In August 1993, the state of Florida cracked down on the sales practices of giant Metropolitan Life, a company dating back to 1868, and the country's second-largest insurance firm. MetLife agents based in Tampa were alleged to have duped customers out of some $11 million. Thousands of these customers were nurses lured by the sales pitch to learn more about "something new, one of the most widely discussed retirement plans in the investment world today."[275] In reality, it was a life-insurance policy in disguise, and what clients were led to think were savings deposits were actually insurance premiums.
As we will see, the growing scandal rocked MetLife, and eventually brought it several billion dollars in fines and restitutions. What was not clear for certain was the full culpability of the company: Was it guilty only of not monitoring agent performance sufficiently to detect unethical and illegal activities, or was it the great encourager of such practices?
The first premonitory rumble that something bad was about to happen came to Rick Urso on Christmas Eve 1993. Home with his family, he received an unexpected call from his boss, the regional sales manager. In disbelief, he heard there was a rumor going around the executive suites that he was about to be fired. Urso had known that the state of Florida had been conducting an investigation, and that company auditors had also been looking into sales practices. And on September 17, two corporate vice-presidents had even shown up to conduct the fourth audit that year, but on leaving they had given him the impression that he was complying with company guidelines.
Urso often reveled in his good fortune and attributed it to his sheer dedication to his work and the company. He had grown up in a working-class neighborhood, the son of an electrician. He had started college, but dropped out before graduating.
His sales career began at a John Hancock agency in Tampa in 1978. Four years later, he was promoted to manager and was credited with building up the agency to number two in the whole company.
He left John Hancock in 1983 for MetLife's Tampa agency. His first job was as trainer. Only three months later, he was promoted to branch manager. Now his long hours and overwhelming commitment were beginning to pay off. In a success story truly inspiring, his dedication and his talent as a motivator of people swept the branch from a one-rep office to one of MetLife's largest and most profitable. By 1993, the agency employed 120 reps, seven sales managers, and 30 administrative employees. And he was the head. In 1990 and 1991, Urso's office won the company's Sales Office of the Year award. With such a performance history, the stuff of legends, he became the company's star, a person to look up to and to inspire trainees and other employees.
Urso had the passion of an evangelist: "Most people go through life being told why they can't accomplish something. If they would just believe, then they would be halfway there. That's the way I dream and that's what I expect from my people."[276] He soon became known as the "Master Motivator," and increasingly was the guest speaker at MetLife conferences.
On the Monday after that Christmas, the dire prediction came to pass. He was summoned to the office of William Groggans, the head of MetLife's Southeast territory, and there was handed a letter by the sober-faced Groggans. With trembling hands he opened it and read that he was fired. The reason: engaging in improper conduct.
Unfortunately, the growth of his Tampa office could not be credited to simple motivation of employees. Urso found his vehicle for great growth to be the whole-life insurance policy. This was part life insurance and part savings. As such, it required high premiums, but only part earned interest and compounded on a tax-deferred basis; the rest went to pay for the life insurance policy. What made this so attractive to company sales reps was the commission: A Met whole-life policy paid a 55 percent first-year commission. In contrast, an annuity paid only a 2 percent first-year commission.
Urso found the nurse market to be particularly attractive. Perhaps because of their constant exposure to death, nurses were easily convinced of the need for economic security. He had his salespeople call themselves "nursing representatives," and his Tampa salespeople carried their fake retirement plan beyond Florida, eventually reaching 37 states. A New York client, for example, thought she had bought a retirement annuity. But it turned out to be insurance even though as a single woman she didn't need such coverage because she had no beneficiaries.[277]
As the growth of the Tampa agency became phenomenal, Urso's budget for mailing brochures was upped to nearly $1 million in 1992, ten times that of any other MetLife office. This gave him national reach.
Urso's own finances increased proportionately because he earned a commission on each policy his reps sold. In 1989, he was paid $270,000. In 1993, as compensation exceeded $1 million, he moved his family to Bay Shore Boulevard—the most expensive area of Tampa.
A few complaints began surfacing. In 1990, the Texas insurance commissioner warned MetLife to stop its nursing ploy. The company made a token compliance by sending out two rounds of admonitory letters. But apparently nothing changed. See the following Information Box about the great deficiency of token compliance without follow-up.
An internal MetLife audit in 1991 also raised some questions about Urso's pre-approach letters. The term nursing representative was called a "made-up" title. The auditors also questioned the term retirement savings policy as not appropriate for the product. However, the report concluded by congratulating the Tampa office for its contribution to the company. Not surprisingly, such mixed signals did not end the use of misleading language at that time.
