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Concrete Steps to Restore a Company`s Reputation

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Concrete Steps to Restore a Company`s Reputation

Imagine that you`re the CEO of a large firm like the one described in the attached file. What concrete steps would you take to restore your company`s reputation if it has been sullied?

COMPANY: MARSH & MCLENNAN (MARSH, INC.,
PUTNAM FUNDS, AND MERCER CONSULTING)
INDUSTRY: INSURANCE (MARSH, INC.), MUTUAL FUNDS
(PUTNAM FUNDS), AND CONSULTING (MERCER)

SITUATION
Starting in late 2003, Marsh & McLennan (MMC), with a reputation as one
of the most staid and well-managed companies in the United States, became
embroiled in a series of ethical scandals. The first involved Putnam Funds, a
mutual fund company in Boston and traditionally the cash cow of MMC.
Putnam first lost huge bets on technology and growth stocks when the stock
market imploded in 2000. Then it was the first mutual fund company named
in the market-timing scandal that involved mutual fund companies across
the industry. (Market timing is shifting money in and out of mutual funds
based on the performance of one or more market indicators. In the recent
scandal, large investors were allowed to "time the market" by trading late—
after the markets had closed—which provided a clear advantage for the big
guys and a clear disadvantage for the little guys.) There is no doubt that of
all the mutual fund companies, Putnam took the biggest hit for the scandal,
and it continues to struggle to make its way back. Its assets under
management—the major measure of stability and heft in the industry—
fell from $370 billion in late 2000 to $194 billion during the first quarter of
2005.25 But Putnam was only the beginning of trouble at MMC.
In October 2004, New York State Attorney General Eliot Spitzer filed a
civil complaint against MMC, the parent company of Marsh, Inc., the world`s
largest insurance broker. In the suit, Spitzer charged that Marsh betrayed
clients by steering business to underwriters with whom it had cozy relationships
in exchange for millions in backdoor payoffs. As one Marsh executive
said, "We need to place our business in 2004 with those that have superior
financials, broad coverage, and pay us the most." Spitzer`s complaint uncovered
a broad mosaic of industry-wide bid rigging for which Marsh served as
the chief architect. Other companies such as AIG, Hartford, and ACE were
involved, but Marsh was the big player in the arrangement.26 (At the time of
Spitzer`s suit, Jeffrey Greenberg was CEO of MMC; his brother, Evan
Greenberg, was CEO of ACE; and the legendary Maurice "Hank" Greenberg,
father of Jeffrey and Evan, was CEO of AIG and would later face enormous
troubles of his own.)

HOW THE COMPANY HANDLED IT
To stanch the bleeding at Putnam, MMC forced out Putnam`s CEO, the
imperious Lawrence Lasser, who took a $78 million severance payout and
left the company that he had captained for years.27 MMC quickly hired
squeaky-clean Charles "Ed" Haldeman as the new CEO to lead Putnam out
of the swamp. In April 2004, Putnam settled with the SEC and agreed to
accept new employee trading restrictions and to conduct and provide regular
compliance reviews. The company also paid $110 million in various fines.
(There were additional charges, settlements, and fines from a variety of
sources, including the Commonwealth of Massachusetts.)28 Haldeman
brought in a new management team and made other changes, but the
company continues to struggle to regain its former position as a leader
in the industry.
Its parent, MMC, had a more difficult time with its woes. In a highly
unusual move, Spitzer refused to negotiate with the company as long as its
executive team was in place. Soon after, CEO Jeffrey Greenberg and the top
company lawyer resigned and Michael Cherkasky took the helm. Cherkasky
was Spitzer`s former boss in Manhattan`s district attorney`s office and the
CEO of Kroll, Inc., a leading risk consulting company acquired by MMC
shortly before its legal woes began. Cherkasky`s relationship with Spitzer
proved very helpful forMMC—the company quickly agreed to a settlement of
$850 million and also agreed to lead the insurance industry in reforming
industry practices

A note: Mercer HR Consulting, the other third of the MMC business, also
had its own troubles. It disgorged more than $440,000 in fees from the New
York Stock Exchange (NYSE) after admitting that it misled the NYSE board
of directors regarding the $140 million pay package of Richard Grasso, then
CEO of the NYSE

