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Marsh & McLennan's Directors on Hot Seat

Oct 26, 2004 | AP No doubt the nail biting has started among members of the Marsh & McLennan Cos. board of the directors. With the company plagued by yet another scandal, their oversight will certainly be called into question.

It should be. In the wake of all the business scandals, boards all around corporate America are under intense scrutiny over how they do their jobs, and new court cases are raising the possibility that directors could be found personally liable for what they do and what they fail to do.

Serving on a corporate board has never been a cushy job, but now a director's every move has potential consequences.

That isn't to say boards today are being held to such high standards that they can't make mistakes. The question is whether they stick to their mission: To act in good faith and in the best interest of the company and its shareholders.

"Directors, time to time, may make bad business decisions. They aren't liable for that," said Gregory Puff, a partner at the law firm of McDermott Will & Emery. "They are liable when they don't discharge their fiduciary obligations."

At March & McLennan, that will surely be examined now that the company is at the center of the giant scandal rocking the insurance business, with its brokers accused of cheating clients by rigging bids and taking payoffs from insurance companies to steer clients their way rather than get the best prices for policies.

The directors have done their best to distance themselves from the alleged wrongdoing. Immediately following news on Oct. 14 that New York Attorney General Eliot Spitzer was suing the company, the 10 independent directors on the 16-person board issued a statement that they had begun a review of the accusations.

On Monday, they announced that Marsh & McLennan CEO Jeffrey Greenberg had resigned from the company. He was replaced with Michael Cherkasky, a former district attorney who just last week was named head of Marsh Inc., the company's risk and insurance services unit. And on Tuesday, the company said it would be adopting "significant reforms" to its business operations.

Yet all that maneuvering might not get the board off the hook, at least in the eyes of shareholders who have watched their stock holdings lose more than 40 percent of their value in recent weeks. With as much as half the company's profits being derived from fees now in question, at issue is how much the directors knew about such dealings.

The last place that board members will want to be called on to defend their role is in the courts, which have begun to shift away from their long-standing reluctance to second-guess how boards operate.

For instance, a Delaware Court of Chancery judge ruled in June that officers and directors who have a specialized expertise in a particular industry can be held to a higher standard than those members of the board that don't have similar knowledge.

Surely, March & McLennan's shareholders will be watching for that outcome. Its board members should be, too.

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