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MMC's Focus on Appearances

September 12, 2012 | About:

Marsh & McLennan Companies Inc. (NYSE:MMC)’s J. Michael Bischoff, is now CFO of the insurance brokerage. An analysis of the company’s financial statements suggests that MMC managers went to unusual lengths to present their performance data in the best light possible during recent months.

After Vanessa A. Wittman said this February that she would quit her role as CFO to take a senior position at the technology giant Google, Bischoff took over on an interim basis in late March. Bischoff, who has served at MMC in various roles since 1982, officially became CFO on September 4. “His extensive experience and demonstrated ability to create shareholder value are important assets,” MMC’s CEO Brian Duperreault said in a press release.

Some of the “value” might also involve presentation. The financial data in MMC’s regulatory filings gives it an AGR score of 27 as of August, indicating that it has higher accounting and governance risk than 73% of companies.

To be sure, MMC has been struggling to regain its credibility in recent years, after settling then-New York Attorney General Eliot Spitzer’s allegations of bid-rigging in January 2005. Since then, the company has taken steps toward improving its corporate governance. For example, MMC changed its majority voting policy in the election of directors in December 2005 (its bylaws were technically amended in December 2006) that requires directors who do not receive a majority of votes cast to tender their resignations. It also made other improvements to its corporate governance profile later, such as saying in October 2006 that directors should not serve on more than four additional public company boards.

Despite such progress, MMC’s recent activity has shown some red flags. For example, the company eliminated around 400 positions at Mercer and 40 positions at corporate in 2011, but then went ahead and spent money on stock buybacks and acquisitions. While such layoffs are in no way illegal, they reveal something about the management’s behavior and priorities.

On Aug. 17, 2011, MMC said that its board authorized the increase of its share buyback plans by $500 million to $1 billion. “Our earnings power has continued to strengthen over the past several years, allowing us to invest in our businesses and return capital to shareholders,” CEO Duperreault explained in a press release. Even so, earnings per share that have improved from revenue growth in core operations differ in quality from those that gained a boost from share buybacks.

Meanwhile, MMC’s earnings also consist of an unusually high proportion of estimated rather than tangible assets. Units of MMC have undertaken scores of acquisitions in recent years, ranging from Alexander Forbes' South African brokerage operations this January to the North Carolina-based employee benefits agency Progressive Benefits Solutions this June. MMC said it paid $6.64 billion more than book value for such acquisitions as of June 30, or nearly 44% of its total assets. Some experts have noted concerns about companies that have more than 20% of their assets in goodwill, and academic research has shown that managers tend to temporarily overstate earnings in the periods following such deals. MMC warned in its annual filing for the year 2011 that a goodwill “impairment could have a material adverse effect on our results of operations in any given period.”

MMC has also taken a higher risk of having to make adjustments down the line related to the amount it will have to pay out for employee pensions. As of June 30, MMC assumed that the assets in its pension would grow at a rate of 8.75% versus the industry median of 7.5%. In another move that lowers MMC’s anticipated long-term liabilities, the company estimated that the value of money will cheapen relatively quickly over the years by assuming a discount rate of 5.9% as of June 30 compared to the industry median of 5.4%.

Of course, aggressive accounting is not the same as accounting fraud. But if MMC’s estimates turn out to be wrong in the long run, CFO Bischoff might find himself in an uncomfortable place someday.


Region: North America

Country: United States

Sector: Financials

Industry: Financials - Specialty

Market Cap: $18,595.2 million (Large Cap)

ESG Rating: F

AGR Rating: Aggressive (27)


Rating: 3.6/5 (5 votes)


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