American International Group’s (AIG) Growth and Future: The

Greenberg Factor: Case Study Analysis

America International Group (AIG) is the world’s leading global insurance and financial services
organization. It was started in 1919 in Shanghai as a small Insurance company selling
property/casualty insurance policy for Americans in China, by Cornelius Vander Starr. In 1960,
Maurice Hank Greenberg joined American Home and his charismatic leadership and product
innovation transformed a small International Insurance Company into a global financial
powerhouse.

The case here explains the corporate governance issues faced by the company. From the year
2004, AIG started facing corporate governance issues over including independent directors into
the board. It has also been facing regulatory probe from New York Attorney General Eliot
Splitzer, Securities and Exchange Commission and the Justice Department for non-traditional
reinsurance plans and accounting methods.

Facts About The Corporate Governance Issues in the Case:

➢ In 1969, AIG went public.

➢ Since 2002, shareholders started worrying about the succession plan of Greenberg at AIG
as he had almost run the company for 35 years and still bristled at the talk of retirement
and did not name a successor.
➢ Greenberg’s involvement in two private companies C. V. Starr and Starr International
(SICO), which had substantial dealings with AIG showed conflict of interests and did not
have standard governance protection procedures.
➢ Governance experts felt that AIG’s board was the weakest in America, board was too
large with 20 members, lacked active executives in its independent directors, and
governance practices did not inspire confidence and transparency to shareholders.
➢ Greenberg argued back by giving the company’s good performance as the indicator of a
strong board and good governance; and large number of board of directors contributed
more meaningful decisions in favor of shareholder’s interests. But due to the increase in
 pressure from shareholders, he created an independent nominating/governance committee
and put majority of outsiders on the board.
➢ In 2002, AIG saw a $ 1.2 billion underwriting loss in its general insurance operations due
to terrorist attacks on the World Trade Center. Capital losses and a weak stock market led
to decreased net profits inspite of increase in premium revenues.
➢ September 2003: AIG was sued by the SEC for selling insurance to Brightpoint Inc. to
cover losses that had already occurred. It also paid $ 10 million fine to settle inquiries
into the case.
➢ From 2004, AIG started facing inquiries for being involved in bid rigging and price
fixing, earning manipulation of its own and client’s operations, violation of federal
security laws and underreported commissions to firm owned by Greenberg. In
September, one of the group’s subsidiaries, AIG Financial Products was investigated by
the US justice department for helping a Pennsylvania bank to push bad debts from its
balance sheets. In November it paid $ 126 million to settle those charges.
➢ In October 2004, two middle level executives at AIG pleaded guilty for their role in the
bid rigging process of Marsh & McLennan. Greenberg denied AIG’s involvement in the
case and pushed the blame on the prosecutors and the press for its decline in stock prices
that year.
➢ February 2005: regulators suspected and found evidence that AIG arranged deals to
manipulate financial figures of its own and its clients.
➢ Investigations by Spitzer in 2000 revealed that AIG’s reserves were low and to cover it
AIG took the help of General Re where AIG received $ 500 million from it as an interest
free debt. This was categorized by AIG as a normal insurance contract & the amount was
shown as an income.
➢ Apart from these, Greenberg also faced criminal enquiry regarding AIG’s purchase of
American General, pressurize chairman of NYSE to help in making up AIG’s share price
to restrain AIG from having to issue more shares to pay for American General. AIG was
also suspected to be involved in setting up its own off-balance-sheet entities, controlling
sellers.
➢ March 14th 2005: AIG’s board forced Greenberg to step down and just remain as a non-
executive Chairman and made Martin Sullivan as his successor. The SEC probes against
 AIG have expanded and the accounting errors have been increased to $ 1 billion,
resulting in the ousting of Greenberg from the board and \being replaced by Frank Zarb.

Analysis:

After Greenberg joined American Home, he took AIG to astounding heights in an equally
astounding short time span. He put his heart and soul into the company. His style of leadership
was autocratic. He was a tough boss, continuously kept his employees under surveillance, was a
complete workaholic. Greenberg was considered the toughest competitors in the American
Insurance industry. He almost kept the company covered in secrecy, never conducted any PR
activities or made conference with analysts, maintained tough relations with the journalists. But
he had given entrepreneurial freedom to employees for product innovation. He controlled the
operations at AIG to such a level that not a single work was done without his discretion. These
facts do not support the argument that he was unaware of all the frauds and manipulations AIG
was involved in. The type of governance structure he had created did not allow anything to
happen without his knowledge.

AIG went public in 1969, therefore it was the shareholder’s right to know everything about the
operations of the company. Hence it was unethical on Greenberg’s part to have an autocratic
style of leadership and not maintain transparency in operations.

He handled the operations of the company for 35years yet did not plan for retirement or a
succession plan. This proves that he had grown very possessive about the company, did not trust
anybody, did not want anybody to interfere and change the way he handled things.

In all the criticism he received for his not including independent directors on the board and
having too many board of directors, he has always been defensive and sometimes made changes
just to nullify the criticism. He has been adamant in his decisions any ways. Towards the last part
of his tenure AIG faced a lot of financial difficulties & criticism as from 2002 there were
changes in corporate governance rules in America which he did not comply with at AIG. This
led to the frauds, bid rigging, price fixing, manipulations etc. to hide losses and show profits and
increase share price. He did not realize that a business has changing needs with time and a
company has to change and upgrade itself to be profitable and competitive.
The decision of the board forcefully make Greenberg just an non executive chairman in the
board and then finally ousting him out of the company, may not be completely correct and
profitable as whatever the governance style of Greenberg was he made the company profitable
and was a skilled manager. He had built up the company and was a treasure house of knowledge
and experience in the trade. He could have been allowed to remain as a non-executive chairman
to take advices from. The board said it was forced to act because Greenberg, a valuable asset for
so many years, was in danger of turning into a liability. But this decision caused the share prices
of the company to still decrease; the credit rating of AIG decreased & had negative implications
and cause damage to its name.

The future of AIG under the leadership of Sullivan is a great challenge for him as he has to
rectify the company’s past policies really fast and create transparency. Greenberg still controls
some of the private partnerships that control major chunk of AIG stocks & were responsible for
compensating top executives. In short Sullivan has to take a decision to whether to force
Greenberg out of the private entities or to separate the private entities from AIG. Sullivan has to
bring about a complete cultural change at AIG. Considering all these issues the investors are
skeptical about the future of AIG.