allstate the darker side 2010 condensed

7/24/2019 ALLSTATE the Darker Side 2010 Condensed

1/11A Magazine for Allstate Agency Owners and Allstate Personal Financial Representatives

ExclusivefocusSummer 2010

A Magazine for Allstate Agency Owners and Allstate Personal Financial Representatives

An Official Publication of the National Association of Professional Allstate Agents, Inc.

A Magazine for Allstate Agency Owners and Allstate Personal Financial Representatives

Is Allstate Really

the Best? page 18

From Good Hands to

Boxing Gloves Two

Agent Reviews of the

Controversial Book

page 41

Allstates Hidden

Agenda page 44

The Comprehensive

Recreational Activity

Policy AllstatesSecret Weapon to

Becoming #1?page 22

State Farm

Exploits AllstateAgent Terminationspage 14


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4 Exclusivefocus Summer 2010

Exclusivefocus

An Official Publication of the National Association of

Professional Allstate Agents, Inc.

A Magazine for Allstate Agency Owners and AllstatePersonal Financial Representatives

Summer 2010

BUSINESS14 Atta Boy, Tommy,

but not so fast

28 How Download Delivers Value BY DOUG JOHNSTON

32 How Hurricane-proof areYour Business Records?

BY STEVE MOHR

51 One Improvement in Your Agency can Keep you Ahead of the Rest BY TODD MCINDOO

55 Objection Handling for theRookies and Especiallyfor Veterans

BY SEAN HOWELL

HUMOR22 Ed Liddy Saves the Day

50 I Promise Results withMy Customer RelationshipManagement (CRM)Database Money BackGuaranteed!

BY HESH REINFELD

DEPARTMENTS6 Presidents Letter10 Letters to NAPAA58 Membership Application59 NAPAA Market Place62 Index to Advertisers

FEATURES18 Are We Really the Best? BY THE ANDY ROONEY OF NAPAA

24 Can ALI be an Agents Best Friend?

BY ROB LOOMIS

27 An Open Letter to Joe Richardson from a California Agent

31 Selling your Agency?Consider Advisors Who Understand the Allstate Process

34 An Extraordinary Event

41 BOOK REVIEW: From Good Hands to Boxing Gloves:The Dark Side of Insurance

44 Allstates Hidden Agenda

53 The End of Another Promising Career

MARKETING16 Getting Your Agency on Facebook BY ROBYN SHARP

20 Our Real Business is... Marketing! BY ALLSTATE AGENCY OWNER BILL GOUGH

40 3 Tips Guaranteed to Increase your Quote VolumeBY DAVID NEUENSCHWANDER


3/11Summer 2010

Exclusivefocus 41

Review Number 1

Trial attorney David Berardinellisbook, From Good Hands to Boxing Gloves,tells about a side of the Allstate businessplan that company management wouldprefer to keep secret. Starting with arecap of an accident involving Jose andOlivia Pincheira, Berardinelli progressesto Allstates handling of their claim and

details how his experience as their triallawyer leads to uncovering a businesspractice that, in his words, is The darkside of insurance.

After Berardinelli quickly relates thefacts of the Pincheiras accident, he in-troduces us to McKinsey and Company,

a high profile consulting firm hired byAllstate in 1992, ostensibly to help re-design the companys core business plan

with special emphasis on claims han-dling. Berardinelli spends the rest of thebook describing McKinseys new claimprocess, designed specifically for Allstate.McKinsey calls it Claims Core ProcessRedesign, or CCPR. It has since become

Allstates standard for claims processing.According to Berardinelli, the CCPR plan

book review

From Good Hands to Boxing Gloves:The Dark Side of Insurance

In this issue of Exclusivefocus magazine, we are presenting two

reviews of this controversial book about Allstate. The following

reviews were independently written by two active Allstate agentswho do not know each others identities. Both of them wish to re-

main anonymous.

would provide Allstate with record profitswhile, at the same time, deny financialbenefits to its policyholders. Berardinellifurther likens the McKinsey philosophy,

which he says has become benchmarkfor the Allstate corporate philosophy, to

Wall Streets Gordon Gekkos claim thatGreed is good.

