A firm’s reputation is one of the most valuable assets. Thus, when a risky situation occurs, the company loses its reputational capital. Reputational risks involve the trustworthiness of the business by various stakeholders. The firm’s loss of reputation can result to the decline in the shareholders’ wealth and the loss of huge amounts of revenue. A company may or may not have been responsible for the problem; but, in any case, it suffers severely when a risk occurs. A risk results from the type of information channeled to the public. It may include the company’s financial performance.
However, reputational risk goes beyond accounting losses and is reflected on the external performance of a company. Risks can also occur as a result of management disclosure of sensitive information. There is evidence that reputational risk is influenced by the size of a firm, its financial performance, brand equity, geographical diversification, product diversification and form of ownership in a company (Marsh & Mclennan 2010). The conduct of management can adversely impact the firm’s reputation in various ways, especially in case there are financial irregularities. A risk occurs where the management wants to meet behavioral expectations in an industry while there is stiff competition.
Reputation Issues at MMC
Prior to 2004, Marsh and McLennan Company (MMC) had built a reputation as one of the leading financial services group. The company was a consolidation of Marsh Brokers and Marsh Inc., Mercer, a consulting firm, Guy Carpenter, a reinsurance service company, Putnam Investments, which offer fixed income and equity products, and Kroll, a security consultancy firm. The company had grown rapidly since the Second World War through an aggressive management style that involved maximizing returns and driving its employees to become very efficient and effective at their work places. The company tried to reduce its market risks through diversification of its products and services.
In the years 2003 and 2004, the company was in trouble after all its major businesses faced certain reputational issues. First, it was Putman Investments, where management was involved in market timing and late trading. The organization’s investors were not informed of these actions by the company. As a result, Putman Investments was able to benefit important clients by skimming returns of the ordinary investors. The company ensured that important clients reinvested funds in it. Therefore, some investors benefited at the cost of other investors. Putman Investments was implicated with these charges, and it lost more than $60 million as state charges. In addition, the company lost 50% of the assets due to redemption by investors. Its reputation was significantly damaged due to those events (Hull 2007).
Another company related to MMC, Mercer (a human resource consulting company), was also in trouble during the same period. This occurred as a result of a contract from NYSE to analyze the CEO functions and provide sound advice on the amount of compensation he would receive. The company was convinced by the CEO to validate his compensation requirements. Later it stated that the CEO’s compensation level was very high and Mercer had wrongfully validated the payment. As a result, Mercer settled the matter by contributing $440,275 and avoiding further legal actions.
The company’s insurance brokerage arm, Marsh Inc., was in trouble either. It became known to the public that Marsh Inc. had agreed with other insurance companies to set above market rates policies for its customers. However, according to the set regulations, Marsh Inc. was required to search for the best policies for its clients without holding prior agreements with other insurance companies. Marsh Inc. gained millions of dollars from commissions paid by the insurance companies. Fourteen of the company’s executives admitted the fact of making arrangements with insurance companies. In effect, the company’s earnings dropped by 19% in 2004. The three companies combined caused significant losses to MMC. Furthermore, the company faced various action suits. MMC publicly apologized for the illegal conduct in its companies.
The company experienced a significant decline in its share prices. When the state of affairs was made public, the company’s share prices declined by 50%. As noted, reputational risks may occur due to various factors. In the financial services sector, conflicts of interests can arise between the clients and the interests of a firm. As such, a company can act on its behalf, hence maximizing its interests, or it can favor certain clients over others. Such conflicts of interests are monitored and controlled through legal and regulatory means in order to protect the interests of all parties involved. As a result, the company’s management will have to incorporate measures internally that will ensure prevention of illegal and unethical acts. Management should implement measures to prevent the occurrence of reputational risks; this is because there are no perfect remedies in case such risks occur. The measures that the management can take include the delegation of risk evaluation to the company’s managers. Moreover, the company should have proper coordination among its business units and effective sharing of information among different businesses.
The management needs to evaluate all the reputational risks facing their company. Thus, it is important that the company’s corporate strategy will consider the effects of reputational risks. This means that the company’s decision making would consider the effects of reputational issues. Reputational risks would not severely affect it if they occurred.
Research proves that the company’s management was composed of individuals who excelled in different activities. The code of ethics was established under the aim of maintaining the company’s reputation and the need to mitigate conflicts of interests. As a result, it is surprising that the organization suffered unethical practices discovered in 2003 and 2004. The management style can be accused of being the cause of all the organization’s problems. Research shows there was a high pressure working environment and the management was under pressure to perform well or suffer the consequences of losing their jobs (Hull 2007). In addition, the management did focus on the improvement of the employees’ skills. However, the company compensating its employees for their unethical behaviors resulted to high returns. Thus, domineering and authoritative management practices led to the fall of the company’s reputation. The lack of organizational systems that would protect the company’s reputation increased the possibility of its managers unethically achieving their goals.
