Can Cherkasky save Marsh? The financial giant's board picked a squeaky clean outsider to lead it back from the brink. But even the new CEO agrees this turnaround is far from over.

When Michael Cherkasky took the helm of embattled Marsh & McLennan Cos. last October, the global financial services giant, with $12.2 billion in 2004 revenues, was whispered to be "the next Arthur Andersen." The 130-year-old firm's viability was so precarious following the indictment of several insurance brokerage executives for price fixing and bid rigging--part of New York Attorney General Eliot Spitzer's investigation into alleged anticompetitive compensation and account placement practices--that implosion seemed imminent.

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Marsh Mac, the name CFOs and risk managers use when talking about MMC's insurance brokerage business Marsh, was not the only unit in trouble. Putnam Investments, its mutual fund company, was tarnished by allegations of securities fraud; the U.S. Securities and Exchange Commission charged that Putnam brokers were paid to recommend certain mutual funds, propelling large pension funds like California Public Employees' Retirement System to fire Putnam as their investment manager. And MMC's benefits consulting unit, Mercer Consulting, was under investigation for allegedly pushing Putnam mutual funds to its pension clients. The firm also was fending off charges that it mischaracterized the exorbitant compensation of then-New York Stock Exchange Chairman Richard Crasso to the exchange's board.

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Arguably, the most pressing problem was Spitzer, an ambitious prosecutor who once worked for Cherkasky when both men were assistant district attorneys in the New York County District Attorney's office in Manhattan. Spitzer, who declined repeated requests to comment, was investigating the broker's compensation practices, particularly its acceptance of so-called contingent commissions from insurance companies to which Marsh had steered high volume, profitable commercial insurance business. The allegations posed a dire threat to Marsh's revenue stream; contingent commissions had supplied more than $800 million of its $1.5 billion in earnings in 2003.

This is the world into which Cherkasky stepped. When MMC's board of directors looked around for the right man to steer the troubled firm, it didn't look far. Only three months earlier, the company had acquired Kroll, an investigations and crisis management firm that Cherkasky headed as CEO. At Kroll's helm from 2001 to 2004, he had turned around the debt-ridden company, managing it out of a disastrous merger and piloting its tremendous growth in the aftermath of the Sept. 11 terror attacks.

Rather than hire an insurance executive to lead the world's largest insurance brokerage and its consulting and investment subsidiaries, MMC's board instead chose an industry outsider with a sterling reputation, who could rebuild the firm in his own image. The fact that Cherkasky personally knew Spitzer and had donated money to his political campaign was an added bonus. Unlike MMC's former CEO Jeffrey Greenberg, who locked horns with Spitzer in the Putnam and Mercer investigations, Cherkasky and Spitzer were friends who could fashion a settlement. Moreover, Cherkasky was well-versed in the nuances of crisis management. "It's what I had done at Kroll--helping companies through crisis situations," he explains.

Nearly a year into his tenure as president and CEO, Cherkasky has worked hard to reinstate the lost trust between the firm and its clients, a success he attributes to Marsh's local brokers: "They met with clients and asked, 'Do you trust me? You may not trust my firm, but do you trust me?' That made all the difference," he says. Cherkasky also settled the most damaging charges by Spitzer, working out a deal to end Marsh's maligned practice of accepting contingent commissions and, as part of the agreement, creating an $850 million settlement fund to reimburse affected corporate clients. In June, thousands of risk managers--the executives who buy insurance for their companies--were notified of their individual settlement offers. As of press time, all but one company had accepted the amount tendered.

Cherkasky's repeated call for greater transparency into Marsh's inner workings on behalf of clients and his vow to disclose the compensation sources of different MMC units have also appeased clients. Most risk managers have stuck by the beleaguered broker, despite a full court press by competitors like Willis Group Limited in London and Arthur J. Gallagher & Co. in Chicago. Still, Cherkasky faces serious challenges ahead--not so much from Spitzer, but from Wall Street, which has punished MMC in the last year, gutting roughly 40 percent, or about $9 billion, from its market capitalization.

Investors are leery over the loss of revenue formerly supplied by contingent commissions at a time when the notoriously cyclical insurance market is softening. With property/casualty insurance prices beginning to slide, brokerage income that relies on traditional commissions paid by insurers is headed south. "Cherkasky threw contingent commissions overboard without any idea how to make up for that loss of income," charges Robert Hartwig, chief economist of the New York-based Insurance Information Institute. "They had become very dependent on contingent commissions to help smooth earnings over the course of the industry's cycle. With the industry heading into the soft part of the cycle, his timing couldn't have been worse."

But Cherkasky sees contingent commissions as inherently unethical. "They're wrong because they create the appearance of a conflict of interest," he says. "Not that we did anything illegal--I just don't think they're in the best interests of clients."

As for the loss of income from contingent commissions, Cherkasky insists that structural changes in the way Marsh conducts business globally will give it leverage to increase fees. For example, he says he's making it easier for clients to access insurance and reinsurance markets and obtain risk management, claims handling and other broker-provided services. "If we prove our value, our clients will reward that," he says.

Guiding a Rebound

In his expansive office on the 44th floor of Marsh's New York City headquarters, Cherkasky argues that his efforts to revive MMC are largely successful, with the crisis now behind the firm. Since taking the helm, the company has replaced the leadership of two of its three main companies and hired a new general counsel, and the board added a new administrative officer. Cherkasky put a premium on communication, which was "frequent and very open," he says. "I set up a series of conference calls where anyone in the company could call me. It was actually quite expensive. We had open lines and questions from all over the world. It was an open dialogue where we clearly addressed where our problems are." In keeping with the strategy of direct communication, the CEO has met one-on-one with more than 800 clients since taking over.

