Marsh's Mea Culpa

Isn't it ironic that the day after I post an entry on broker fee disclosure, Marsh comes out with plans for a new compensation scheme to offset the billion dollar loss they suffered by swearing off contingency fees to settle bid-rigging charges? Will it pass muster with buyers? And how long will Michael Cherkasky be able to hang on as president and CEO of Marsh & McLennan Companies given his own startling admission of leadership failures?

As reported by our own Mark Ruquet on NU's Online News Service earlier today:

“To deal with what has become an unlevel playing field between brokers who take contingent commissions and those who do not, Marsh is discussing with carriers payment of enhanced commissions on midsize and small commercial accounts in the United States,” Mark wrote. (For the full story, click here.)

Mr. Ruquet reported that Mr. Cherkasky–who has been doing double duty as CEO for MMC's Marsh brokerage unit since tossing former CEO Brian Storms overboard in September–”said the enhanced commissions will be fully disclosed to clients and will not be accepted without their approval…He added that a couple of insurers have already agreed to the new commission schedule here.”

Marsh has been scrambling to make up the difference for the loss of lucrative contingency fees on the volume and/or profitability of the business they write for particular carriers. The pressure is even more intense with the softening market driving down prices, along with the standard commissions paid on premiums.

Corporate buyers represented by the Risk and Insurance Management Society reacted cautiously to the scheme, being polite at least until more details are known.

“Transparency and client disclosure are the cornerstones of RIMS position on broker compensation,” RIMS said in a statement. “Marshs announcement that it will accept enhanced commissions on midsize and small commercial accounts in the United States describes a program that is in accord with RIMS position.”

The buyer group added that “we look forward to reviewing the full details of Marshs enhanced commission program. In particular, we need further clarification on disclosure and assurance that full disclosure on all commissions takes place in advance of transaction, ensuring adequate time for the buyer to determine if the proposal is acceptable.”

Still, I can't help but wonder if Marsh's new compensation scheme is merely a pig with lipstick, as one insurance company official suggested to me at NU's P-C Executive Conference today after the Marsh news broke.

Meanwhile, Mr. Cherkasky made some extraordinary remarks about mistakes he made in choosing Marsh's leadership during a conference call on the broker's poorly received earnings, according to Mr. Ruquet's NU report. (David Small, an analyst with Bear Stearns, headlined his grim note to investors about Marsh: “Who Knew There Was Something Below Rock Bottom?”)

My role as CEO is to look at the business and put the right leaders in place, and then help them perform and be successful. I will tell you I got it wrong, Mr. Cherkasky said in response to a question about the failure of Marsh to show third-quarter growth under his tenure. I didnt help in the critical areas of Marsh in the U.S. and the U.K. to get that right.

Mr. Ruquet reported that “Mr. Cherkasky took full responsibility for the appointment of Brian Storms to head up Marsh in 2005, and the resulting implementation of business practices that the CEO said resulted in the stifling of the entrepreneurial spirit of the sales staff as they concentrated more on dealing with new business processes and less on selling. The result was loss in business retention. He said the sales force had lost faith in Mr. Storms leadership and there was no discipline at the centralized leadership that was created under the Marsh CEOs tenure.”

I would love to hear Mr. Storms' side of the story, and we will try to seek him out for comment. But I have a feeling that “no comment” might be part of the $13 million severance package Mr. Cherkasky said was paid out to the former CEO as he was shown the door.

Mr. Cherkasky bought himself some time by throwing Mr. Storms under the bus, but he needs to move fast to pick a new fulltime CEO–someone who can turn the troubled brokerage around in a hurry.

Mr. Cherkasky was the perfect choice to take over MMC in the midst of the bid-rigging scandal. His personal relationship with then New York attorney general (now governor) Eliot Spitzer helped restore Marsh's battered credibility and put their regulatory woes behind them.

But the memory (and patience) of shareholders are notoriously short, especially with a CEO who admits putting the wrong people in charge of a major operation. Unless we see a dramatic bottom line improvement by the time he must report first-quarter 2008 results, Mr. Cherkasky might be joining Mr. Storms on the unemployment line.