On Friday, July 29, the Pennsylvania Attorney General, the Hershey Trust Company and the Milton Hershey School, entered into a written settlement resolving an investigation conducted by the Attorney General concerning certain governance practices of the two entities. The high profile of both the parties and of the investigation, and the terms of the settlement, are worthy of health system governance committee review.

The investigation had been prompted by Attorney General concerns with Hershey compliance with a previous 2013 settlement between the parties on certain governance related issues. The key terms of the 2016 settlement reflect the particular focus of the Attorney General’s scrutiny. Those terms included ten year term limits for board members; mandatory performance evaluations; the resignations of five individual directors; required notice to the Attorney General on board nominations and a best efforts commitment to nominate candidates with appropriate education, training and experience; limits on director compensation; limits on cross-directorships with other Hershey-related entities; and clarifications to the existing Hershey conflicts of interest policy.

The settlement brings to a close what has been to date one of the most prominent governance controversies in the nonprofit sector. While the terms and conditions set forth in the settlement reflect the measures deemed necessary by the Attorney General to protect the charitable interests, they should not be viewed as per se governance “best practices.” The more significant lesson to nonprofit health systems from the settlement is the extent to which state charity officials will scrutinize and investigate charitable organizations where deemed necessary to preserve charitable assets—and the financial, operational and reputational costs (to both the organization and to individual directors) arising from such scrutiny.