During the first few chapters, I initiallyfound myself railing against Berardinellis

supposition that Allstate was purposefullyand maliciously denying the Pincheirasclaim. After all, being a good Allstater, I

was naturally going to come to the corpo-rations defense. Not knowing the explicitfacts of the case, and instead relying onthe summary Berardinelli presented, itseemed highly unlikely Allstate would en-gage in a process which not only involvedan Allstate agents purported lies, but theuse of a then-secret formula for defraud-ing Allstates own clients. As impatient

as I was to quickly dismiss this book asa sour grapes retribution for running hisclient through the mill, Berardinelli pa-tiently tells a story that, in the end, makesa compelling case.

It was breathtaking to read about thedepth and breadth the company wentthrough in order to manipulate and, inessence, invent a new way to processclaims. Previously implemented in oth-er industries, the McKinsey Greed isGood philosophy successfully merged

Allstates pursuit for ever-increasingprofits at any cost with the new CCPRclaims process. Berardinelli goes on tosay that when used as the new standard,CCPR relegates insurance customers tonuisance status and treats them as animpediment to profits rather than the fi-nancial focal point they deserve to be.

In Chapter nine, Berardinelli repro-duces a slide from McKinseys February16, 1994 presentation to Allstate. The


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Review Number 2I do not believe maximizing profits for

the investors is the only acceptable justifica-tion for all corporate actions. The investorsare not the only people who matter. Cor-

porations can exist for purposes other thansimply maximizing profits. John Mackey,Whole Foods Market CEO

The time is always right to do what isright. ~Martin Luther King, Jr.

Sears - Satisfaction Guaranteed oryour money back. Allstate - Youre ingood hands. Reputation. Integrity. Do-ing the right thing. These are, or were,

the driving forces of business. Yet we asagents, and especially long-term agents,

who have lived by these attributes for yearshave seen these same virtues disappear at

Allstate. We sense it like we sense a stormcoming by the wind shifting in the trees.Somethings amiss in our corporation.

Just who is the corporations customer? Asagents, we know who our customer is, but

who is Allstates customer?In the must-read book From Good

Hands to Boxing Gloves: The Dark Side of

Insurance, attorney and author David J.Berardinelli exposes what agents knowall too well: the shareholder is Allstatescustomer and enhancing shareholderreturn is its underlying operating prin-ciple. Mr. Berardinelli is a trial lawyer

who worked to become the first personto obtain the now infamous McKinseyDocuments. The book talks about howthe documents teach insurers to profitby denying or delaying claims, and how

Allstates Good Hands treatment of its

customers has been supplanted with amore aggressive and adversarial approachwhich, metaphorically speaking, requiresthe policyholder to don a pair of boxinggloves to spar with the company in orderto reach a fair claim settlement.

As agents, we know the traditionalrules of insurance. Our customers believeus when we tell them that their homes,autos, property and their lives are in GoodHands. We are the face and heartbeat of

slide depicts a Current Game graphshowing gradually declining payoutsof bodily injury claims over a 1250-dayperiod. The intent is to show that earlyin a claims history; BI payouts tend tobe higher, followed by a tapering offand a gradual step-down effect untilmost claims are settled by the end of the1250-day period. The same slide alsodepicts a graph entitled New Game in

which McKinsey recommends Allstatesettle 90% of its claims in less than 180days, or the Good Hands segment, fol-lowed by a deliberate delay of about fourmore years to settle the remaining 10%.McKinsey labels this segment BoxingGloves. Berardinelli estimates that bygiving customers the Boxing Glovetreatment, Allstate can rack up billionsin profits through this new delay tactic.

According to Berardinelli, this strategy

involves keeping clients away from at-torneys, promising forthcoming fairsettlement offers, but not delivering,and exploiting policyholders financial

vulnerability by making lowball initialsettlement offers.

Berardinellis logical presentation inFrom Good Hands to Boxing Glovesalignsthe Allstate philosophy with McKinseyand Companys credo of Greed is good.It appears that encouraging Allstatespursuit of financial gains at the expense

of the very customers it purports to serveis childs play for McKinsey. Berardinellireminds us that lest we forget one ofthe biggest financial scams of our time,one would do well to remember Enron.

While the Enron name is synonymouswith greed and corruption, it is McKin-sey that provided them with the neces-sary internal mechanics required to pulloff their ascent to the top of Wall Street.

