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The Secret World Of Marsh Mac


When Jeffrey W. Greenberg took the helm of notoriously secretive Marsh & McLennan Cos. (MMC), a $12 billion financial-services company, on Nov. 18, 1999, analysts were happily buzzing that Greenberg was a gregarious, outgoing executive. The word on Wall Street was that he would raise the profile of Marsh Mac with more public appearances and open communication than his tightlipped predecessor, A.J.C. "Ian" Smith.

They couldn't have been more wrong. In the past four years, Greenberg sightings have been scarce. The company, true to its secretive history, became even more cloistered. But on Oct. 14, Marsh & McLennan was forced into a harsh public spotlight when New York Attorney General Eliot Spitzer charged its insurance brokerage with fraud. In a civil complaint filed in New York State Supreme Court, Spitzer alleges that the company engaged in bid-rigging, price-fixing, and accepting payoffs from insurance companies.

Marsh & McLennan, the world's largest insurance broker, is paid millions annually to manage clients' risks and crises. Now it's having epic problems of the same nature itself. In a three-month investigation, BusinessWeek spoke with some 50 former and current MMC employees, insurance industry executives, and investigators -- and discovered that the firm's problems may well go far beyond Spitzer's initial charges.

BusinessWeek has learned that MMC and its executives could face a raft of further legal and regulatory problems. Spitzer's office is mulling criminal charges against several execs connected with the insurance brokering scandal. It is also looking into whether Mercer, MMC's pension-consulting arm, and Putnam Investments, MMC's mutual-fund company, push clients into buying Marsh insurance products. As part of an industrywide sweep, the Securities & Exchange Commission is probing Mercer's alleged "pay to play" practices of requiring payoffs from money managers who want it to recommend them to pension clients. At the same time regulators are examining payments Putnam and other mutual-fund outfits make to companies to ensure that their funds are featured in corporate 401(k) plans.

As if that's not enough, several class actions have sprung up -- at least one regarding the alleged fraud at Marsh Inc., as the insurance brokerage is known, and others involving Putnam. Already, the legal onslaught is taking a toll. On Oct. 19, Moody's Investors Service downgraded the firm's debt, citing concerns about "financial consequences" arising from Spitzer's lawsuit. And fear that some of MMC's revenue streams could dry up has knocked down its share price. In the four trading days following Spitzer's Oct. 14 announcement, the stock plummeted 48%, wiping out $11.5 billion in market cap.

At the center of the storm stands Jeff Greenberg, 53. If you ask almost anyone about him, you'll hear that he is smart as a whip, incredibly knowledgeable about the insurance business, well-spoken, and polished. Much like his father, Maurice R. "Hank" Greenberg, 79, the legendarily hard-charging chairman and CEO of insurer American International Group Inc. (AIG), he has a history of being opportunistic when it comes to scoring profits for his company. Even now, his defenders insist that he inherited serious problems, particularly in the brokerage and mutual funds businesses, when he moved into the top slot.

Yet Greenberg has been slow to tackle the problems and reluctant to change the arrogant culture in which they festered. His company has a business model of aggressively cross-selling the products of its various divisions, which, say former and current employees and investigators, can lead to serious conflicts of interest. The potential for new conflicts rose as Greenberg pursued a policy of growth by acquisition. Add the tough financial goals that Greenberg sets for senior managers, and the pressure to bend the rules grows. An MMC spokeswoman disagrees: "MMC has historically served clients with a wide array of services and products. We find if we serve clients well, financial goals are met."

The firm's obsessive focus on secrecy helps keep any misdeeds under wraps, say the sources. "Some companies have a culture based on kickbacks and undisclosed financial arrangements, and their people are forced to remain silent about wrongdoing," says Edward A.H. Siedle, a former Putnam compliance director and SEC official who now heads the Center for Investment Management Investigations in Ocean Ridge, Fla., which looks into pension fraud.

Why didn't Greenberg act more promptly? Some critics say he seems deaf to the swelling chorus of demands from regulators and the public for higher standards of behavior in the financial-services industry. In the early days of Spitzer's investigations, Greenberg dispatched General Counsel William L. Rosoff to meet the Attorney General. Rosoff behaved like a pit bull, says one attendee, and infuriated Spitzer with condescending remarks. "The leadership of that company is not a leadership I will talk to," Spitzer said later.

