Hershey Company

Chocolate and child labor: A hurdle for Hershey

November 16, 2012: 3:38 PM ET

Hershey is being sued based on allegations that its suppliers use illegal child labor. Corporate board reactions to these issues have been mixed at best. It's time for a change.

FORTUNE -- Children who amassed stockpiles of Halloween candy last month most likely netted impressive loot from just one company. Hershey claims that it's the largest chocolatier in North America, with over $6 billion in annual revenues and over 80 brands including Reese's, Kit Kat, Twizzlers, Jolly Rancher, and Ice Breakers. Unbeknownst to some parents handing out these treats, Hershey also happens to be embroiled in a child labor controversy.

A lawsuit filed by law firm Grant and Eisenhofer on All Saints Day alleges that Hershey's suppliers use child labor. Grant and Eisenhofer sued on behalf of one of the chocolate maker's largest shareholders, the Louisiana Municipal Police Employees' Retirement System. "There are substantial grounds to believe that the Company's Board of Directors (the"Board") has caused or permitted the Company to support the use of unlawful child labor, in fact integrating this illegal conduct into its business model," the complaint states.

In the complaint against Hershey (HSY), the pension fund asks to see corporate records to determine whether the company has been using suppliers known for illegal child and forced labor practices.

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Hershey had "announced plans to put $10 million towards solving child labor problems on West African cocoa farms by 2017," according to a February article from Fortune.com, based on a January press release from the company. A company spokesperson told me they "don't comment on pending litigation," but wrote by email that "The Hershey Company takes its commitment to responsible sourcing very seriously," noting that, "last month we announced our commitment to source 100 percent third-party certified cocoa by 2020."

Chris Meyer, a stewardship investing specialist with Praxis Mutual funds, says he has been speaking with Hershey on these issues since 2009.  By the end of this year, the Rainforest Alliance will have certified Hershey's Bliss chocolate line for human rights and environmental standards, he told me.

But Hershey's labor issues haven't been confined to cocoa farms. Earlier this year, the Labor Department "issued fines of $283,000 for health and safety violations against a company that operates a plant in Pennsylvania packing Hershey's chocolates, saying it had covered up serious injuries to workers," the New York Times reported. Protests last year by hundreds of the plant's foreign student workers prompted the investigation, according to the Times.

When many board members consider labor issues, they often think about sweatshops and famous cases like Nike that have received a lot of attention. Some recognize both the ethical and reputational concerns.

But board members' reactions are a mixed bag. Apple stepped up its efforts this year to police suppliers after a series of New York Times articles on Foxconn, a Chinese plant with questionable labor practices, according to the Fair Labor Association. Although Foxconn improved some of its practices, in September the Times reported new allegations of forced labor at the company's facilities.

Of the dozens of board members I've talked to about Foxconn, not all think the labor issues there matter. Some board members feel that the concerns raised by the Times were much ado about nothing. They believe that if an action does not cause financial pain to the company, it's okay.

Board members who adopt this Benthamite philosophy are responsible for staggering weaknesses in our capital markets system. In overseeing corporations, these individuals put the onus of ethical leadership outside the corporation itself. They grow concerned with ethical breakdowns if, and only if, the market or the government exacts a heavy penalty for their actions.

These kinds of board members disregard the futility of relying on those with sparse information and circumscribed ability to enforce good corporate behavior. They do not admit that the costs market participants and society assume are ones the corporation itself should bear. Nor do they appreciate that by delaying their own involvement, their corporations may escape in the short run but could very well invite worse disasters that will haunt them in the long-term.

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Directors who take this approach may get involved with environmental causes if doing so can help the immediate bottom line. They may concern themselves with governance -- in form rather than substance -- because they'd rather avoid sour board elections. But they are much less likely to concern themselves with labor matters, layoffs, or pay inequality.

"Employees are our most valuable asset," a CEO may say. And it's easy to say those six words. But these directors don't put that issue on the agenda. While they may never say so on the record, they don't really care about corporate culture or worker happiness.

This is not because they have given it much thought. In fact, the problem is that they lack a thoroughly considered business philosophy. They run in a pack where they can avoid such thinking. They bow down to short-term shareholder value. They do not have an informed view on their duties to stakeholders or the corporation's role in society.

Is it hopeless? No. But it is the next frontier.

Although less than a decade ago, concern for the environment wasn't in, today it's considered smart for business. Governance, although many can't define it, is discussed widely and considered important, not irrelevant, as it was decades ago. Boards now need to put the treatment of employees -- whether they are inside or outside the company -- at the top of their agendas.

Let's hope Hershey becomes more transparent, as the lawsuit requests. It will make the chocolate taste that much better.

Eleanor Bloxham is CEO of The Value Alliance and Corporate Governance Alliance (http://thevaluealliance.com), a board advisory firm.

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