And while Enron ultimately took the bigfall, McKinsey quietly slipped out the

back door to pursue its next high-payingclient.From Good Hands to Boxing Glovescon-

cisely chronicles Allstates connection toand its use of McKinsey and CompanysGreed is good philosophy. It defines

Allstates current direction, which maywell serve to dissuade new clients fromever coming close to Allstates GoodHands for fear they may have to wearboxing gloves instead.

the insurance contract to our customers.They pay their premiums and when theyhave a covered loss, they believe thoseGood Handswill make them whole. Re-place the home damaged by a hurricane,tornado or fire; reimburse them for med-ical expenses or horrible injuries from anauto accident, especially if caused by anuninsured motorist. The customer natu-rally believes that Allstate will settle theirclaim fairly and promptly and will keepthe policyholders best interests at thecenter of the process.

According to Berardinelli, Casualtyinsurance is indemnity coverage. It doesnt

pay a set benefit. It pays as much as thepolicyholder needs, up to the policy limit torestore an insured to the same financial posi-tion after the loss that he or she was in priorto the loss.

I dont know about you, but these days

I have a sense of dread and uncertaintyevery time a customer calls to report aclaim. I never know what to expect any-more. After all, we know Allstate wantsto settle the claim as quickly as possiblefor the least amount of money. My fearis that Allstate will lowball the customer

with a take it or leave it settlement of-fer. And when this happens, the boxinggloves come out and I get caught in themiddle, trying to do the right thing for mycustomer. Naturally, the company usually

wins and I lose another customer.

Allstate Hires McKinsey: 1992

First, a little background on McKinsey.They do not solicit clients. Clients have toseek them out, just as Enron did. So whydid Allstate seek and then adopt McKin-seys business model and what motives didsenior executives at Allstate have?

As you may recall, in 1992 Sears, try-ing to prop up its suffering retail busi-ness, decided to spin off Allstate, Cold-

well Banker and Dean Witter. Sears,of course, didnt make the official an-nouncement of its plan until 1993, butsome senior executives at Allstate seemto have been tipped off to the then-secretrestructuring plan.

Enter Ed Liddy

In 1992, Sears CFO was Ed Liddy. Justtwo years later he becomes president andCEO of Allstate. Coincidence? While at


5/11Summer 2010

Exclusivefocus 43

Sears, Liddys executive compensationwas mostly in the form of Sears stock andoptions, which were dependent on theentire performance of four separate busi-nesses. All that changed when Allstate

was spun off and became the nationslargest publicly traded personal lines in-surance company. Thereafter, executivestock options would depend solely on

Allstates ability to increase net profitsand build the value of Allstate stock.

McKinsey urged Allstate to align the in-terests of its employees and management

with those of the shareholder. Accordingto Berardinelli, Proof of McKinseys plan to

put shareholders ahead of policyholders isnthard to find. Allstates 2005 Proxy State-ment clearly spells out this plan: Because webelieve strongly in linking the interests ofmanagement with those of our shareholders,we first instituted stock ownership goals in

1996 for executives at the vice president leveland above. Therefore, Allstate CEOs arerequired to own company stock worth seventimes their annual salary. Senior manage-ment executives are required to own stockworth four times their annual salary.

You do the math. If you owned millionsof Allstate shares whose interest would

you protect? Who would your customerbe, the policyholder or the shareholder?

At the time of his retirement on De-cember 31, 2006 Liddy owned almost 4

million shares of Allstate worth approxi-mately $250,000,000 at the market priceof $65.11But wait, theres more!In all,Liddys move to Allstate in 1994 netted aPERSONAL FORTUNE of approximate-ly $350 million upon retirement on Decem-ber 31, 2006 - much of it due to McKinseysbusiness model.

For Liddy and other executives, in-cluding current president and CEO Tom

Wilson, it was, and still is, a sweet, sweetdeal indeed. For policyholders, it means

excessive premiums combined with re-duced claim payments. And it continuesto mean rate increase upon rate increasefor our customers. No hard talking pathcan explain away the obvious: Executiveendorsed, expertly entrenched, corpo-rate-sponsored greed.

Mr. Berardinellis book reads like a mur-der mystery in which he delves into the

whodunit of Allstate and McKinsey likeSir Arthur Conan Doyles Sherlock Hol-

mes. Among chapter titles and sub-titles: Good Hands or Boxing Gloves An Alternative Explanation of

Earnings McKinsey and the Greed is Good

Model McKinseys Solution to the Allstate

Problem Changing Employee Behavior We get What we Measure Litigation as a tool Colossus Redefining the GameEye-opening for agents will not be

what Allstates culture is, as we experi-ence this out of control beast on a dailybasis. What will be eye-opening is thesmoking gun itself; the subpoenaedMcKinsey slides from the presentation in

which the profitability to be had - by ba-sically turning the claims process into an

adversarial, litigious profit center wasrevealed. The keep em running, keepem guessing human resource policy thathas affected agents and employees since1994, when most agents were employees,continues to fester as RFG for todaysso-called independent contractor Ex-clusive Agents. As the McKinsey reportstates:We get what we measure. The newmeasurement approach will be based on the

processes and activities required to achievethe desired outcomes (increasing profits).