Several former top MMC honchos blame Greenberg's executive style. They say he is an indecisive leader and somewhat detached. He is a hands-off manager -- as long as his staff make their numbers. Says one employee: "It's the kind of place where if you don't meet or exceed a goal, heads roll." Typically, Greenberg favors domineering division heads and gives them free rein -- until a problem occurs. Then he is quick to oust them. MMC says: "Greenberg's record in management changes and actions to resolve problems demonstrate the opposite."

The day after Spitzer announced his charges, MMC's board expressed full confidence in the CEO. That's no surprise: Greenberg chairs the board, which Nell Minow, editor and corporate governance expert at the Corporate Library, says is fiercely loyal and "rife with cronyism." Six of its 16 members are directly involved in running Marsh Mac or one of its subsidiaries, says Glass Lewis & Co., a San Francisco proxy-research firm.

The board may be compelled to take action against top execs if enforcers now circling the company are able to force fundamental changes in the way it does business. Analysts and other experts say that could damage the company's financial health. "If you eliminate all the questionable payments at Marsh & McLennan, you eliminate half of their profits," says a former executive. Spitzer's complaint says contingent commissions -- lucrative payments Marsh receives for steering unsuspecting clients to certain insurers -- alone amount to $800 million a year, or about half the insurance brokers' 2003 net income. Says Ronald W. Frank, a Smith Barney (C) analyst: "One of the risks to Marsh isn't just possible fines but the fact that a significant component of its compensation is being brought into question."

BusinessWeek requested several interviews with Greenberg but was repeatedly told: "Mr. Greenberg does not speak to the press." Understandably, companies are reluctant to comment on ongoing investigations. A company spokeswoman says, "Marsh & McLennan is a company that neither condones nor tolerates wrongdoing and takes forceful action when such issues arise." The company said it has voluntarily suspended the contingent fee payments. Until the latest scandal, Greenberg and others in the industry have staunchly defended the fees. They say brokers go beyond the call of duty for their clients, by, for example, creating custom policies or collecting premiums. On a July conference call with analysts, Greenberg said: "We provide services for which we expect compensation. We don't spend a lot of time worrying about it."

"Throwing the Quote"

Perhaps William Gilman, Marsh Global Broking's executive director of marketing and a managing director, was doing the worrying. Gilman, in his 60s, is a larger-than-life character who some call Kill Bill, after the Quentin Tarantino movies. The nickname could also have something to do with an internal AIG memo about bidding for business that was an exhibit in the Spitzer case: "Per W. Gilman -- get to right number [regarding a bid] or 'we'll kill you."' Says a former colleague: "He's the kind of guy who stubs a cigarette out in your coffee cup."

Gilman, says Spitzer's complaints, strictly enforced the system of rigged bids and payoffs from insurers. He also rated insurers by how much they paid Marsh in contingent commissions. A September, 2003, e-mail from his office released by Spitzer reads: "We need to place our business in 2004 with those that...pay us the most." A source close to the investigation told BusinessWeek that Gilman will likely face criminal charges. Gilman did not return several calls. On Oct. 19, MMC suspended Gilman and four others.

Folks dealing with Marsh were supposed to abide by "Billy's Rules" -- a playbook Gilman devised for insurers, according to someone familiar with the company. The rules were: 1) No "no's" (meaning Gilman should never be told "no" about any predetermined Marsh arrangement). 2) Don't get stupid (never question Marsh's schemes). 3) If you get stupid, we will broom your ass. 4) Never think you own your business, you only rent your business. Marsh owns your business. "Billy's Rules," emblazoned on an office plaque, hung in Gilman's office.

Gilman, according to the complaint, oversaw Marsh's "throwing-the-quote" scheme, whereby some insurers were told to quote artificially high bids for business. Several times, Gilman refused to allow AIG to relay competitive bids to clients, according to Spitzer's complaint, warning AIG that "it would lose its entire book of business with Marsh" if it didn't provide higher price quotes than the insurer Marsh favored. The phony quotes were often referred to as "throwaway quotes," "protective quotes," "backup quotes," or "B quotes," says the complaint. In return, according to Spitzer, Marsh protected AIG and other firms that played ball when it was their turn to win. AIG declined to comment.