RESULTS

In 2004, MMC`s stock price fell from a 52-week high of $47.35 to a low of
$22.75—an incredible fall fromgrace for a company that had performed so well
and so predictably for decades.31 In a mere four days of trading, the company
lost $11.5 billion in market value.32 That plunge hurt MMC employees more
than most investors because, until shortly before these problems,MMCemployees
could invest theirMMCretirement savings only inMMCstock. The thinking
among MMC senior executives was that people would be more motivated to
produce excellent results if their entire retirement savings were tied up inMMC
stock. In a real ethical lapse, senior executives had other investment options—it
was only rank-and-file employees who were restricted to MMC stock. MMC`s
strategy was particularly unfathomable when you consider thatMMC`s Mercer
HR Consulting employed numerous retirement experts who routinely advised
their clients about the importance of providing employees with diversified
options for retirement investments. After years of listening to employees plead
to be allowed to diversify and afterwatching Enron`s employees lose their shirts
when their company`s stock plunged, MMC executives finally allowed for
limited diversification. Beginning in 2003, MMC employees could diversify
part of their retirement investments into a few Putnam funds—nowhere near the
number or range of options provided by other large corporations to their
employees. Many MMC employees who did not move quickly enough to
diversify lost much of their retirement investments after MMC stock plummeted.
Note to students—diversify your investments, and never put all your
investments in company stock! (Also, in the interest of full disclosure, please
note that one of this book`s authors, Katherine Nelson, was employed as a
principal at Mercer HR Consulting from 1998 to 2001 and was an "employee
investor" of MMC.)
In addition to the substantial settlements, the financial losses, the pessimism
of financial analysts, and the enormous hit taken by MMC investors and
employees, 5,000 jobs were lost and the company`s reputation remained
damaged for a number of years.

COMMENTS

One of the wisest comments about the crisis at MMC comes from the former
CEO of Putnam Funds, Charles Haldeman, who said, "What our parents told
The results of these very public conflicts of interest will be felt for years. Various
regulators and attorneys general from a number of states are still investigating the
banks and their business practices. As a result of the various debacles in the banking
industry, Citigroup has been fined more than $5.5 billion since 2003, and JPMorgan
Chase has been fined more than $4 billion.38 Other financial institutions have also been
fined sums totaling in the billions, and numerous corporate brands have been muddied.
However, all of that "justice" has not yet restored the faith of the public in the markets,
nor will it help the hundreds of thousands of individual investors who have lost their
shirts because of these shenanigans. In a 2002 Business Week poll of its readers,
93 percent said they had "only some" or "hardly any" trust in the executives who run
big companies, and 95 percent felt that way about big auditing companies.39 More
recently, a 2010 survey indicated that 70 percent of the public believes that businesses
and financial companies will go back to "business as usual" after the 2008-09
recession.40 In the same survey, only 29 percent of respondents in the United States
thought that they could trust banks "to do the right thing." That`s down from 68 percent
in 2007.41 In a 2012 survey, Wall Street and Congress were in a dead heat as the least
trusted institutions in the U.S., and public confidence in them could be measured in
single digits.42 It is a sad commentary.
us about protecting our reputation is true. If you lose it, it`s hard to win it back
again." Haldeman also talked about the isolation that existed in Putnam before
his arrival. Apparently, Putnam had a history of not cultivating relationships
with the press or the government, and when the scandal broke, it had no friends
to turn to. Haldeman also vowed to change that. "At the time of our problems,"
he said, "We didn`t have those relationships and it was difficult for us. At a
time of need we didn`t have too many friends or supporters. We don`t want to
be in that position again."34 Haldeman served as CEO of Putnamfrom the time
the crisis broke in 2004 until 2008, when MMC sold Putnam to Power
Corporation and replaced Haldeman.35
The scandal that rocked MMC was an example of how former New York
State Attorney General Eliot Spitzer liked to turn an industry upside down.
Writer Peter Elkind wrote of Spitzer`s strategy in Fortune magazine: "The
strategy has been remarkably consistent. Step one: Wade broadly into a gray
area of odorous but long-accepted industry practices. Step two: Seize on
evidence of black-and-white outrageous conduct—typically in email form—
and use it to marshal public outrage. Step three: In the resulting tsunami of
scandal, swiftly exact reform of the whole industry, including gray-area
behavior." Within two weeks of filing charges, Marsh and its largest competitors
had agreed to stop bid rigging. Similarly, industry-wide mutual fund
abuses stopped within weeks of Spitzer filing charges against Putnam.36
Please note that Eliot Spitzer has had his own ethical lapses. A little over a year
after being elected governor of New York State, he was caught up in a federal
wiretap of a prostitution ring (he was found to be a client) and resigned in
disgrace in early 2008.


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