Does this sound a bit like Expected Re-sults or RFG?

While the main subject of Mr. Berardi-nellis book deals with McKinsey and theclaims paying process changes to increaseprofitability at Allstate using CCPR, itisnt a stretch at all for us to surmise thatMcKinsey must have been asked for other

ways to increase profitability in Allstatesdistribution sector the agency system.

At the time, the vast majority of agentswere Allstate employees who began to

feel the effects of the companys cost-shifting plan. The costs of running anoffice, which the corporation previouslyassumed, were slowly shifted to agentsthrough the Neighborhood Office Agent(NOA) program and then in 2000, All-state completely shifted its costs, includ-ing pensions, employment taxes, healthinsurance, etc. to its newly-converted en-trepreneurial agent work force. Thus, thegreatest oxymoronic title in Allstate his-

tory: the Independent Contractor Exclu-sive Agency Owner!

Enter 2010. Agents are being termi-nated for lack of production, for AFS,agency standards and perhaps most ab-surdly - for ALI. Now the Ideal AgencyModel, part of the Sales and CustomerService Roadmap, threatens to eliminatethousands of agents as they struggle togrow their agencies to meet this new$4 million per agency corporate stan-dard. Indeed, the future looks bleak forthe agency force. Yes, some will make it,but most will fail for a number of rea-sons, including rates, MMGs and a lackof capital. McKinsian in its goals andobjectives, the Ideal Agency Model wasdescribed as follows by Joe Richardson inan announcement released to the field:

Based on agency feedback and model-ing, Allstate has determined an ideal scale

that puts an agency in an optimal financialposition while still encouraging growth andsustainability.

An agencys progress toward this idealagency model will be measured, and toolsare being built to support agencies in theirefforts to maintain a positive trajectory to-wards the model.

For agencies who have already met orexceeded the ideal model, Allstate will contin-ue to provide extensive support to encourage

growth and sustained success.

The future for many small to mediumsize agencies is clear: grow or go. Zerotolerance.

While the Good Hands to BoxingGloves business model is being appliedto the detriment of policyholders, it ishelping to achieve the expected resultsthat company leaders need to enhancetheir compensation levels and, of course,increase shareholder value.

It is very clear to this writer that thissame Good Hands to Boxing Gloves

business model has, and will continue tobe, applied to the agency force.Make no mistake. At a minimum, All-

state has a 10-year plan on just when andwhere they are going. Its common knowl-edge that the company plans to reduce thenumber of existing agents by up to 3,300existing agents over the next few years. If

you dont plan accordingly, you may justbe knocked out of the ring whether its

your first or your fiftieth fight.


6/11


WHAT WOULD YOUdo if someonestole something from you? What would

your reaction be if someone lied to you?What if, in the course of a business re-lationship, both of these things hap-pened to you? Doubtless you would seekto quickly end such a relationship. Youmight even consider legal action if the

elements of both cost and outcome weredecidedly in your favor. But if the offensesarent easily quantifiable, or if over time,they have grown from an annoyance tooutright unethical, when does your levelof awareness trigger a response?

Allstate has declared its agent salesforce independent. Yet in clear contra-diction to an IRS Private Letter Ruling,IRS standards and Allstates own wordsof a promise of independence, Allstate

agents are anything but independent.On the IRS Website under the headingofBehavioral Control, the IRS stipulatesan employee relationship exists whena certain amount of control exists. The

very first point of control listed underthe sub-heading Types of InstructionGiven is When and where to do the

work. Allstate agents know the compa-ny dictates the number of hours required(44 hours per week) as well as the work

week schedule (Allstate defines the ac-ceptable holiday schedule) and where thecompany finds it suitable for an agent tolocate their offices. Allstates corporateadvertising for new agents declares onesability to Be your own boss. If agentshave to conform to corporately-definedoffice hours, work week schedules, and

corporately approved locations, clearlyagents are not their own boss. Issues suchas these and more comprise the liepartof the equation.

