A day after sacking its chief executive officer, Marsh & McLennan Companies Inc announced on Tuesday that it is adopting "significant reforms" to its business operations, including the permanent elimination of incentive fees at the center of a price fixing and bid rigging probe.
On Monday, the board of the largest US insurance brokerage accepted the resignation of Jeffrey Greenberg from the posts of chairman and chief executive. The ouster appeared aimed at clearing the way for settling civil charges filed earlier this month by New York Attorney General Eliot Spitzer, who accused the New York-based company of bid rigging and price fixing.
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.
Among the reforms to be initiated by Jan. 1 are an end to all incentive fees.
"Marsh has permanently eliminated the practice of receiving any form of contingent compensation from insurers," Marsh & McLennan said in its Tuesday announcement.
Contingent commissions -- also known as marketing service agreements or placement service agreements -- are fees paid to brokers by companies in exchange for getting more business.
Despite the promised reforms, Moody's Investors Service on Tuesday downgraded Marsh & McLennan's debt by two notches, to Baa2 from A3. It said the downgrade reflected concern about future earnings, the cost of re-engineering its business model and uncertainty over the pending litigation. Both Standard & Poor's and Fitch Ratings repeated that they have the company's debt on "negative watch" for possible further downgrades.
Cherkasky told a conference call with reporters that Marsh & McLennan also was centralizing its insurance placement process to give the company "the ability to get the best deal for our clients" and to create a system that can be easily audited.
He said he believed that moving quickly to adopt reforms will "give us competitive advantage" in the marketplace.
Cherkasky also said that the company has taken action against several Marsh & McLennan employees linked to the probe.
Company spokeswoman Barbara Perlmutter said four employees were suspended and one was fired, but declined to give further details. Cherkasky said that if an internal investigation finds others involved in wrongdoing, "they will absolutely not stay" with the company.
Cherkasky also said he believed there were "very, very, very few" instances of price fixing and added that the company "will work with the attorney general to figure out an appropriate restitution package."
In announcing a civil suit against Marsh & McLennan on Oct. 14, 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.
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