Gilman also staged what he called "drive-bys" -- in which insurers were asked to attend presentations for prospective clients even when they knew they had no chance of snagging the deal, according to Spitzer. A regional manager for Munich-American RiskPartners, a division of American Reinsurance, who was so frustrated by constant requests from Marsh for "live bodies" to attend drive-bys that he wrote in an all-caps e-mail: "We don't have the staff to attend meetings just for the sake of being a body. While you may need a live body, we need a live opportunity."

Gilman may have enjoyed such power because Marsh already dominated insurance brokering. By the late '90s, Marsh had cornered 40% of the global business thanks to aggressive acquisitions. Marsh's grip tightened when it centralized control of broking activities in New York. Analysts say Marsh's dominance allows it to control pricing, the way insurance products are structured, and how premiums and payouts are disbursed. "They have both their clients and insurers by the cojones," says a competitor.

But now it's MMC's top brass who are squirming. Being in the spotlight is highly uncomfortable for MMC -- long known as a patrician, white-shoe firm with an air so understated and secretive that at least one former exec likened it to working at the CIA. Its ranks have included Ambassador L. Paul Bremer III, former Presidential Envoy to Iraq, who recently ran MMC's crisis-consulting business; Stephen Friedman, President George W. Bush's top economic adviser and former Goldman, Sachs & Co. (GS) co-chairman, who was an MMC senior principal; Craig Stapleton, the husband of George W. Bush's cousin Dorothy, who was an MMC president; and Lord Lang of Monkton, a former British Member of Parliament who still sits on the board. Many Marsh and Putnam execs summer by the sea in ultra-wealthy and clubby Watch Hill, R.I.

"I'd Love to Talk...But"

MMC certainly goes to extraordinary lengths to ensure loyalty. A former Putnam executive recalls being grilled by a company psychiatrist in a hotel room for hours during a job interview. Says the former exec: "Everyone has a Dr. [James] Terry story. He would ask questions like: 'What's the worst thing that ever happened to you?' 'What are your views on religion?' 'Who do you vote for?' They tell you they're looking for any signs of malfeasance or criminality. But they're also looking for people who will fit in, lockstep, at the company." An MMC spokeswoman claims that using a psychiatrist for screening purposes is "industry practice." Terry could not be reached for comment.

Once they're in, most people who join MMC's upper echelons must sign binding noncompete agreements, say both current and former employees. "Each time you exercise stock options, you have to sign a new one," says one former exec. MMC calls this, "a generally accepted practice." Employees who leave MMC and then disparage it in public risk losing any deferred compensation to which they are entitled. One former MMC exec told BusinessWeek: "Gee, I'd love to talk to you. There's a lot to say. But they've got my money."

Since moving to rival broker Willis Group Holdings Ltd. (WSH), a former Marsh exec says he has been spied on by a private investigator who he suspects was Kroll Inc., which MMC bought in July for $1.9 billion. He says he believes MMC wants to ensure that former employees are not using its proprietary information. MMC would not comment without specific details. Another former exec says MMC constantly monitored internal phone calls. MMC says it is unaware of this.

At the start of 2004, insiders say, MMC managers were forced to sign new noncompete agreements. At least two longtime MMC execs left as a result, they say. "The feeling was, I've never disparaged the company and I've been loyal all these years. And you're making me sign another one of these?" says one.

The changes, say former execs, were designed to stem a rising tide of defections by its brokers to smaller rivals who they say treat clients more fairly. Over the past year, MMC has been embroiled in a nasty lawsuit with Palmer & Cay, a Savannah (Ga.) insurance broker whose president, James B. Meathe, is Marsh's former Midwest chief. In documents filed in Michigan's Wayne County Circuit Court in September, 2003, MMC alleged that P&C set out to induce some 70 "key Marsh employees to resign" and "violate their noncompete agreements" to join P&C, which P&C denied. Robert Cleary, a lawyer representing P&C declined comment. Sources familiar with the suit say Marsh has used tough tactics, with one Marsh board member telling P&C: "We're going to bury you." MMC declined comment.

Such behavior seems at odds with Greenberg's impeccable pedigree. After graduating from upper-crust Connecticut boarding school Choate, Greenberg headed to Brown University, where he graduated with honors. He then earned a J.D. degree at Georgetown University's law school. Greenberg sits on a number of prestigious nonprofit boards, including the New York Stock Exchange. He's a trustee of the Brookings Institution and a member of the Trilateral Commission -- an organization David Rockefeller founded in 1973 that consists of the world's top political and business leaders.

