(Bloomberg) ? Marsh & McLennan Cos., Aon Corp. and Willis Group Holdings Ltd., insurance brokers whose business practices are the focus of a probe by New York Attorney General Eliot Spitzer, have more insiders on their boards than most US companies, according to corporate governance advisers.

The six largest publicly traded insurance brokers have boards that are about 60 percent independent, compared with 74 percent for companies in the Standard & Poor's 500 Index, according to Investor Responsibility Research Center in Washington and Institutional Shareholder Services Inc. in Rockville, Maryland.

"We are looking for investor-friendly companies, and insider boards muddy the issue," said John Affleck, who helps manage $1.6 billion at Stratton Management Co. Stratton, based in Plymouth Meeting, Pennsylvania, held 52,450 Marsh shares as of September and sold its Aon shares in the past two years.

The failure of brokerage boards to police top executives helped create a culture that condoned rigged bids and fees that Spitzer describes as "payoffs," former Texas Insurance Commissioner J. Robert Hunter said.

"These are captive boards," said Hunter, who is now insurance director at the Consumer Federation of America in Washington.

"They tend to be dominated by current and former industry executives."

On October 14, Spitzer sued Marsh for taking fees from insurers while allegedly rigging bids to client.

Marsh is the only broker to have been sued in Spitzer's investigation, which is continuing.

The Marsh board ousted chief executive officer Jeffrey Greenberg on October 25 after Spitzer refused to negotiate with him. Shares of the company, which said it is the target of at least 23 shareholder lawsuits, lost two-fifths of their value since Spitzer filed suit. Aon shares are down by a quarter.

Marsh shares fell 8 cents to $27.45 in New York Stock Exchange composite trading today. Shares of Aon rose 5 cents to $20.82.

Marsh has seven current and former executives on its 16- member board. That makes it 56 percent independent. Barbara Perlmutter, a Marsh spokeswoman, declined to comment.

"The board is supposed to protect shareholder value," said Cynthia Richson, corporate governance officer at the Ohio Public Employees Retirement System in Columbus, whose $53 billion fund holds shares of five insurance brokers, including Marsh and Aon.

"If they are asleep at the switch or involved in business arrangements that compromise their objectivity, they aren't doing their job."

Four public pension plans, including California Public Employees' Retirement System, pressed Marsh in December to add new independent directors after allegations of improper trading surfaced at its Putnam Investments mutual funds unit.

Marsh agreed in March to put Zachary W. Carter, a former federal prosecutor, on the board. Carter is now a member of a special board committee set up to resolve the legal issues.

His appointment boosted Marsh's independence rating to 56 percent from 52 percent.

The board of Chicago-based Aon, the second-largest broker, is 69 percent independent. Among Aon's directors are CEO Patrick Ryan, Chief Operating Officer Michael O'Halleran and two directors who do business with the company: R. Eden Martin, an attorney at Sidley Austin Brown & Wood, and Edgar Jannotta, an investment banker and chairman of William Blair & Co.

"With Mike O'Halleran's decision not to stand for re- election to the board, going forward, the only member of the board who is current management will be Pat Ryan," Aon spokesman Gary Sullivan said. "As for Mr. Jannotta and Mr. Martin, the level of business that Aon does with their companies is well under the threshold set by the New York Stock Exchange for independent directors."

The NYSE says directors aren't independent if they receive more than $100,000 in direct fees a year from a company or are part of businesses that get revenue of more than $1 million, or 2 percent of total sales, from it.

The corporate-governance rating companies and the Council of Institutional Investors, a Washington-based group representing 130 private and public pension funds, don't consider directors with any business links to be independent.

"Bankers and lawyers on boards of companies they do business with is always a problem," said Ann Yerger, the council's acting director. "Even if the fees are small, there is always the promise of bigger fees."

Some brokers are "being pushed" by new federal regulations and stock-exchange listing standards that require more outside directors, said Jim Henderson, chief operating officer at Brown & Brown Co. in Daytona, Florida, the fifth-largest insurance broker.

Brown & Brown increased its board independence this year to 55 percent from 50 percent, according to the Investor Responsibility Research Center. "This emphasis on board independence and the rating of companies is a good thing," Henderson said.

In 2003, the six brokerages had boards that were, on average, less than 50 percent independent, according to the rating companies. Itasca, Illinois-based Arthur J. Gallagher & Co., the third- largest broker, also added a new director, raising its independence rating to 77 percent. No. 4 Willis replaced three insiders with three outside directors in 2004, lifting its independence to 60 percent from 30 percent.

The insurance broker with the lowest rating is Glen Allen, Virginia-based Hilb Rogal & Hobbs Co., where more than half of 13 board members have business or personal links to the company, the corporate governance companies said. Spokeswoman Liz Cougat declined to comment.

"It sounds like these companies were playing fast and loose with the rules," said Adam Starr, who helps manage $5 million at New York-based Cramer Rosenthal McGlynn Inc. "If I were running an insurance brokerage, I'd be very careful to have a board that had the appearance of independence. I'd have a priest, a minister and a rabbi."

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