In 1999 and 2000, Allstate promisedits then-employee agents the ability toreplace the growing equity of their em-ployee pensions with the value of theirfuture book of business under the newIndependent Contractor Exclusive

Agent program. This promise, used as

an inducement for employee agents toquickly convert to the new contract hasseldomly been delivered on. Newly-hiredagents are promised the future value oftheir book as a secure retirement income

vehicle as well. As we now know, valuesof agents books are shrinking, but it isnot the U.S. economy that is taking itstoll on their values.

Values for books of business have beenseverely curtailed by Allstate managementthrough various forms of interference.

Chief among the types of interference isthe 90 day termination notice. Resultingin the confiscation of an agents book ofbusiness at bargain basement prices, All-state frequently employs this method ofcontract termination and then parks thedeparting agents book at the CIC or atanother agent location at a discountedcommission schedule. Agents are oftenharassed with relentless emails or phonecalls decrying their performance and areadvised to sell even before any formal no-

tices are delivered. Many times this ployis used even when no warning or termi-nation notice is forthcoming. When All-state gains control over an agents bookin this manner, it is thetheft part of theequation. Every Allstate agent shouldrealize by now that they are not inde-pendent contractors. This article is notabout the agents status as employees;it is about Allstates motivation for mis-classifying agents as independent.

feature

Allstates Hidden AgendaONE AGENTS OPINION


7/11Summer 2010

Exclusivefocus 45

Greed and its PartnerA lie, in and of itself, is not necessar-

ily damaging. White lies are told withpredictable frequency at dinner parties orduring bragging sessions after a fishingtrip. Anyone can stand up in a crowdedmovie theater and declare he is the besttennis player on the planet, in spite of thefact he isnotRoger Federer. However, thisexample would result in an embarrassingmoment for the individual as opposed tocreating a beneficial outcome for the liar.It is when the result of telling a lie benefitsthe liar at the expense of the recipient thatthings begin to get more serious.

In the book, From Good Hands to BoxingGloves(reviewed in this issue), we learnedthat Allstate customers Jose and OliviaPincheira were involved in a disputedclaim with Allstate beginning in 1999.

The books author, David Berardinelli,

explains that the Pincheiras agent admit-ted she told Mr. Pincheira that medicalpayments coverage was the same as unin-sured motorist except that uninsured mo-torist coverage paid for lost wages. Clearlythis is not the case. As the Pincheiras wereretired, they were sold on eliminatingthis valuable coverage because the agentfalsely explained the coverage. Likely, theagents intent was not to harm the client,and had Allstate admitted the error, theresulting lawsuit and public disclosure of

Allstates connection with McKinsey andCompany may have never seen the lightof day. But according to Berardinelli,

Allstates choice to defend the lie ratherthan resolve the dispute is totally foundedin a level of greed that is so profound, itis breathtaking.

Nearly eight years earlier, Allstate hadalready entered into an agreement withMcKinsey and Company, an internationalbusiness consulting company. McKinsey

was hired to perform a top to bottom

redesign of Allstates business operations.McKinsey was to concentrate initially onthe claims portion of Allstates operations.

As related in the book, it was McKinseysClaims Core Process Redesign or CCPRthat the company used to derail the Pin-cheiras claim. It was also clearly Allstateschoice to implement the CCPR mandatesor not. For Allstate, it became the pur-suit of profit over contractual obligation.Greed over compassion.

Greed does not exist without a plan.You might say they are partners. Mostof us understand it is not a bad thing to

want more of something. After all, whowouldnt want more dessert, or more loveor more money? It becomes a differ-ent issue, however, when our desire forsomething is conjoined with a plan that,

when implemented, harms someone else.If Im greedy and I want more dessert, I

be greedy today! Rather, we hope he de-clares a hopeful future for his companythat is consistent with sound businessethics and mindful of his fiduciary re-sponsibilities toward company employ-ees, shareholders and the general public.But when the CEO has a plan that en-riches him at the expense of others, anethical line has been crossed that oughtto land him in jail. Any plan a CEO un-dertakes that breaches the ultimate fidu-ciary responsibility of putting employeesand shareholders first is a defacto lie.

And therefore, for greed to exist theremust also be a lie at some level.