In the summer of 1993, Florida state regulators began a more in-depth examination of the sales practices of the Urso agency. The crux of the investigation concerned promotional material Urso's office was sending to nurses nationwide. From 1989 to 1993, millions of direct-mail pieces had been sent out. Charges finally were leveled that this material disguised the product agents were selling. For example, one brochure coming from Urso's office depicted the Peanuts character Lucy in a nurse's uniform. The headline described the product as "retirement savings and security for the future a nurse deserves." Nowhere was insurance even mentioned, and it was alleged that nurses across the country had unknowingly purchased life insurance when they thought they were buying retirement savings plans.
As the investigation deepened, a former Urso agent, turned whistleblower, claimed he had been instructed to place his hands over the words "life insurance" on applications during presentations.
As a result of this investigation, Florida Insurance Commissioner Tom Gallagher charged MetLife with serious violations.
Under investigation by Florida regulators, the company's attitude changed. At first, MetLife had denied wrongdoing. But eventually it acknowledged problems. Under mounting public pressure, it agreed to pay $20 million in fines to more than 40 states as a result of unethical sales practices by its agents. It further agreed to refund premiums to nearly 92,000 policyholders who had bought insurance based on misleading sales information between 1989 and 1993. The refunds were expected to reach $76 million.
MetLife fired or demoted five high-level executives as a result of the scandal. Urso's office was closed, and all seven of his managers and several reps were also discharged. Life insurance sales to individuals were down 25 percent through September 1994 over the same nine-month period in 1993. Standard & Poor's downgraded MetLife's bond rating based on the alleged improprieties.
Shortly after the fines were announced, the Florida Department of Insurance filed charges against Urso and 86 other MetLife insurance agents, accusing them of fraudulent sales practices. The insurance commissioner said, "This was not a situation where a few agents decided to take advantage of their customers, but a concerted effort by many individuals to dupe customers into buying a life insurance policy disguised as a retirement savings plan."[278]
Now MetLife attempted to improve its public image by instituting a broad overhaul of its compliance procedures. It established a corporate ethics and compliance department to monitor behavior throughout the company and audit personal insurance sales offices. The department was also charged with reporting any compliance deficiencies to senior management and to follow up to ensure the implementation of corrective actions.
In MetLife's 1994 Annual Report, Harry Kamen, CEO, and Ted Athanassiades, president, commented on their corrective actions regarding the scandal:
We created what we think is the most effective compliance system in the industry. Not just for personal insurance, but for all components of the company. We installed systems to coordinate and track the quality and integrity of our sales activities, and we created a new system of sales office auditing.
Also, there were organizational changes. And, for the first time in 22 years, we assembled all of our agency and district managers—about a thousand people—to discuss what we have done and need to do about the problems and where we were going.[279]
Meantime, Rick Urso started a suit against MetLife for defamation of character and for reneging on a $1 million severance agreement. He alleged that MetLife made him the fall guy in the nationwide sales scandal.
The personal ramifications for Urso's life were not inconsequential. More than a year later he was still unemployed. He had looked for another insurance job, but no one would even see him. "There are nights he can't sleep. He lies awake worrying about the impact this will have on his two teenagers." And he laments that his wife cannot go out without people gossiping.[280]
Is Urso really the unscrupulous monster who rose to a million-dollar-a-year man on the foundations of deceit? Or is MetLife mainly to blame for encouraging, and then ignoring for too long, practices aimed at misleading and even deceiving?
Undeniably Urso did things that smacked of the illegal and unethical. But did the corporation knowingly provide the climate? Was his training such as to promote deceptive practices? Was MetLife completely unaware of his distortions and deceptions in promotional material and sales pitches? There seems to be substantial evidence that the company played a part; it was no innocent and unsuspecting bystander.
At best, MetLife top executives may not have been aware of the full extent of the hard-selling efforts emanating at first from Tampa and then spreading further in the organization. Perhaps, in the quest for exceptional bottom-line performance, they chose to ignore any inkling that things were not completely on the up and up. "Don't argue with success" may have become the corporate mindset.
At the worst, the company encouraged and even demanded hard selling and tried to pretend that it could be accomplished with acceptable standards of performance. If the standards were not met, the company's top executives could argue that they were not aware of any wrongdoing.
There is evidence of company culpability. Take the training program for new agents. Much of it was designed to help new employees overcome the difficulties of selling life insurance. In so doing, they were taught to downplay the life insurance aspects of the product. Rather, the savings and tax-deferred growth benefits were to be stressed.
New agents learning to sell insurance over the phone were told that people prefer dealing with specialists. It seemed only a small temptation to use the title nursing representative rather than insurance agent.
After the scandal, MetLife admitted that the training might be faulty. Training had been decentralized into five regional centers, and the company believed that this might have led to a less standardized and controlled curriculum. MetLife has since reorganized, so that many functions, including training and legal matters, are now done at one central location.[281]
The company's control or monitoring was certainly deficient and uncoordinated during the years of misconduct. For example, the marketing department promoted deceptive sales practices, while the legal department warned of possible illegality but took no further action to eliminate it.
The MetLife revelations focused public and regulatory attention on the entire insurance industry. The insurance commissioner of Florida also turned attention to the sales and marketing practices of New York Life and Prudential. The industry itself seemed vulnerable to questionable practices. Millions of transactions, intense competition, and a widespread and rather autonomous sales force—all these afforded opportunity for misrepresentation and other unethical dealings.
For example, just a few months after the Tampa office publicity, MetLife settled an unrelated scandal. Regulators in Pennsylvania fined the company $1.5 million for "churning." This is a practice whereby agents replace old policies with new ones for which additional commissions are charged and policyholders are disadvantaged. Class-action suits alleging churning were also filed in Pennsylvania against Prudential, New York Life, and John Hancock.
But the problems go beyond sales practices. Claims adjusters may attempt to withhold or reduce payments. General agents may place business with bogus or insolvent companies. Even actuaries may create unrealistic policy structures.
With a deteriorating public image, the industry faced further governmental regulation from both state and federal agencies. But cynics, both within and outside the industry, wondered whether deception and fraud were so much a part of the business that nothing could be done about them.[282]
Here we have an apparent lapse in complete feedback to top executives. But maybe they did not want to know. After all, nothing was life-threatening here, no product-safety features were being ignored or disguised, nobody was in physical danger.
This raises a key management issue. Can top executives hide from less-than-ethical practices—and even illegal ones—under the guise that they did not know? The answer should be No! See the Information Box below for a discussion of management accountability.
We are left with MetLife's top management grappling with the temptation to tacitly approve the aggressive selling practices of a sales executive so successful as to be the model for the whole organization, even though faint cries from the legal staff suggested that the practices might be subject to regulatory scrutiny and disapproval.
The harsh appraisal of this situation is that top management cannot be exonerated for the deficiencies of subordinates. If controls and monitoring processes are defective, top management is still accountable. The pious platitudes of MetLife managers insisting that they have now corrected the situation hardly excuse them for permitting it to have developed in the first place.
Ah, but embracing the temptation is so easy to rationalize. Management can always maintain that there was no good, solid proof of misdeeds. After all, where do aggressive sales efforts cross the line? When do they move from simple "puffing" to become outright deceptive? See the following Information Box regarding puffing, an admittedly gray area of the acceptable. Lacking indisputable evidence of misdeeds, why should these executives suspect the worst? Especially when their legal departments, not centralized as they were to be later, were timid in their denunciations?
Turning to controls, a major caveat should be posed for all firms: In the presence of strong management demands for performance—with the often implicit or imagined pressure to produce at all costs, or else—the ground is laid for less-than-desirable practices by subordinates. After all, their career paths and even job longevity depend on meeting these demands.
Such abuses are more likely to occur in a climate of decentralization and laissez-faire. A results-oriented structure suggests that it's not how you achieve the desired results, but that you meet them. So, while decentralization, on balance, is usually desirable, it can lead to undesirable practices in an environment of top-management laxity.
At the least, it leads to opportunistic temptation by lower- and middle-level executives. Perhaps this is the final indictment of MetLife and Rick Urso. The climate was conducive to his ambitious opportunism. For a while it was wonderful. But the abuses of accepted behavior could not be disguised indefinitely.
And wherever possible, top management will repudiate its accountability.
MetLife responded slowly to the allegations of misconduct. A classic mode for firms confronted with unethical and/or product-liability charges is to deny everything, until evidence becomes overwhelming. Then they are forced to acknowledge problems under mounting public pressure—from regulatory bodies, attorneys, and the media—and have to scramble with damage control to try to undo the threats to public image and finances. In MetLife's case, fines and refunds approached $100 million early on. They would eventually reach almost $2 billion.
Being slow to act, to accept any responsibility, and, for top executives, exhibiting aloofness until late in the game, are actions that inflame public opinion and regulatory zeal. How much better for all involved, victims as well as the organization itself, if initial complaints are promptly followed up. And, if complaints are serious, they should be given top-management attention in a climate of cooperation with any agencies involved as well as the always-interested media.
On August 18, 1999, MetLife agreed to pay out at least $1.7 billion to settle final lawsuits over its allegedly improper sales practices. The agreement (in which MetLife admitted no wrongdoing) involved about 6 million life-insurance policyholders and a million annuity-contract holders. Essentially, these customers were expected to get one to five years of free term-life insurance coverage.
MetLife argued for years that it had done nothing wrong. It had previously dispensed with most of its litigation problems by settling rather than going to trial. The incentive for settling these final class-action suits even at the cost of a massive charge was to clear the way for MetLife's planned conversion to a stockholder-owned company from its current status as a policyholder-owned mutual company. "Clearly it's something they needed to put behind them before they demutualized," or went public.[283]
Harry Kamen, CEO of MetLife, brought Robert Benmosche, age 57, an ex-Wall Streeter, on board in 1995 to turn things around. Benmosche solved many of MetLife's problems and became chairman when Kamen retired in 1998. In April 2000, he took the company public, and the stock offering raised $5.2 billion.
In his relentless restructuring, Benmosche axed poor performers, some 1,300 including 154 assistant vice presidents and higher in 2001—and demanded better results and ethical standards. He required agents to work full-time, instead of part-time, as many had previously done: "I knew this was needed after I met someone who complimented one of my agents for his plumbing skills," explained Benmosche. He also compelled all agents to get securities licenses so they could sell investments like variable annuities. Bonuses were now tied into performance reviews and a division's financial results, and officers' bonuses were partly paid in stock that they were discouraged from selling: "If the top people . . . don't do what they have to do to make sure the company strongly survives, we should lose our shirts." MetLife's revenues in 2001 were $32 billion, up 18 percent since Benmosche became chairman.[284]
Demutualization, or taking a company public, has the powerful advantage of easier availability of funds due to stock offerings. But there are some drawbacks. The chief one is that public ownership exposes a firm to more visibility and criticism, as the following Information Box describes alleged abuses of executive compensation for another big insurance company.
Invitation to Make Your Own Analysis and Conclusions
Do you think Urso's career could have been salvaged? What could he have done? What could higher management have done to save this man's gifted but misguided career? Or was he worth saving?
Do you think Rick Urso should have been fired? Why or why not?
Do you think the MetLife CEO and president should have been fired? Whyor why not?
Why was it seemingly so desirable to avoid the term "life insurance"? What is wrong with life insurance?
Given the widespread publicity about the MetLife scandal, did you think the firm could regain consumer trust in a short time?
"This whole critical publicity has been blown way out of proportion. After all, nobody was injured. Not even in their pocketbook. They were sold something they really needed. For their own good." Evaluate.
"You have to admire that guy Urso. He was a real genius. No one else could motivate a sales organization as he did. They should have made him president of the company. Or else he should become an evangelist." Evaluate.
Do you think the arguments are compelling that the control function should be centralized rather than decentralized? Why or why not?
Before
It is early 1990. You are the assistant to the CEO of MetLife. Rumors have been surfacing that life-insurance sales efforts are becoming not only too high pressure but also misleading. The CEO has ordered you to investigate. You find that the legal department in the Southeast Territory has some concerns about the efforts coming out of Urso's highly successful Tampa office. Be as specific as you can about how you would investigate these unproven allegations, and explain how you would report them to your boss, assuming that some questionable practices seem apparent.
It is 1992. Internal investigations have confirmed that Urso and his "magnificent" Tampa office are using deceptive selling techniques in disguising the life-insurance aspects of the policies they are selling. As the executive in charge in the Southeast, describe your actions and rationale at this point. (You have to assume that you do not know the later consequences.)
After
The s___t has hit the fan. The scandal has become well publicized, especially on such TV programs as Dateline and 20/20. What would you do as top executive of MetLife at this point? How would you attempt to save the public image of the company?
The publicity is widespread about MetLife's "misdeeds." Debate how you would react. One position is to defend your company, rationalize what happened, and downplay any ill-effects. The other position is to meekly bow to the allegations, admit wrongdoing, and be as contrite as possible.
Is MetLife still prospering under Benmosche? Can you find any information that contradicts that the situation has virtually been forgotten by the general public? Can you find out whether Rick Urso has found another job? Could you develop the pros and cons of a mutual (policyholder-owned) firm and a public firm owned by stockholders?
[275] Suzanne Woolley and Gail DeGeorge, "Policies of Deception?" Business Week, January 17, 1994, p. 24.
[276] Weld F. Royal, "Scapegoat or Scoundrel," Sales & Marketing Management, January 1995, p. 64.
[277] Jane Bryant Quinn, "Yes, They're Out to Get You," Newsweek, January 24, 1994, p. 51.
[278] Sean Armstrong, "The Good, The Bad and the Industry," Best's Review, P/C. June 1994, p. 36.
[279] MetLife 1994 Annual Report, p. 16.
[280] Royal, p. 65.
[281] "Trained to Mislead," Sales & Marketing Management, January 1995, p. 66.
[282] Armstrong, p. 35.
[283] Deborah Lohse, "MetLife Agrees to Pay Out $1.7 Billion or More to Settle Policyholder Lawsuits," Wall Street Journal, August 19, 1999, p. B14.
[284] Carrie Coolidge, "Snoopy's New Tricks," Forbes, April 15, 2002, pp. 100–102.
[285] Scot J. Paltrow, "As a Public Company Prudential May Find Pay Scales Draw Fire," Wall Street Journal, August 14, 1998, pp. A1 and A8.