978-1259278211 Case 3 Solution Manual Part 1

Unlock access to all the studying documents.

View Full Document

Teaching Note: Case 3 – American International Group and the Bonus Fiasco

Case Objectives

1. To help students understand how the ethical orientation of leadership is a key factor in

2. To help students understand the role of strategic control mechanisms in aligning the

3. To encourage discussion of the effectiveness of external regulations in dealing with issues

See the table below to determine where to use this case:

NOTE: There are both PRIMARY and Secondary chapters that can be used for this case. The

Teaching Note gives guidance for the PRIMARY use chapters, and provides suggestions if the

instructor wants to use the case to illustrate concepts from the Secondary chapters.

PRIMARY

Chapter Use

Key Concepts Additional Readings

or Exercises

11: Strategic

Leadership; ethical orientation; integrity-

NOTE – see news

9: Strategic

Control &

Strategic control; traditional vs.

contemporary control system;

NOTE – see news

stories, web links and

SECONDARY

Chapter Use

4: Intellectual

Assets

Intellectual, human and social capital

10: Organizational

Design

Organizational structure

Case Synopsis

In 2008 the financial crisis began with sharply declining housing prices, leading to an escalation

AIG was an insurance company trading in an unregulated industry using Credit Default Swaps

(CDS). A CDS is insurance on a mortgage-backed security, providing the holders of this security

coverage in the event the value of the security goes down. When the housing market tumbled,

Jake DeSantis, an AIG financial services executive vice president, provided a different

perspective. Only a small portion of financial services managers had worked with the

dysfunctional CDS. In cooperation with the spirit of the bailout, many managers in the division

had agreed to work for a salary of $1 a year. Several continued to work 10-14 hours a day under

Teaching Plan

This case was written to provide a forum for discussing the issues of ethical leadership, strategic

control mechanisms, external governance, and stakeholder responsibility. What do leaders have

to do in order to nurture a culture dedicated to excellence and ethical behavior? How did the

decisions made by leadership affect the firm’s functioning and its relationships with multiple

stakeholders who relied on the organization? However, fundamental to the case is the

examination of strategic controls, both internal and external, and to what extent these controls

can be effective in inspiring and maintaining an ethical orientation toward the design and use of

appropriate reward mechanisms in public companies.

Regarding issues of leadership, ethics, and strategic control, the instructor may want to contrast

the AIG situation with the example of Enron’s collapse in 2001. The instructor can provide

historical context by reminding students about the ethical issues that surrounded Enron

(information about this case is available from several sources, including

http://www.nytimes.com/2006/05/26/business/businessspecial3/26verdict.html). Students can be

asked if they think Enron’s lessons about corporate governance, a cautionary tale from the 1990s,

were learned by the U.S. corporate community. Based on AIG’s decisions, it appears not…

NOTE: this AIG case can also be used in a course in organizational behavior to illustrate

organizational decision-making, motivation theory and rewards, and individual behavior under

stress. It could also be used in a discussion of overall financial controls in the context of a larger

economy, in which case it might be accompanied by a full-length documentary film such as

Inside Job, (see http://www.sonyclassics.com/insidejob/ ) or Too Big To Fail (see

http://www.hbo.com/movies/too-big-to-fail/index.html ).

Summary of Discussion Questions

Here is a list of the suggested discussion questions. You can decide which questions to assign,

and also which additional readings or exercises to include to augment each discussion. Refer

back to the Case Objectives Table to identify any additional readings and/or exercises so you

can integrate them into your lesson plan if you wish.

1. Ethics comes from the top of the organization. How did AIG’s leadership handle the

situation?

2. What controls did AIG have in place, and how did those controls affect its corporate

behavior?

3. Provide a stakeholder analysis of those affected by the bonus issue. What alternatives are

present to prevent or lessen these sorts of events? How effective are external regulations

in encouraging ethical behavior?

4. OPTIONAL DISCUSSION QUESTION: Is there any way to reconcile the reasoning

behind the bonuses and the government response? Consider if you had complete control

over the administration of the bonuses back in March 2009. Draft a plan integrating the

best points of the different perspectives.

Discussion Questions and Responses

1. Ethics comes from the top of the organization. How did AIG’s leadership handle the

situation?

Referencing Chapter 11: Strategic Leadership: Creating a Learning Organization and an

Ethical Organization

The concept of leadership involves the process of transforming organizations from what they are

to what the leader would have them become. This definition implies dissatisfaction with the

See Chapter 11, Exhibit 11.1. This involves:

●Setting a direction

The interdependent nature of these three activities is self-evident. Consider an organization with

a great mission and a superb organizational structure, but a culture that implicitly encourages

Leaders need to set the direction for the organization by continually scanning the environment to

develop knowledge of all stakeholders, and knowledge of salient environmental trends and

Although not in the case, AIG’s leadership prior to the appointment of Edward Liddy had worked

aggressively to grow the firm into a global leader. The goals were international recognition and

Leaders are responsible for designing the organization: a strategic leadership activity of building

structures, teams, systems, and organizational processes that facilitate the implementation of the

Given previous leadership’s goals, the creation of specific divisions at AIG to handle things like

financial services, and equity and commodity trading, in addition to traditional insurance, made

Difficulties in implementing the leader’s vision and strategies include a lack of understanding of

responsibility and accountability among managers, reward systems that do not motivate

Since AIG had close ties to investment banking, it made sense to implement reward systems that

were standard in that business – stock options, bonuses, perks such as resort retreats and other

outings. Given the growing resentment over the years at the perception of “greedy Wall Street”

Leaders, especially those who have responsibility for some degree of public trust, must also

maintain at least the outward appearance of an ethical business culture. See the definition of