Most of us remember the Enron scan-dal. At the time it represented the premierexample of corporate greed. To then-En-ron CEO Jeff Skilling, the potential forimmense wealth was so overpoweringthat the lies he was willing to tell were

practically boundless. In the end, greedblinded him so much that he was even

willing to risk an insider stock tradefor 500,000 Enron shares worth $15.5million. It is doubtful Skilling set out todefraud Enron at the beginning of histenure with the company. Rather, it washis Harvard MBA, combined with histraining at McKinsey as one of their topexecutives that offered him the insight torecognize the opportunity. Said another

way; knowledge, plus greed, plus the lie

equaled the potential for untold wealth.In all, the Enron collapse represented theloss of more than $60 billion in market

value, $2.1 billion in retirement savingsand 5,600 jobs. Skilling wasnt willing tothink about the consequences of his ac-tions, he only saw the cash.

If the old adage of the apple not fall-ing far from the apple tree is true ofpeople, it likely has a similar adage forcorporations. In 1979, fresh from gettinghis MBA from Harvard, Skilling was

recruited by McKinsey and Company.There he enjoyed a kinship-like bondand a plethora of business skills unri-

valed in his industry. By 1987, he was atop executive for McKinsey and provedhis considerable talents while working asa consultant to Enron. In 1990 he wasrecruited by Enrons Ken Lay to be CEOof Enron Finance Company. In 2001,Skilling became CEO of Enron Corpo-ration. A scant few months later, Skill-

might plan a way to distract you so I cantake the last piece of birthday cake. All in

good fun, of course. But when greed in-volves money, the potential for schemesor plans would seem to be limitless. As

we will see, some plans end with a differ-ent than expected outcome.

Why McKinsey?It would shock most of us if it was

reported that the CEO of a prominentcorporation called a press conference andpublically declared, I think Im going to

Enron is

not McKinseys

only controversial

connection.

McKinsey has

been associated

with a lawsuit

related to Hurricane

Katrina, Swissairs

bankruptcy, the

British railwayfinancial collapse,

Allstates claims

practices,

and more.


8/11


ing would resign, followed by the now

famous investigation.Enron is not McKinseys only contro-

versial connection. McKinsey has beenassociated with a lawsuit related to Hur-ricane Katrina, Swissairs bankruptcy,the British railway financial collapse,

Allstates claims practices, and more.Several books have been written detail-ing Mckinseys controversial activitiesincluding From Good Hands to BoxingGloves. So the question then becomes,are there just a few bad apples or is the

apple tree producing the bad fruit?When Allstate hired McKinsey and

Company in 1992 to help redesign(plan) its business processes, it is likelythey had a specific set of problems inneed of addressing. After suffering morethan $2.5 billion in losses from Hurri-cane Andrew, anticipating going publicin the largest initial public offering everin the United States, and dealing withIRS scrutiny over its captive agents fil-ing Schedule C, Allstate likely could use

the expertise they felt McKinsey had tooffer. But just as likely was the fact thatAllstate viewed McKinseys expertise indramatically increasing executive com-pensation as a most coveted benefit.

Unlike a marriage or even a dating situ-ation, opposites do not attract in the busi-ness world. A partnership of like-mindedentities run by like-minded individuals isessential if success is to be attained. Like-ly, the millions of dollars Allstate paid to

McKinsey didnt hurt either, but there

also had to be more. McKinseys Har-vard business school mentality, combinedwith its considerable connections, repre-sents the core of its philosophy and wasaptly summed up in a January 17, 2002

Wall Street Journal article that said, Fordecades, McKinsey has been revered - even

feared - for its influence in boardrooms andits extensive and powerful old-boy networkamong major corporations. Its alumni listreads like a whos who of the Fortune 500,including the likes of IBM Corp. Chief Ex-

ecutive Lou Gerstner. In recent years, thatnetwork has helped privately held McKinseywin lucrative consulting contracts from com-

panies run by its former partners.Allstate knows a thing or two about

old-boy networking as Former SearsCEO Ed Brennan, and Ed Liddy canattest. And lest we forget, Tom Wilsonserved as Sears Vice President of Strat-egy and Analysis. All of these men even-tually found their way to very powerfulpositions at Allstate.

Dear Shareholders:What is yours, is mine

If corporate profits are the primary fo-cus of a CEO, can greed be far behind?

What differentiates a successful CEOfrom one that is going the way of Enrons

Jeff Skilling? Shareholders would arguethat the former enriches the value of acompany and takes care of his employ-ees. The latter enriches himself and takes

advantage of his employees.McKinsey and Company was hired

during Jerry Choates tenure with All-state. It is assumed Jerry Choate, thenPresident of Allstates Personal Prop-erty unit, at least had a hand in hiringMcKinsey and Company. Choate laterbecame CEO. His successor, Ed Liddy,then retained McKinsey and continuedimplementing their plan with equal en-thusiasm.In From Good Hands to BoxingGloves, Berardinelli writes, We do knowthat Choate and Liddy immediately im-

plemented McKinseys recommendation tocreate executive compensation plans at All-state based on a strong belief in linking theinterests of management with those of ourshareholders. Together, Choate and Liddyused the Sears IPO and their adoption of

McKinseys business plan, to create lottery-sized personal fortunes for themselves.

