will negatively affect society in the long run." (18) Some even believe that if companies started to become socially involved, their actions would "usurp[] the role of democratically elected officials." (19)

        In general, the rule of the shareholder approach is to "advance capital to a company's managers, who are supposed to spend corporate funds only in ways that have been authorized by the shareholders." (20)

      2. Stakeholder Approach

        Unlike the shareholder approach, the stakeholder theory has its roots "in the late 1970s and early 1980s" when "researchers with backgrounds in philosophy, psychology, sociology, and management began ... challeng[ing] some of the basic assumptions of classic economics and shareholder theory." This approach is founded on the idea that "taking the interests of all the firm's stakeholders into account, the firm could do 'better' (achieve greater performance) than by simply focusing on shareholder interests." (22) It is hinged on the concept that if a firm creates value for stakeholders, it creates value for shareholders. In general, stakeholders are "individuals and constituencies that contribute, either voluntarily or involuntarily, to [a company's] wealth-creating capacity and activities, and who are therefore its potential beneficiaries and/or risk bearers." (24)

        A company can look to increase value through the stakeholder approach by focusing on four major responsibilities: economic responsibility to shareholders, legal responsibility to laws and regulations, ethical responsibility to recognize that a company is a part of a community and has obligations to the community, and discretionary responsibility to engage in philanthropy. (25) The approach, unlike the shareholder theory, emphasizes an ethical responsibility to the community and understanding of the company's impact on the community. (26)

        There is some debate about who fits into the stakeholder category, but it is generally agreed that this includes "shareholders, customers, employees, suppliers, and the local community." (27) This approach holds that managers are agents to all stakeholders, and they are required to balance the legitimate interests of all stakeholders when making decisions. (28) The long-term goal is to balance profit maximization with long-term success. (29)

    3. Laws Governing Charity Trusts

      While corporations have generally been left to choose which approach best suits their company, charity trusts have some limitations imposed on them. Historically, these limitations have been imposed by state attorneys general, but Congress has imposed some of its own limitations, primarily dealing with diversification.

      1. Power of State Attorneys General

        "Attorneys general are charged with the unique and important duty of representing the public's interest in charity." (30) In most cases, it is the attorney general who has the power and standing to "fight" charities and charity trusts. (31) Attorneys general have a well-settled and clear authority to prevent and remedy breaches of fiduciary duty by trustees of charitable trusts and the responsibility to monitor attempts to modify or terminate trusts. (32) These powers go all the way back to the English common law. (33) While attorneys general ensure that the charitable trust is managed in accordance to the donor's intent, they also represent the community and public interests. (34) It follows, then, that the intention of a charity trust is to devote property for the purpose of benefiting the...

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