Michael G. Cherkasky, president and chief executive officer of Marsh & McLennan Companies, said he erred in his selection of leaders for Marsh, allowing the firm's business to become unprofitable.
"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 didn't help in the critical areas of Marsh in the U.S. and the UK to get that right."
His remarks came during an investment analyst's teleconference call to discuss the third-quarter results for the New York-based services firm–the parent company of insurance brokerage firm Marsh, reinsurance firm Guy Carpenter, Mercer and Oliver Wyman consulting, and risk consulting firm Kroll.
While MMC reported net income increased in the quarter by $1.8 billion over last year, primarily on the completion of the $3.9 billion sale of its investment firm Putnam to Great-West Lifeco, income from continuing operations was down 40 percent, or $53 million, to $80 million–a drop of nine cents a share to 15 cents.
David Small at Bear Stearns called the results "disappointing," with MMC missing the analyst's estimate of 31 cents a share for the third quarter and analysts' consensus estimate of 32 cents a share.
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 CEO's tenure.
"Our brokers need to be able to concentrate on clients and not process," Mr. Cherkasky said.
Mr. Storms' departure in September cost MMC $13 million in severance, the company revealed.
NU was unable to contact Mr. Storms for comment.
To correct the problems at Marsh, which Mr. Cherkasky is heading as interim CEO (he emphasized that he is only a transitional figure in that post), he announced a series of new initiatives.
o The company is realigning management and leadership, putting brokerage experts in place to lead Marsh.
Business will be simplified so the front line executives spend all their time with clients.
o There will be a narrowing of information technology initiatives with more focused implementation.
o Costs will be reduced through the realignment and consolidation of some business units. This is expected to save $125 million in the last part of this year and result in $200 million year over year.
o 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. MMC gave up taking contingent commissions to end a suit by then New York State Attorney General Eliot Spitzer over allegations of steering of contracts and kickbacks from insurers.
Mr. Cherkasky said the enhanced commissions will be fully disclosed to clients and will not be accepted without their approval. Such commissions are currently being paid by insurers on business in the United Kingdom at a rate of 2.5 percent. He added that a couple of insurers have already agreed to the new commission schedule here.
For the third quarter, MMC revenues grew $262 million, or 10 percent, to $2.8 billion. Net income increased $1.8 billion, from $176 million, or 31 cents a share, to $1.9 billion, or $3.60 a share.
MMC's net income for nine months grew 312 percent, or $1.6 billion, to $2.4 billion, or $4.31 a share, compared with $764 million, or $1.36 a share, for last year. However, income from continuing operations dropped 3 percent, or $16 million, from $464 million, or 84 cents a share, to $448 million, or 81 cents a share. Revenues rose 7.5 percent, or $585 million, for the nine-month period, from $7.8 billion to $8.4 billion.
Marsh reported revenues for the third quarter rose 3 percent, or $30 million, to $1.04 billion. However, Mr. Cherkasky said organic growth was flat. For the nine months, revenues were up 1 percent, or $44 million, to $3.3 billion.
To illustrate how difficult business in the U.S. has become, revenues in the Americas grew only $4 million, or 1 percent, to $598 million in the quarter. During the nine-month period, the Americas revenue is down 2 percent, or $31 million, to $1.77 billion from $1.8 billion in 2006.
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