Michael G. Cherkasky had served Marsh & McLennan Inc. for three years since 2004 to 2007 in the capacity of the company’s President and Chief Executive Officer. During his term, the company experienced various challenges in terms of its financial performance. In 2007, the organization’s financial performance fell way below the expectations of the board of directors and shareholders. This made Standard & Poor’s lower the company’s rating. The reputation of the company was adversely affected. This led to the low performance of its stocks in the market.
Marsh & McLennan’s board of directors decided to replace their management in order to mend the reputation of the company. Brian Duperreault was appointed to succeed Michael Cherkasky. He too had served Marsh & McLennan Inc. as the President and the Chief Executive Officer from January 2008 to December 2013. The stewardship of Brain to the company had seen the company develop tremendously. The operating results of the company improved when compared to the previous years. The company management team praised Brain during his retirement for leaving the company in a better position than it had been when he had begun working for it. Brain built a very strong leadership team that helped him in his stewardship career. He formed a firm foundation for the future growth of the company.
Dan Glaser succeeded Brain Duperreault after his retirement in the year 2011. He had been serving in senior positions in the insurance brokerage and commercial insurance in various countries such as Europe, the United States of America and the Middle East countries. During that time, he demonstrated strong and impressive leadership skills.
A reputation risk is an information risk based on the trustworthiness of an individual or business. The company’s reputation in terms of its leadership demonstrated significant influences on the stock market valuation. In the year 2007, the leadership skills of Michael Cherkasky, Marsh &McLennan’s CEO, experienced many challenges. The company’s performance did not meet the expectations of its shareholders and directors. Standard and Poor’s rated the company rather low at that time. This directly affected the reputation of the company. The demand for and prices of its stocks decreased. The board of directors had to rescue the situation before the worst possible consequence could happen, namely the company losing its niche in the market (Marsh & Mclennan 2010).
Marsh & McLennan Inc. was willing to ensure the reputation of the company was maintained at a high profile. There is a direct relationship between the company’s reputation in terms of leadership and the value of its stocks in the market. The first step the company took was replacing its current leader Michael Cherkasky with Brian Duperreault. Duperreault introduced evolutionary leadership through his vast knowledge and experience in the insurance industries. After he took the leadership role of Marsh & McLennan, the reputation of the company rose significantly. The market value of its stocks increased due to the good reputation of the company’s leadership. The company has continued to safeguard this reputation through appointing good leadership like that one of the current president and CEO, Dan Glaser. The good reputation of the organization’s leadership ensures that the stock market prices remain relevant and profitable for the benefit of the company.
Michael Cherkasky was ranked among the top ten Chief Executive Officers who needed to leave their respective companies in 2008. He was the president and CEO of MMC group of companies during that period. One major problem the CEO faced was that he had built his reputation as a former Kroll’s CEO. Prior to his position at Kroll, he successfully held the position of Chief of Investigations for the District Attorney in New York. The CEO was the best person to run Kroll. However, he was not the best person to run the entire MMC group of companies. It was justified for Michael Cherkasky to be forced out of his position as the CEO of MMC group (Hull 2007).
The company’s performance deteriorated during his term. MMC core earnings dropped by 40%, and they were way below the company’s expectations. MMC had the lowest investment grade, according to Standards and Poor’s (BBB). This affected the company in terms of the clients it would serve. During Michael Cherkasky’s term, the company sold Putnam Mutual Fund subsidiary. This did little to improve the company’s position considering that it was sold at $3.9 billion and they only gained $2.5 billion after deduction of taxes and minority interests of shareholders. Their credit ratings did not improve. The company’s stock value fell by 22% during his first two years of leadership, and by 18% further on (Marsh & Mclennan 2010). The company had a liquidity crisis since the investigations of 2004. Cherkasky was allowed to spend more funds to solve the problem. However, the money was used for share buy backs, and this did not improve the situation. The company awarded its shareholders a dividend of 3%, which was considered to be rather unfavorable by most investors.
The board decided to appoint Brian Duperreault as the person who would cope with running the company in the best way. The major reason for his appointment was his remarkable reputation in the industry. The announcement of his appointment was made on January 30th 2008. Duperreault was appointed as a result of his being ACE Limited CEO for ten years. During that period he had increased shareholders value and produced positive returns for investors. In addition, he had occupied the post of the board’s chairman for three years. Under Duperreault’s leadership ACE grew to become a global commercial enterprise. It also acquired various businesses in the course of its expansion. Brian held various positions at American International Group for more than 20 years. His experience posed him as the best person to be appointed for the position of CEO and President of MMC.
Brian Duperreault had success as the MMC’s CEO. He was able to restore positive financial performance while, at the same time, managed to build a great reputation for the company. Hence, under his management, the company experienced improvements in profit margins, control of costs while maintaining its clients as well as the return of profitability in all of its subsidiaries. The company changed its aggressive management style to a talent development and reward based management.