Mutuals in Mass. May Get Caught Up in Exec Pay Firestorm

Three hundred and twenty years after the Salem witch trials, Massachusetts may again stand for mass hysteria.

Lawmakers there have filed at least three proposals this month in the state Senate to add new executive compensation rules for mutually owned companies. Widespread displeasure with executive pay packages outside banking is driving the legislation, but banks may be subject to it as well.

Mistaken identity, bankers there say; the proposals, intended to amend the state budget, were first meant to apply solely to mutual insurance companies after Liberty Mutual Insurance paid Ted Kelly, its former chief executive, about $50 million annually. But some legislators want to expand at least one proposal to include other mutuals, says state Sen. Brian Joyce, a Democrat who sponsored one of the measures. His bill would require mutually owned companies to disclose more details about executive compensation.

"When a person gets into the corner office of a mutual, he or she has a fiduciary obligation," Joyce says. "Any surplus profits ought to be put back into the company."

The proposals come at a time when several mutuals are considering conversion, largely because of last year's elimination of the Office of Thrift Supervision. More than 70% of financial institutions in Massachusetts are mutuals.

Joyce says the objective is to provide more information to depositors and policyholders, and to "shed a little sunlight" on pay.

Another proposal, filed by state Sen. Patricia Jehlen, would require that a majority of a mutual company's directors be independent. The measure originally applied only to insurers, says Daniel Smith, Jehlen's chief of staff.

A third proposal, by state Sen. Mark Montigny, would require say-on-pay votes at mutual companies' annual meetings. Montigny did not return calls, and it was unclear whether his proposal applies to all mutually owned companies.

Executive compensation has been a hot topic at annual meetings this year. Many shareholders of publicly traded banking companies have expressed concerns about executive pay at those meetings. Shareholders rejected executive compensation plans at Citigroup, Sterling Bancorp and FirstMerit in nonbinding say-on-pay measures.

Mutuals have unfairly got caught up in the brouhaha, says Stanley Ragalevsky, a banking lawyer at K&L Gates in Boston.

"Depositors in a mutual want to know their deposits are safe and insured," Ragalevsky says. "Beyond that, I don't know that they have a vested interest in how much individuals with the bank get paid. It personally doesn't affect them because they don't own shares in the mutual."

Depositors in mutuals do not own shares in the company that can be bought or sold, says Douglas Faucette, a banking lawyer at Locke Lord Bissell & Liddell. He says a mutual depositor does not have property rights, whereas a policyholder with a mutual insurance company has an ownership interest in that company.

"They're not run like public companies. They're run like charities in that many have institutional-type boards," Faucette says. Executives at mutuals "wouldn't be in a position to make a lot of money."

The $7.9 billion-asset Eastern Bank in Boston is the biggest mutual in the state, based on assets. Other large Massachusetts mutuals include the $4.1 billion-asset Middlesex Savings Bank.

The Massachusetts Bankers Association is "vehemently opposed" to the executive compensation proposals, and its lobbyists are holding discussions with Massachusetts lawmakers about the differences between mutual holding comapnies and mutual insurers, says Bruce Spitzer, a spokesman for the association.

"Our mutual banks are neither owned by their depositors, nor are they public companies," Spitzer says. "We are very, very different than mutual insurance companies. It may be that the only thing we have in common is the name."

Pay aside, the legislative proposals may in the end be a tempest in a teapot. While some analysts expect to see a new wave of second-step conversions by mutuals, the executive compensation proposals in Massachusetts, if they are approved, are unlikely to themselves fuel second-step conversions, Ragalevsky says. "There are other, more important considerations," he says, noting that it is easier to maintain local control of a mutual, compared to a stock-owned bank.