Corporate Governance: Case Study Report on Marsh & Mclennan Companies, Inc.

Only available on StudyMode
  • Download(s) : 146
  • Published : August 12, 2008
Open Document
Text Preview
Introduction

Marsh & McLennan Companies (MMC) founded in 1871, is a global insurance brokerage firm providing advice and solutions in the areas of risk, strategy and human capital. It has clients in more than 100 countries and a workforce of more than 60,000 employees as indicated in MMC 1st quarter results report on April 21 2004.

On October 14 2004, New York Attorney - General Eliot Spitzer filed civil charges against MMC for alleged misbehaviour in property-casualty insurance coverage, which included fake bids, collusion, improper steering of business to favour insurers, payments by insurers to avoid solicitation of competing quotes, outright threats against those resisting participation in the fraudulent schemes (CFO.com reading 3).

Key Ethical Issues

Bid rigging process
MMC worked with major insurers to rig the bidding process for property-casualty insurance coverage. MMC brokers decided which insurers would get their clients’ business and at a certain price. MMC’s business plan was to increase revenue by steering business to those insurers willing to pay higher commissions. (FT reading 8)

Conflict of interest
Clients of MMC were misled into thinking that they were getting the most competitive deal, but in actual fact they paid a much higher premium. MMC did not act in the best interest for their clients because MMC received fees from clients and commissions from the insurers (Berenson, 2004)

Price-fixing
MMC engaged in price-fixing scams to manipulate the price market in the insurance industry. In order to assist one insurer to renew a policy, it maintained an agreement with other insurer companies to set higher prices so that the former could retain its business.

Acceptance of kickbacks
Insurers offered incentives to MMC in the form of controversial contingent commissions on top of the basic standard commission for achieving a certain quota of business. The contingent commissions formed half of MMC’s net income in 2003. (Business week reading 6) MMC artificially inflated its share price and made material misrepresentations of earnings and failed to disclose material information regarding their critical source of revenues - contingent commissions.

Lack of transparency
MMC did not make adequate disclosure to their clients the payments they received from the insurer.

Lack of integrity
MMC informed insurance companies that receiving more business would require the latter to pay above market commissions to them.

Company culture
The company had an obsessive focus on secrecy and it deemed fit to operate in its own way, hidden from public and client view. Employees had to remain silent about wrongdoing. They were reluctant to engage in whistle blowing due to the risk of losing their jobs and any form of compensation.

Abuse of market size and power
MMC dominated the insurance brokering industry. MMC had cornered 40% of the global business. MMC’s dominance enabled it to control pricing, the way insurance products were structured and how premiums and payouts were disbursed.

Lack of audit processes
There was a lack of audit processes to ensure that MMC’s financial transactions had adequate documentation. The proper tone for ethical behaviour was not set at the top.

Rationale for Developing the Policy

In the past, MMC focused on key business values such as efficiency, growth and profit. MMC’s practices were in line with the teleological philosophies which are concerned with the end results. As long as their actions produced the desired results in the end, MMC considered them ethical. MMC had not adhered to the deontology theory which argues that there are some things we should not do, even to maximize utility. (Ferrell)

Based on the Global Business Standards Codex (GBS Codex) (Lynn Paine et al, 2005), MMC’s conduct failed to address five of the benchmark principles outlined: 1The Fiduciary Principle pertaining to diligence and loyalty. 2The...
tracking img