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1. What controls did AIG have in place, and how did those controls affect its
corporate behavior?
Carefully developed policies and procedures guide behavior so that all employees will be
encouraged to behave in an ethical manner. However, they must be reinforced with
Referencing Chapter 9: Strategic Control and Corporate Governance
Strategic control involves the process of monitoring and correcting a firm’s strategy and
In a traditional control system, top management formulates strategies and sets goals.
These strategies are implemented, and then performance is measured against the
predetermined goals. In a contemporary control system, managers continually monitor
both the internal and external environments, and identify trends and events that signal the
Students should therefore recognize the importance of involving all operating managers
In the traditional insurance business, firms such as AIG anticipate risk by using models
based on known risk factors (remember that a “risky environment” is one in which
information on the environment is not completely available, and decisions are made
based on an assessment of the probabilities of the occurrence of events). Therefore, well-
learned processes (risk models) are used to set goals, and performance is monitored
Strategic control focuses especially on the roles of informational and behavioral control
in the formulation and implementation of strategies. See Chapter 9, Exhibit 9.2.
Informational control is concerned with whether or not the organization is “doing the
AIG had used information from its standard risk models to determine if it was “doing the
right things” to accrue reputation and profits – this had set the stage for the firm’s choice
Chapter 9 emphasizes the importance of aligning both informational and behavioral
control systems with organizational strategy. The information gained from the internal
and external environment is reviewed against the firm’s strategy and goals. If the results
Jake DeSantis’ letter demonstrates how well AIG had utilized those behavioral controls in
the past – he and his employees were committed to the corporation, willing to work for
2. 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?
Corporate governance refers to the need for a firm’s shareholders (the owners) and their
elected representatives (the board of directors) to ensure that the firm’s executives (the
management team) strive to fulfill their fiduciary duty of maximizing long-term
One party’s actions can impact the success and well-being of a much larger community:
AIG and other financial institutions had ultimate responsibility for maximizing long-term
value. