CEO blazing new path for brokerage giant

by Robert Powell
Virginia Business
September 2005

Michael Cherkasky describes himself as a change manager. While working at Kroll Inc., a major risk consulting company, the former New York prosecutor supervised a Teamster union election and oversaw reforms at the Los Angeles Police Department. When he became Kroll’s CEO in 2001, he restored the company to profitability.

Now, he is working on his biggest assignment, rebuilding the stature of Kroll’s parent company, Marsh & McLennan Cos. (MMC), after a scandal that shook the insurance brokerage industry to its foundation. “My perspective is the company was bruised but it wasn’t broken,” Cherkasky says during a Richmond visit to talk with company clients and employees. “Because of the crisis, we have been more open to our internal criticism, to make changes that we think will make this a better company in the future than it ever was.”

Cherkasky became president and CEO of MMC after New York Attorney General Eliot Spitzer sued the company in October, accusing its Marsh Inc. division, the world’s largest insurance broker, of colluding with insurance companies in a bid-rigging and kickback scheme. The suit alleged that Marsh solicited bogus insurance bids and steered its clients’ business to certain insurers in exchange for large contingent fees. Insurance companies have routinely paid brokers contingent fees or commissions for hitting volume or profit targets, but the payments are not supposed to override the interests of a broker’s clients.

Spitzer’s suit had an immediate impact on MMC. Its stock plunged and Jeffrey Greenberg, its chairman and CEO, resigned. Some analysts believed that if Spitzer decided to seek a criminal indictment against MMC, it would be the company’s death knell.

Cherkasky, Spitzer’s former boss in the Manhattan district attorney’s office, moved quickly to repair the damage after being named CEO. He fired employees implicated in the scandal, banned contingent fees and arranged a settlement with Spitzer in which a $850 million fund was set up to compensate Marsh customers in the U.S. The company also created a compliance organization, named a compliance officer and adopted new standards of conduct.

In giving up contingent fees, MMC cut itself off from $800 million in annual revenue, a figure representing more than half the company’s $1.5 billion profit in 2003. The move forced Cherkasky to lay off 5,000 employees (“the hardest thing I have ever done”) and prune small accounts.

Nearly a year after the scandal surfaced, MMC still faces an uphill climb. While the company is profitable, its stock recently traded at only 57 percent of its 52-week high. Lehman Bros. analysts say that the rest of this year and next year will be difficult for the company because of a softening insurance market.

Nonetheless, Cherkasky says, MMC has lost relatively few accounts, perhaps three in Virginia. By this year’s second quarter, the company’s client retention numbers had returned to normal levels.

In his travels, Cherkasky says, few clients now ask him about the scandal. “Those that wanted to leave … would have done it by now,” he says. In fact, Cherkasky appears to be the one asking the questions. “I ask them, ‘How are we doing?’ If you don’t ask, they won’t tell you.”

One of the things that he is telling clients is that MMC’s current way of doing business is the wave of the future. He notes that, while Marsh has given up contingent fees, “most of the industry hasn’t. It’s not good governance for a corporation to be involved in contingent commissions.”
But while he believes that the brokerage industry must change, Cherkasky doesn’t favor federal oversight. He says that insurance companies are well supervised by the current system of state regulators.

Cherkasky’s visit to Richmond was not part of some barnstorming tour of company offices. Making preparations for a CEO visit, he notes, can be disruptive. “I go where people invite me,” he says. “We in New York have caused enough trouble.”

When he talks to employees, Cherkasky thanks them for their steadfastness despite suffering financially and emotionally in the turmoil. He says that clients didn’t bolt in the crisis because of the trust that they held in their local brokers. “If [the brokers] had left, the clients would not have stayed,” he says. “They are the saviors of the company.”