At any banking conference, you will hear the trustees of many mutual banks say they are "committed to mutuality." They may even have adopted mission statements enshrining a commitment to remain "mutual and independent" as part of the bank's definition of its own identity.
But how many boards have actually adopted plans for preserving their mutual form of ownership?
In today's community banking environment, "staying mutual" is something that must be deliberately planned and implemented. It can no longer be assumed that the objective of staying mutual will just happen by itself. The playing field is too steeply tilted toward mutual-to-stock conversion for mutuality to be a comfortable default option.
If a bank's trustees or directors want to "stay mutual," they must devise an effective mutuality preservation plan.
The first and most important piece of any bank management plan is a written policy approved by the trustees or directors. The "Policy Statement on Preserving Mutuality" should articulate the objective of staying mutual and the reasons for doing so. It should describe the principal means by which the bank's mutuality will be preserved. It should identify circumstances that might warrant reconsideration of the bank's mutual ownership, and it should describe the procedures to be followed in determining whether to convert to stock ownership at some point in the future.
A second important step to consider is amending the bank's governing documents to require special votes and procedures for abandoning mutuality and converting to stock form. These provisions may include a requirement that any stock issuance be approved by a "supermajority" vote — four-fifths, for example — of the trustees and of its corporators, members, or other stakeholders.
The objective of these provisions, and others like them, is to place a high (but not insurmountable) burden of persuasion on those who would have the bank abandon mutuality. Most banks' governing boards have authority to make such amendments to their bylaws without getting approval from corporators or members.
For increased protection, such provisions may also be inserted, with approval of the corporators or members and the banking commissioner or other chartering authority, in the bank's corporate charter.
An effective management succession plan is another important step for a community bank seeking to remain mutual and independent. The lack of next-generation leaders ready to assume the reins is often cited as a reason for converting and merging community banks out of existence. For a bank to remain mutual, it must have a practical and active mechanism to identify, recruit, and prepare the next generation of its leadership.
An essential complement to the succession plan is a framework for providing appropriate compensation and incentives to senior managers. Any plan to maintain mutuality will be only as effective as executives' commitment to that objective.
Also critically important is a plan to maintain appropriate capital to support continued operations and growth. Most mutual banks' capital plans are centered on sustaining profitability, along with maintaining, investing, and growing capital reserves. Continued mutual ownership should not be seen as an alternative to financial discipline. In appropriate circumstances, operating and investment earnings may be supplemented by the issuance of hybrid or secondary capital instruments, such as trust-preferred stock (for banks with mutual holding companies) or subordinated debt.
The board may wish to require its approval for key business advisers — legal counsel, auditors, and financial advisers. A bank that wants to remain mutual should not rely on advisers who structure their compensation around an eventual public offering. Due diligence should be employed to identify advisers whose professional skills and compensation arrangements are consistent with the bank's commitment to remain mutual over the long term.
Of course, an important element of any community bank's plan should be to ensure that any additions to the governing board share its commitment to a mutual form of ownership.
These days, it is far easier for a community bank's board of trustees to proclaim a "commitment to mutuality" than to implement that commitment by passing on to the next generation a bank that is still in mutual form. Often by the time the board realizes that it is headed down the path to conversion, the process may appear too far advanced to reverse.
If the board is serious about preserving the bank's independence and its mutual form of ownership and passing it on to the next generation for the community's benefit, it must take steps to make that commitment effective.