He and his second wife Kimberly have four children. According to friends, they lead a relatively quiet Manhattan life with little of the ostentation that often accompanies the CEO lifestyle despite the $22 million Greenberg took home last year. The family has a spacious but understated apartment on Park Avenue and a weekend house in Lakeville, Conn. With his tall and muscular physique, friends say, he plays a mean game of tennis. Steven Rattner, managing principal at private investment firm Quadrangle Group LLC who serves as a Brown trustee with Greenberg, says: "Jeff's a real stand-up guy. He's thoughtful, committed, and always does what he says he's going to do." Veteran journalist Nikki Finke, who was married to Greenberg in the early 1980s, says he was never a spoiled rich kid. During high school he pumped gas and cleaned boats.

And despite the unfolding scandals, most industry players still seem to respect Greenberg. He certainly got high marks in his early days as MMC CEO for his handling of the aftermath of the September 11 World Trade Center attacks. Three years earlier, Marsh had leased floors 93 to 100 in Tower One, and 294 MMC employees -- mostly salesmen, secretaries, and analysts in their 20s and 30s -- lost their lives after the first airplane hit. At services, Greenberg spoke movingly about the makeshift memorial that had occupied an entire wall next to the cafeteria at MMC's Sixth Avenue headquarters.

After Andrew

Still, just days after September 11, Greenberg and top MMC execs met to figure out how to profit from the disaster. They formed a subsidiary -- Axis Specialty Ltd. -- to sell insurance to corporate customers at three or four times the rates before September 11. MMC says that it was merely "meeting market demands."

For some industry players the move recalled what Greenberg did in 1992 after Hurricane Andrew slammed into South Florida and wiped out some $15 billion worth of property. Jeff, who was working for dad at AIG, sent out an internal memo stating: "This is an opportunity to get price increases now." It was leaked to the press, which had a field day -- with one newspaper branding him "a vulture." The memo moved Ralph Nader to complain and Florida regulators to freeze rates. People close to Jeff say he was humiliated by the incident. "That's a major reason why he avoids the press these days," says one.

Greenberg's ambition has been fueled by father Hank. Says ex-wife Finke: "Jeff was always terrified of his father. He was deeply insecure and wanted his approval." "Hammerin' Hank" is known for his cantankerous, rough-and-tumble demeanor. "Hank was known for calling up his lieutenants on weekends and holidays and bawling them out," says a former executive.

When Jeff was working under his father in the early '90s, heading up AIG's domestic brokerage group, Marsh sources say Hank raked him over the coals at a meeting in front of top executives. Hank, they say, had ordered Jeff to deal with a personnel issue, but Jeff had dragged his feet. Says one: "Hank started yelling at Jeff in front of everyone: 'You either fix your management problem, or I'll fix mine!"' But the coup de grace came in 1995 when Hank abruptly promoted Jeff's younger, less experienced brother Evan, making them equals in AIG's hierarchy. Two weeks later, Jeff left.

Evan, 49, is a college dropout and nonconformist who, by his own admission, had a bit of a troubled youth. But he had a knack for the insurance business and rose quickly at AIG. Unlike Jeff, Evan is one of the few people who stand up to his father. "Evan's scrappy -- a yeller," says an insurance industry veteran. "I think Hank could somehow relate to him better than Jeff." But in 2000, Evan also resigned from AIG. He now heads Ace Ltd. (ACE), a Bermuda company named in Spitzer's complaint -- along with AIG -- as one of those involved in Marsh's alleged bid-rigging and price-fixing schemes.

Months after exiting AIG, Jeff landed at Marsh & McLennan, where he had worked as a broker in the mid-'70s. As a partner in MMC Capital, the firm's risk-capital unit, he excelled at building MMC's Trident Funds, which invested billions in various insurance entities and real estate, and hoisted himself onto the fast track. He was determined "to show up his dad and brother," says a source familiar with the family.

At Marsh Mac, Jeff was able to take advantage of the Greenberg name: Then-CEO and Chairman Smith -- an old acquaintance of Hank's -- was Jeff's personal mentor. Jeff was named chairman and chief executive of MMC Capital in 1996. By the beginning of 1999, he had been promoted to president of Marsh & McClennan. And by the end of that year, he was CEO. He was elected chairman in May, 2000.