The ethical organization is characterized by a conception of ethical values and integrity as a

driving force of the enterprise. Ethical values shape the search for opportunities, the design of

Organizational ethics helps to define what a company is and what it stands for. The ethical

orientation of the leader is a key factor in promoting ethical behavior, promoting an ethical

orientation. A strong ethical orientation can have a positive effect on the organization’s

commitment and motivation to excel. Ethical orientation involves the practices that firms use to

A key point in the AIG case is where AIG’s executive vice-president Jake DeSantis points to

Liddy’s promise that the company would “live up to its commitment” to honor the retention

contracts, believing the contracts to be “both ethical and useful”. Also DeSantis believed

There cannot be high-integrity organizations without high-integrity individuals. However,

Organizational integrity rests on a concept of purpose, responsibility, and ideals for an

organization as a whole. An important responsibility of leadership is to create this ethical

framework and develop the organizational capabilities to make it operational. There are two

But being ethical is much more than being legal, and an integrity-based approach addresses the

Integrity-based ethics programs combine a concern for law with an emphasis on managerial

responsibility for ethical behavior, including (1) enabling responsible conduct; (2) examining the

As the textbook says, seldom does the character flaw of a lone actor completely explain

corporate misconduct. Leaders play a key role in changing, developing, and sustaining an

In nurturing a culture dedicated to excellence and ethical behavior, managers and top executives

must accept personal responsibility for developing and strengthening ethical behavior;

It’s probably unfortunate that Edward Liddy was the target of most of the outrage from all

stakeholders. Although not in the case, Liddy had only been CEO for less than six months when

Jake DeSantis, from what we know from his letter, appears also to want to be a role model for

Certainly Liddy did appear to try to enable responsible conduct – the fact that he even took the

job indicates that he was willing to take managerial responsibility. He was also willing to

NOTE – ADDITIONAL READING AND VIDEO NEWS REPORTS:

Although the case focuses on then current AIG CEO Edward Liddy, the story of AIG ex-CEO

Maurice R. (Hank) Greenberg might be the most interesting one. Here’s an article from

Also from March 2009 here are videos of then CEO Edward Liddy giving testimony before

Congress on the bonus situation:

http://www.youtube.com/watch?v=VR4z6O7Entg (Liddy being questioned by Congressman

Elijah Cummings about the role of bonuses)

http://www.youtube.com/watch?v=3I80qfMdraM&feature=related (Liddy explaining how the

Federal Reserve was aware of the bonus situation, but Congress was not directly in the

communication loop.)

Liddy received the brunt of the outrage, but he had only been CEO for less than six months when

the new about the bonus situation broke. Reports are that Liddy was asked by then Treasury

Based on the above, was Liddy the correct target for all the anger? Should he have done or said

something different to protect either himself or AIG during the bonus story coverage?

Here is a website with overview links to the overall AIG rescue situation. Contained here are .pdf

documents with timelines and testimony from various parties:

http://www.businessinsurance.com/article/99999999/PAGES/1156

Of particular interest is the succession of CEOs after Maurice (Hank) Greenberg attained the

CEO position in 1987. In 1997 Hank’s son Evan Greenberg was promoted to COO. Evan

Another document from the above overview site is a copy of a September 16th 2008 letter sent by

Hank Greenberg, ex-CEO of AIG, to Robert Willumstad, then Chairman of the Board and CEO

Also of interest is this link to a letter sent on October 30, 2008 by Greenberg to then CEO and

Chairman Edward Liddy, suggesting that AIG be permitted to participate in a TARP-like

An article from April 2009, written on the occasion of Hank Greenberg’s invitation to

Washington to help make sense of the AIG mess, notes that Greenberg was responsible for

supervising Joseph Cassano, chief of AIG’s Financial Products (FP) unit, whose sales of

As an addendum to Hank Greenberg’s story, on July 8, 2009 he was absolved by a jury trial from

any responsibility in the split of Starr International from AIG in 2005. Greenberg had been

Before the economic troubles hit in 2008, AIG was one of many financial services companies

advertising to market themselves as legitimate and prescient partners in money-making ventures.

One of the arguments made for giving the Financial Products executives their bonuses was that it

would keep them happy and willing to do the work they were hired to do. In July 2009, when the

second bonus payment was made, one recipient reported, “I was definitely feeling negative about

the economy last year, when I lost the company billions of dollars and all,” says Josh Harbock,

After the fact, ex-CEO of AIG Hank Greenburg pointed a finger at the banks and other financial

institutions who took their insurance money from AIG after the government bailout: “AIG said it

had paid out about $50 billion to various financial firms to which it had sold credit-default

“Now (in April, 2009) Greenberg and others argue that AIG should not have made good on many

of those contracts. These critics say it should have been obvious to the sophisticated financial

firms who bought that insurance that AIG had no ability to pay out on such claims. So when AIG

It appears from the above that Hank Greenberg may have consistently tried to provide direction

to the company. What does the above say about the role of strategic leadership?

Here is a link to a Time Magazine article from March 19, 2009 containing a detailed report on

the overall AIG situation:

http://www.time.com/time/business/article/0,8599,1886275-1,00.html

In August 2009, newly appointed CEO Robert Benmosche said he believed AIG would be able to

pay back the government, and show a return for shareholders. Outgoing CEO Liddy had said the

government would likely be paid back in full in 3-5 years. AIG will do this by selling off

Did Benmosche succeed in modeling integrity-based ethics? It doesn’t appear so. Although AIG

did manage to “repay” its obligation to the U.S. Department of the Treasury, here’s a collection

of news comments on AIG’s situation as of 2013, one of which reports on how Benmosche