Cherkasky opted for a phased-in approach to managing the crisis. From the end of October 2004 through March 2005, he focused on the actual crisis itself, "analyzing the problems and making sure people associated with the problems left the company," he says. "From March onward, we focused on implementing the changes that we had assessed we needed to do to repair the company." The solutions were largely structural, such as changing the way brokers place risks in the insurance markets. Placement is now carried out by marketing specialists, who are charged with providing timelier, more thorough service, and more incisive client risk management. Previously, the process was more decentralized and less efficient. Cherkasky also directed that brokers focus only on the most profitable accounts, resulting in thousands of mostly midsized clients that were let go.

There are still many creases to be ironed out, however. While the market timing and compliance problems that plagued Putnam Investments are resolved, having settled with the SEC for $55 million, the mutual fund management company is still under pressure to revive revenues, which declined 12 percent in 2004. "Putnam has struggled more than any major asset management company, with the exception of Janus," says Mark Lane, principal and research analyst at William Blair & Company, a Chicago-based investment bank. Cherkasky retorts: "Putnam is the world leader in good governance today. The fact that PanAgora Asset Management (a majority-owned affiliate of CalPERS) has rehired Putnam testifies to its good standing."

More problematic are the financial pressures at Marsh. While Cherkasky deserves plaudits for restoring much of the trust lost during the Spitzer investigation, he will have a tougher time restoring Marsh to its historic levels of profitability. And first-quarter results weren't a good sign; revenues from the risk and insurance services segment dropped about 11 percent to $1.75 billion in the quarter. "There are some hungry competitors out there looking at Marsh's market share," Hartwig comments. "While customers haven't exited en masse, they have to be careful of a death by 1,000 cuts."

To conserve expenses, Cherkasky pared the work force by 4,500 employees, allowing the firm to recover $400 million to $500 million. But that's still roughly half the high margin revenue the firm used to receive annually in contingent commissions. To make up the difference, Cherkasky says he is creating "a hard mind-set to a revenue-based culture," augmenting and rebuilding Marsh services globally "with increasing focus on our clients' interests." He is introducing an a la carte pricing structure for its services, which previously were lumped together, thereby raising its hopes of generating a greater volume of fee-based income.

Hartwig isn't convinced. "From what I've seen and heard, the attempts to successfully pass along fee increases aren't going well," he says. Lane agrees: "Outside of raising traditional commissions underwriters pay Marsh, it's impossible to replace that contingent revenue. Meanwhile, Marsh is in a more competitive pricing environment, with prices softening in many lines of insurance. Frankly, it's the most difficult time since 1998-1999 in which to grow an insurance brokerage business."

A recent survey by the Council of Insurance Agents & Brokers trade group backs him up; it indicates that premiums for commercial accounts are rapidly decreasing. For example, 44 percent of medium-sized companies surveyed stated that their commercial insurance premiums had dropped 10 to 20 percent in the last year, while 39 percent of large accounts noted similar decreases. Lower premium dollars translate into lower commission dollars for Marsh and other brokers.

Critics also question Cherkasky's background to run a giant financial services company. "He has no experience whatsoever in the insurance business," says Hartwig. Lane adds that "it could be argued that he is the CEO of Marsh simply because he was in the right place at the right time. They were in a crisis and he was a hire of convenience, a crisis manager 'just down the hall.'"

Yet, it is likely Cherkasky's outsider status that the board relished. Under former CEO Greenberg, MMC had earned a reputation for secrecy and close-to-the-vest dealings. Cherkasky, by contrast, extends himself to the media, open to any and all questions, to which he provides frank, if somewhat vague, responses.

And he is not just a figurehead. Cherkasky has locked horns with stock analysts who insisted MMC would gain financially by selling Putnam and Mercer. "Our sum-of-the-parts analysis suggests they're worth more separate than together," Lane says. "However, that presumes they're able to get the insurance brokerage business back on track over a reasonable period of time, which remains to be seen." Cherkasky insists he has no plans to sell or spin off the businesses.

But he does clearly have his work cut out for him, and only time will tell if Cherkasky is able to put Marsh back on top. At least two people betting he can do it are former bosses Robert Morgenthau, Manhattan district attorney, and Jules Kroll, founder of the eponymous company and vice chairman of MMC today. "Mike is a prodigious worker," says the Manhattan D.A. "He is all business--not that he doesn't have a sense of humor, but he's a guy who'll stay with the job 100 percent until it's done. He is absolutely the right guy for them. The stuff that happened there before ... Mike wouldn't tolerate that for five seconds."

Kroll says Cherkasky is doing an out-standing job. "There is an innate toughness that he possesses when it comes to what he thinks is the right thing to do," he adds. "Some people will look at this negatively and think he is overly rigid, but I think that is his strength. There's a Latin expression that comes to mind when I think of Mike--Res ipsa loquitur--the thing speaks for itself. That's Mike. He's a straight shooter. And you always know where he stands."

The proof of MMC's turnaround will come in the next two years as the firm battles to revive revenues in the face of declining commission dollars. If clients find more value in Marsh's revised approach to global brokerage and risk management services, and are willing to pay more in fees for this benefit, then Marsh will have made it out of the morass. If not, then shareholders should expect more hard times ahead.

RELATED ARTICLE: Contingent No More

The loss of contingent commission income has hurt revenues and operating income of MMC's risk management and insurance broking division, primarily Marsh.

               Revenues       Operating Income

1st half 2004  $2.6             $1.0
1st half 2005  $2.1           $248 million

Source: Company reports

Note: Table made from bar graph.