Choate had accumulated stock andoptions worth an estimated $63 millionand retired in 1998, receiving an esti-mated $10 million more. Liddy retiredin 2006 with 3,823,255 shares of Allstate

worth $250 million, plus an additional$71 million in retirement package bene-fits. Not bad parting gifts for two gradu-ates of the McKinsey business plan for

Allstate CEOs.Apparently, Tom Wilson is just getting

ramped up with his wealth accumulation

plan because his total compensation for2008 was $9.51 million and $10.4 mil-lion in 2009. And even though the stockhas tanked recently, his 2010 compensa-tion looks to be going up. All this is oc-curring as Wilson lays off or fires thou-sands of employees and agents, and whilegiving up market share to GEICO, StateFarm and Progressive.

Dear Agents: What isyours, never really was yours.

Therefore, it was always mineBut Allstate and Wilson couldnt earna dime if it werent for the blood, sweatand cash that Allstate agents have in-

vested into their agencies. The way thecompany goes through agents, it wouldseem more correct to classify them asuseful idiots instead of the key com-ponent they are. And much like the lazychild is maligned for sloppy schoolwork;the Allstate agent is derided for failing


9/11Summer 2010

Exclusivefocus 47

to meet corporately-imposed quotas. Inspite of this, Allstate agents are pit bulls

when it comes to making their agenciessuccessful. They are highly talented pro-fessionals who run agencies that provide

Allstate and themselves a decent incomestream. The agents overarching motiva-tion is to succeed as a business and pro-

vide a decent income for their families.But in addition to the annual profit

they take from their agencies, every agentalso expects a final return on their invest-ment (when they retire) in the form ofthe sale of their book of business. It is safeto assume that every EA has been toldby management, at one time or another,that they own their book of business. Ofcourse, what theyre referring to is thatnebulous, albeit ingenious, creation thecompany has dubbed economic inter-est. This clever terminology was doubt-

less meant to fool agents into thinkingthey actually own something. The com-pany took the independent agent model,

where agents own their books lock stockand barrel, and morphed it into a look-alike with little substance. Of course, it is

Allstates intent to imply that agents havecontrol (ownership) over the dispositionof the accumulated value of their booksof business, but ultimately, it is Allstatethat holds all the cards.

Its also crystal clear that Allstate,

along with some other captive carriers,rejects the notion that its independentcontractor agents own their client lists,customers or books of business. This, ofcourse, is not true in the independentagent world, where agents are also inde-pendent contractors and, without ques-tion, own it all.

As if to emphasize the point, AllstateCEO, Tom Wilson, made an interestingdeclaration during the companys 4thQuarter 2009 Earnings Call. Vinay Mis-

quith from Credit Suisse asked Wilsonthe following: So on stores policy, does All-state own those policies for which the agentsare leaving and therefore you run the risk inthe short term you might have lower policyin force count? Wilson responded, Vinay,

I would start with the concept that nobodyowns the customer. The customer ownsthemselves and their own relationship.

What Wilson really said in two shortsentences is that Allstate agents do not

now, nor will they ever, own their books ofbusiness. He goes on to try to qualify hismisstep, but if we are to take Wilson at his

word, then everything Allstate has everpromised an agent in this regard is untrue

Now Wilson might argue that his met-aphor of the customer owning himself is

annual reviews, and more are the magi-cians lovely assistants that distract theagents, it is the carefully crafted, hiddenelements of the trick that make every-thing possible.

Here are the elements Allstate doesntwant the agent to see:

Establish a complex set of ever-changing guidelines which are geared foronly partial success, constantly forcingagent turnover.

Manage agent turnover rate so thatthe constant outflow of agents providesthe company with a specified premiumbase that has no commission expenseagainst it.

