Mercantile acts to restore its historic glow

March 24, 2004|By JAY HANCOCK

MERCANTILE Bankshares Corp.'s revised conduct code, adopted by the company's board March 9, directs employees approaching the ethics border to ask some questions:

"Can I defend my action with a clear conscience?"

"Are my actions honest in every respect?"

And, the biggest test: "Would I be proud to read about my action in the newspaper?"

Two days after certifying the manifesto, Mercantile bosses got an outside tip about a questionable payment to the mother of a senior vice president. A week after that, two top executives were fired and Baltimore's biggest home-based bank had a starring role in The Sun. It was not a proud moment for either the employees that Mercantile says violated ethical standards or for a bank that says its most valuable asset is its reputation and actually means it.

Mercantile ejected Michael Donnell, a senior vice president, and his boss, John Pileggi, chief executive of investment and wealth management. According to the bank and Donnell's lawyer, Pileggi said it was OK for a hedge-fund adviser hired by Mercantile to pay a referral fee to Donnell's mother.

Mercantile hired the Minneapolis-based adviser, which bank officials and Donnell's lawyer would not identify. Pileggi and Donnell were involved in the hiring process. The fee aimed at Donnell's mother was big: close to $100,000.

And that does not meet the newspaper test. Did Mercantile hire the adviser because it would do the best job of managing more than $40 million for Mercantile and its clients? Or did it hire the adviser because Donnell's mom would get a fee?

Mercantile says the hedge fund in question has produced positive returns for customers, but the issue is the appearance of divergence of interest between employees and customers. That appearance hits the bank doubly hard.

We are not shocked when the reputations of, say, Prudential or Citigroup are impugned. Break the rules every so often, pay the fine and move on. Cost of doing business.

But this wasn't supposed to happen to Mercantile. Current and former bank executives with whom I spoke are crushed.

Founded during the Civil War to protect valuables against marauding soldiers, Mercantile and its ancestors have been home to Baltimore's old, quiet money for more than a century. The bank was so trusted that clients relied on it for medical and legal referrals in addition to financial services. That reputation helped Mercantile become one of the best-performing bank stocks in the world under H. Furlong Baldwin, who ran things for more than two decades until last year. Mercantile stock bought for $500 in 1984 is worth more than $9,000 today, counting reinvested dividends.

Baldwin's replacement as Mercantile boss, Edward J. Kelly III, gets credit for openness and candor. Had the hedge-fund-referral incident surfaced say, two years ago, one hopes the bank's response would have been identical. But one benefit of the recent nationwide corporate sleazefest is that managers are trying harder than ever to do the right thing - and to demonstrate that they are doing the right thing.

It was probably no accident that directors of MBNA Corp. leaked to The New York Times this month details of their disagreements over executive pay with then-MBNA chief Charles Cawley. Mercantile, for its part, issued a press statement on the Pileggi/Donnell matter and answered most of reporters' relevant questions.

David E. Borowy, a Mercantile spokesman, says the bank's revised code of conduct has been in the works since last year and was unrelated to the near-simultaneous disclosure of the hedge-fund matter.

In any event, Kelly has work to do. Mercantile stock has outperformed that of many banks and recently hit an all-time high, but its ascent has slowed.

Last year was the first time in a dozen years that the company's earnings per share weren't higher than those of the year before. The miss was by only a few pennies, and it speaks well of managers that they didn't try to jigger results for the sake of a streak fetish. But shareholders hope for better. Mercantile's wealth-management unit, which with Pileggi's departure is on its third chief executive in less than a year, will be watched especially closely by analysts.

And by clients. But Mercantile's first step seems to be the appropriate one. It's often forgotten these days, but shame is a sign of virtue.

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