Tuesday, June 10, 2014

No. 52: Massachusetts Mutual's Corporate Governance

In June 2005, corporate governance at Massachusetts Mutual Life Insurance Company came to public attention when the board of directors fired Robert J. O'Connell, the company's chairman, president, and chief executive officer. The action led to a protracted dispute over O'Connell's severance package. (See the July 2005, January/February 2007, and March/April 2007 issues of The Insurance Forum.)

In February 2014, MassMutual sent policyholders a proxy statement announcing the annual meeting to be held April 9 at the company's home office in Springfield. The proxy included several bylaw changes to be voted on at the meeting. The changes angered Jessica C. Rule (Natick, MA), a policyholder. She retained Jason B. Adkins of the Boston law firm of Adkins, Kelston & Zavez, P.C. Around the same time, the company received two awards for excellence in corporate governance. In this post I discuss the controversy over the bylaw changes and mention the awards.

The Bylaw Changes
Numerous bylaw changes were proposed. In the order in which the changes appeared in the proxy, here are 12 that deserve comment.
  1. The old bylaws said the annual meeting was to be held at the home office in Springfield. The new bylaws say the meeting will be held as determined by the board "at any location ... either within or outside of the Commonwealth of Massachusetts." Allowing the board to hold the meeting anywhere in the world could cause inconvenience for policyholders who want to attend.
  2. For a special meeting, the new bylaws provide for notification to policyholders through announcements in newspapers. The bylaws should provide for notification to policyholders by mail. 
  3. For an item to be brought to an annual meeting, or to call for a special meeting, the bylaws require the request to be signed by at least half of 1 percent of the policyholders. That requirement creates a huge barrier because policyholders have no means of communicating among themselves. 
  4. The new bylaws provide that policyholders who request a special meeting would be "jointly and severally" responsible for paying the costs of the meeting, including the mailing of proxy statements, unless all the resolutions introduced by those policyholders are adopted. This is a harsh change. 
  5. A bylaw change eliminates a provision that allowed, at the board chair's discretion, a matter raised by a policyholder to be brought before a meeting for a vote or to determine the "sense" of the policyholders, even when the steps taken to raise the matter did not follow the bylaws. That change is regrettable. 
  6. A bylaw change allows the chair to adjourn a meeting for any reason, to another date, time, or place, without notice to policyholders if a new meeting is held within 30 days. This change eliminates notification requirements and gives the chair the power to suspend a meeting at which policyholders are poised to adopt a change that is contrary to the wishes of management. This is a harsh change. 
  7. A bylaw change lowers the minimum board size from 11 to 7, and leaves the maximum at 21. 
  8. A bylaw change eliminates the mandatory retirement age of 70 for directors. 
  9. A bylaw change eliminates the requirement that directors be given 48 hours' notice of a board meeting. 
  10. A bylaw change eliminates the requirement that a quorum for a board meeting has to be at least seven directors, a majority of whom are independent directors. Now the bylaws say a quorum is a majority of the directors in office. 
  11. A new bylaw provision allows approval of a bylaw change or repeal by a two-thirds vote at a policyholders' meeting following board approval of such bylaw change or repeal. This harsh provision allows the change or elimination of a bylaw previously approved by the policyholders. 
  12. A new bylaw provides that the board may remove an officer at any time with or without cause. That may have been added for clarity as a result of the dispute in the O'Connell matter.
The March 20 Adkins Letter
On March 20, on Rule's behalf, Adkins wrote to Mark Roellig, executive vice president and general counsel of MassMutual. Adkins asked for documents relating to the board's deliberations and approval of the bylaw changes. He also expressed concern about some of the changes.

The March 27 Lashway Letter
On March 27, Scott Lashway, vice president and assistant general counsel of MassMutual, replied. He said Rule does not have a right of access to the company's books and records, for two reasons. First, he cited statutes that do not provide for policyholder access. Second, he cited cases on the lack of a common law right of policyholder access. As a "potential" third reason, he mentioned "improper purposes such as facilitating baseless lawsuits." Nonetheless, he offered to provide the minutes of board meetings that included discussions of the bylaw changes, and expressed a willingness to meet with Rule and Adkins.

The March 31 Adkins Letter
On March 31, Adkins replied. He described his review of five sets of redacted minutes of meetings of the board and the board's Corporate Governance Committee (CGC). He said in part:
Based on these board records, it is apparent that the board did not engage in a thorough or independent process before voting to make significant changes to MassMutual's bylaws and seek member approval. It is also apparent that CGC and the full board did not retain independent outside advisors or counsel in this process, which was driven by management on painfully insufficient notice.
On behalf of Rule and all MassMutual policyholders, Adkins requested documents, reports, minutes, and e-mails relating to CGC's and/or the board's deliberative process between December 10, 2013 and January 23, 2014. He also asked that the bylaw changes be tabled pending notice to policyholders about who made the submission, disclosure of the process undertaken by the board in recommending the changes, and recognition of Rule's concerns about the changes and the process.