Require a constant infusion of newly-hired agents that are channeled to sell lifeand annuity products as a requirement tokeep their jobs, thereby providing Allstate

with ever-increasing sales contributions

to its financial services goals. Deny approval of qualified buyers. Deny or limit purchase of books by

Allstate agents. Require sales management compen-

sation to be directly related to the agentsRFG bonus structure. If agents achievecertain bonus levels, managers will becompensated accordingly. When agentsfail to qualify for bonuses, a managers

will be affected bonus as well. Urge agents to invest substantial

amounts of money so that they cannoteasily walk away from their agencies.

Require senior management to befinancially committed by making thempurchase a percentage of their salaryin Allstate stock. From Allstates 2005Proxy statement:

Stock ownership requirement

Because we believe strongly in linking theinterests of management with those of ourshareholders, we first instituted stock own-

ership goals in 1996 for executives at thevice president level and above. These goalswere increased in 2004 to require these ex-ecutives to own, within five years of the datethe executive position is assumed, commonstock worth a multiple of base salary:

Chief Executive Officer 7 times salarySenior Management Executives 4 timessalaryOther Executives 2 times salary

really just a way describing how carefulwe must be in assuming a client will beloyal to our company. But the contextin which the question was asked andanswered left no doubt that in Allstatemanagements eye, a departing agentdoes not own his client list. And this is akey moment, if ever there was one, in ourability to understand how Allstate viewsits relationship with the agent. Because if

Allstate proceeds on the assumption that

agents have minimal or no real rights tothe economic interest in their books ofbusiness, then its right to confiscate theagents books is a forgone conclusion.

How do they do it?Like an audience member mesmer-

ized by a magician on a stage, agents arelulled into participating in a businessplan developed and implemented by All-state. While RFG, quotas, office hours,

It is difficultto say when

Allstates plan will

fail. This is because

so much is riding on

the outcome of what

Allstate started withMcKinsey. Millions,

if not billions, of

dollars are at stake

for Allstate

management.


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Existing executives were given three yearsto reach the new levels of ownership.

This requirement alone demonstratesthat there will be no tolerance for poorperformance from agents who might

jeopardize managements personal for-tunes. Further, Allstate never intendedto give up any of the controls it exertedover its employee agents once they wereforcibly converted to independent con-tractor status in the year 2000. On thecontrary, once the agents were converted,it was much easier to fire them for littleor no reason, giving the company moreincentive to tighten, rather than relax, its

vice-like grip over the agents.Today, any semblance of indepen-

dence allowed with its current agentdistribution program is merely windowdressing. Berardinelli put it most suc-

cinctly when he stated, Whose interestsdo you think Mr. Wilson and other senior

Allstate executives subject to such a stockownership plan are more likely to be inter-ested in protecting? The answer is clearlynot the agents.

As entrepreneurs, agents deal with

the known factors of running their busi-nesses, such as competition, changingexpenses, market conditions, etc. Theyare adept at adjusting for the unexpected,and make decisions based on sound busi-ness ethics. But these are overt elementsof running a business that are easily dis-cernable. When a business relationship istainted by one sides hidden agenda, therelationship is doomed to fail. It is dif-ficult to say when Allstates plan will fail.

This is because so much is riding on theoutcome of what Allstate started withMcKinsey.

Millions, if not billions, of dollarsare at stake for Allstate management.CEOs Liddy and Choate knew how toplay the game and amassed staggeringfortunes, some would say on the backsof Allstate customers. Tom Wilsonlooks to better his predecessors perfor-

mances by combining their efforts withhis vision of the new Allstate agency ofthe future. It is unfortunate that untilnow, not a single agent perceived thepossibility that, not only is there a hid-den agenda, but that they are unwittingand unwilling participants.

This issue is not just about McKinseyand its vision for Allstate. The fact ofthe matter is that Allstate has a choicein the direction it chooses to move thecompany. It has purposefully cost-shift-ed multiple programs to the agency forceand has implemented a carefully craftedemployee agent program which is mul-tifaceted and complex.

Because a tenured agent sales force isnot intended to be a permanent com-ponent of Allstates vision, the companyrefuses to open a dialogue with any rep-resentative voice, including NAPAA.But all of this is a conscious choice that

Allstate has made. If ever there were atest of whose best interest the companyis dedicated to protecting; all you have todo is follow the money.

And finally, here is the epiphany mo-ment this article is attempting to convey:

Allstate can never allow its business modelto include true independent contractors.Once the company becomes incapableof terminating agents at will, manage-ment loses its ability to control the fate oftheir own personal fortunes, and that, myfriends, will never happen. Ef

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2008, UNFCU Financial Advisors LLC, a United Nations Federal Credit Union owned company.


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