Even if Greenberg did inherit the Marsh Mac mess, he's under fire for how he handled it. "Despite seeming like a hero for ousting [former Putnam CEO Lawrence J. ] Lasser and moving toward cleaning up Putnam, the truth is, Greenberg didn't address things until he absolutely had to," says a former colleague. In November, 2003, after Putnam was slapped with a securities-fraud charge, longtime CEO Lasser, 61, was forced to resign. Regulators alleged that company brass had been aware of illegal trading in Putnam funds since 2000.

Problem was, the autocratic Lasser had already built an empire that accounted for half of MMC's revenues when Greenberg took over. "Lasser basically created his own little fiefdom and allowed no one in," says Mercer E. Bullard, president and founder of Fund Democracy, an advocacy group, and a securities law professor at the University of Mississippi. But after the 2000 market crash, some MMC execs say Greenberg should have swooped in and taken control. Says a former Putnam exec: "[Jeff's] delaying tactic cost Putnam its reputation." Insiders say Charles E. Haldeman, who took over as Putnam's CEO last November, was angry at Greenberg for dragging his feet. Haldeman declined to comment.

A Frustrating Process

In the past year, Putnam has lost some $70 billion in assets. Recently, several pension funds, including CalPERS, the California Public Employees' Retirement System, agreed to let Putnam compete for its business, but with stipulations: Putnam must consider pruning executive pay and ramp up financial disclosure. "That's a huge positive move for corporate governance," says Minow.

But governance gurus still aren't happy with MMC or Greenberg. The Corporate Library says the company still awards its execs excessive compensation. In 2003 it paid an aggregate $60 million to its top five officers, vs. an average $21 million at other large financial companies, according to Glass Lewis. MMC says: "Our independent directors and outside consultants set compensation." This past year, several large pension funds joined forces to propel an independent director, Zachary W. Carter, a lawyer, onto the board. Richard Ferlauto, director of pension and benefit policy at the American Federation of State, County & Municipal Employees, says it was a slow-moving and frustrating process: "Jeff thought he knew what was right, and he wasn't going to let anyone rock the boat." Carter didn't respond to numerous interview requests.

Earlier this year Greenberg asked mentor Smith, 69, to come out of retirement to help him. Insiders say Greenberg was intimidated by Lasser and needed Smith to negotiate with the former Putnam CEO. Smith, who has an office close to Greenberg's, was named chairman of Putnam. Greenberg also promoted Steven Spiegel, Lasser's right-hand man, to vice-chairman of Putnam. Says Bullard:"Although Haldeman has taken control and is doing a great job, it doesn't change the fact that a lot of bad stuff happened under Smith and Spiegel."

Some of the bad stuff may have had to do with Putnam funds being pushed by Mercer, Marsh Mac's pension-consulting arm. Mercer was long considered a sleepy, less profitable outpost of the Marsh kingdom. Then, say insiders, in the mid-'90s it came under pressure to turn bigger profits. That's when it started offering pricey conferences for money managers at $50,000 to $60,000 a pop. "If you don't attend those, it's nearly impossible to get on Mercer's list to manage pension money," says Jack Silver, a former trustee at Chicago's teachers' pension fund. MMC denies this. The SEC is investigating these allegations. And Spitzer will likely look into whether Putnam pushes Marsh-brokered variable annuity products onto investors. "There's no disclosure about this conflict to Putnam clients," says Selva Ozelli, a securities lawyer close to the investigation. There could also be an investigation into how Marsh, allegedly slow to pay out premiums, profits from the float.

That means deepening troubles for Greenberg, who some critics say has done far too little to shore up MMC's reputation over the past year. "Print it, post it, and pray -- it seems as if that's all Greenberg's done when it comes to ethics," says Patrick McGurn, special counsel at Institutional Shareholder Services Inc., a corporate governance consultant. Until now, say analysts, Greenberg's main focus has been on acquiring more companies. Now he's forced to deal with spreading legal woes and a public-relations nightmare. Says David D. Brown IV, Spitzer's investment protection chief: "We're really just at the beginning here. We're pursuing a number of leads and will follow them where they take us."

In an Oct. 15 press release Greenberg announced that MMC was appointing a private investigator to look into the alleged insurance broker fraud. It's a move some might have applauded, except for one thing: He gave the job to the head of MMC's Kroll -- who's now the head of Marsh.

By Marcia Vickers


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