We hate most regulation. But even more, we hate corrupt, unethical business people and professionals who bring it down upon us. Bid-rigging, price-fixing and payoffs -- the charges leveled against Marsh & McLennan Cos. (MMC ) and some of the nation's largest insurance companies by New York Attorney General Eliot Spitzer -- are not only civil offenses, they are crimes against capitalism. They prevent competition, erode market efficiency, and raise costs. They destroy public trust by hindering transparency and the free flow of information. The egregious behavior of people who game markets, create conflicts of interest, and deceive shareholders inevitably invite government regulation. Ironically, it is Corporate America that is the greatest victim of the insurance scandal now unfolding. Chief executives should not hesitate to support New York and other state regulatory agencies in cleaning up the insurance markets.
They should also throw their support behind efforts to create a national standard for insurance practices. Unlike banks and the rest of the financial system, insurance is not regulated by Washington but by 50 state insurance commissioners under 50 sets of laws and 50 sets of rates. A congressional bill, dubbed SMART for State Modernization & Regulatory Transparency, could provide uniform standards.
But that isn't nearly enough. A three-month investigation by BusinessWeek into Marsh & McLennan reveals a secretive, arrogant corporate culture, largely hidden from public and client view. A business model based on alleged conflicts of interest, such as steering unsuspecting clients (who pay Marsh for best prices and policies) to certain insurance companies (who pay Marsh to get business), appears to have generated much of the insurance broker's 2003 earnings. Spitzer is also probing Marsh McLennan's pension-consulting arm, Mercer, to see if it pushes clients into buying Marsh McLennan insurance products. The Securities & Exchange Commission is investigating Mercer's practice of requiring payments from money managers who want to be recommended to pension clients. The SEC is also looking into whether executives at Putnam Investments, Marsh McLennan's mutual fund company, made payments to companies to have its funds featured in 401(k) plans. These suggest a corrupted corporate culture that requires change at the top.
In response to the Spitzer charges, CEO Jeffrey W. Greenberg announced that he was appointing a private investigator to look into the alleged insurance broker fraud. He gave the job to the head of Kroll Inc., owned by none other than Marsh & McLennan itself. The very same day, Greenberg appointed the same man as the head of Marsh, the insurance brokerage unit. It's time for a new CEO.