The Newspaper Article
On April 4, the Boston Business Journal carried an article by Matthew L. Brown entitled "Natick policyholder locks horns with MassMutual over rules changes." Brown identified some controversial bylaw changes. He also said: "Still, despite the feel-good talk about mutual companies being owned by policyholders, Rule and others who try to exert any real influence over corporate governance may find themselves whistling in the wind." Brown referred to a MassMutual statement, which I obtained from the company. Here is the statement:
We believe strong corporate governance is the foundation of a successful organization and we take seriously our obligation to operate in our members' best interest. After careful consideration and research, MassMutual and its Board of Directors proposed revised amendments to the company's bylaws. The proposed changes are good for the company's members, policyowners and the company. Each amendment has a clear rationale and, importantly, they are consistent with best practices at mutual life insurance companies and others that are held in the highest regard with respect to corporate governance. These proposed changes were communicated to members in our proxy mailing, and those who have voted agree overwhelmingly with us.
The April 7 PC/CFA Letter
Public Citizen (PC) seeks to "advance health, safety, and democracy, as well as to promote a just and equitable economy." Consumer Federation of America (CFA) seeks to "advance the consumer interest through research, advocacy, and education." On April 7, PC and CFA sent a joint letter to MassMutual's policyholders and board expressing concerns about some of the bylaw changes and the process by which the changes were developed. The two organizations asked policyholders to vote against the changes, and asked the board to table the changes pending notice to policyholders about the concerns.

When I saw the PC/CFA letter, I asked a MassMutual spokesperson to comment on it. In response, I received a statement similar to the one the company provided to the Boston Business Journal.

The Lawsuit
On April 9, Rule filed a lawsuit in state court against MassMutual. She seeks an order requiring production of the requested books and records. She also seeks attorney fees and costs. The company has not yet responded to the complaint. (Rule v. MassMutual, Middlesex Superior Court, Commonwealth of Massachusetts, Civil Action No. 2014-3762-A.)

The Annual Meeting
On April 9, at the annual meeting, according to Adkins' notes about the meeting, about 40 persons attended. Only twoAdkins as a proxy for Rule, and one other policyholderwere not directors, officers, or employees. The meeting lasted about 20 minutes, almost half of which were used by Adkins to read a prepared statement. He described some bylaw changes he considers objectionable, and expressed concern about the process by which the changes were developed. Requests by the two independent policyholders to table the changes were ignored, and their questions were not answered.

The Voting
Owners of individual life policies have one vote, with one additional vote for each $5,000 of insurance in force. Owners of individual annuities have one vote for each $150 of annual annuity income. Owners of variable life policies, variable annuities, and group annuities have one vote. Owners of accident and health and disability income policies have one vote. No policyholder is entitled to more than 20 votes.

I asked MassMutual for the results of the vote. A spokesperson said there were 882,301 votes for the bylaw changes, 50,326 votes against the changes, and 59,426 abstentions. Thus the changes were adopted.

The Process
In Adkins' statement at the annual meeting, he summarized problems with the process by which the bylaw changes were developed. He said:
  • The changes did not go through the normal committee or board process, but were proposed by two officers. 
  • The CGC did not meet separately to consider the changes. 
  • The board did not retain independent advisors to consider the changes. 
  • The board did not meet separately from management to consider the changes. 
  • The board did not meet in person, but instead held a 15-minute telephone conference call dominated by a one-sided management presentation about the changes.
The Awards
On March 20, the Ethisphere Institute, "an independent center of research promoting best practices in corporate ethics and compliance," announced the names of the 144 companies that received the 2014 "World's Most Ethical Company" designation. One was MassMutual. Among other insurance companies receiving the designation were Aflac, CUNA Mutual, Hartford Financial, ING (U.S.), Knights of Columbus, Swiss Re, and Thrivent Financial. 

On April 10, the National Association of Corporate Directors New England Chapter announced its 2014 "Director of the Year Awards," which recognize independent directors of public, private, and nonprofit boards in New England, as well as entire boards, that have "significantly protected or enhanced stakeholder value." MassMutual received the "Private Company Board of the Year Award" for "demonstrating excellence in corporate governance."

General Observations
In its proxy statement, MassMutual said the changes align the bylaws "with widely accepted corporate governance best practices." The company made a similar comment in its statement to the Boston Business Journal. I think the comment is incorrect because some of the changes are contrary to the interests of policyholders. Also, the 50,326 votes against the changes and the 59,426 abstentions suggest some dissatisfaction among policyholders.

I am offering a complimentary 12-page PDF consisting of the March 20 Adkins letter, the March 27 Lashway letter, the March 31 Adkins letter, and the April 7 PC/CFA letter. Send an e-mail to jmbelth@gmail.com and ask for the MassMutual package.