A day after sacking its chief executive officer, Marsh & McLennan Companies Inc. announced Tuesday that it is adopting “significant reforms” to its business operations, including the elimination of so-called contingent commissions.
The move came after the board of the nation’s largest insurance brokerage on Monday accepted the resignation of Jeffrey W. Greenberg from the posts of chairman and chief executive.
The board replaced Greenberg with Michael Cherkasky, 54, who just last week was named head of Marsh Inc., the company’s risk and insurance services unit. Before that, Cherkasky had been chief executive of Marsh Kroll, the Marsh & McLennan risk consulting subsidiary.
In its Tuesday announcement, New York-based Marsh & McLennan said the reforms in its Marsh Inc. unit “will ensure that the best interests of its clients are served and that every transaction is executed in accordance with the highest professional and ethical standards.”
Among the reforms to be initiated by Jan. 1 are the permanent elimination of “any form of contingent compensation from insurers.”
Contingent commissions — also known as marketing service agreements or placement service agreements — are fees paid to brokers by insurance companies in exchange for getting more business.
In morning trading, Marsh shares were up $1.58, or nearly 6 percent, at $28.00 on the New York Stock Exchange. They had fallen 43 percent in the previous 10 days.
In announcing a civil suit against Marsh & McLennan on Oct. 14, New York Attorney General Eliot Spitzer called the incentive fees “kickbacks” and said they were a factor in businesses being forced to pay more than necessary for property and casualty insurance. Spitzer also accused Marsh & McLennan of bid-rigging and price fixing and said he wouldn’t deal with the current management, which precipitated Greenberg’s ouster.
Marsh & McLennan said in its announcement that “all revenue streams will be 100 percent transparent to clients.” It said it would outline for the clients all fees, retail commissions, wholesale commissions and premium finance compensation.
It added that the company “will insist that insurance companies show commission rates on all policies.”
Marsh & McLennan also has formed a global compliance organization, reporting to Cherkasky, who holds the titles of president and CEO, and to the board’s audit committee. The chairman’s position has not yet been filled.
This organization’s scope will include all Marsh businesses worldwide, the announcement said.
In addition to insurance brokering, Marsh & McLennan is the parent company of Putnam Investments, an investment management and mutual fund firm, and Mercer Inc., a consulting service.
Both have also run into trouble with regulators. Putnam was a major figure last year in the scandal over improper trading at fund companies. In April, Putnam agreed to pay $110 million to settle federal and state allegations. Mercer is being investigated by the Securities and Exchange Commission for potential conflicts of interest at its pension-consulting division. That division also settled earlier this year with Spitzer for its role in advising the New York Stock Exchange when its ex-chairman, Richard Grasso, secured a $187 million pay package.
The company also plans to initiate annual compliance and ethics training.
“These reforms are the next critical step to ensure the integrity and quality of our relationships with clients and to resolve our legal and regulatory issues,” Cherkasky said in a statement accompanying the announcement. “In introducing these significant industry-leading changes, we are demonstrating our commitment to our clients and the markets and taking a leadership position in industry reform.”
The departure of Greenberg, 53, who had been CEO of Marsh & McLennan since November 1999, was aimed at spurring settlement talks with New York’s attorney general, as is the new reform package.
After the announcement of Greenberg’s ouster, Spitzer said the board’s action “permits Marsh and this office to move forward toward a civil resolution of our lawsuit.” Spitzer added that any criminal action would not be against the company but against individuals.
Cherkasky spent 16 years working in the criminal justice system, some of them as Spitzer’s boss in the New York district attorney’s office.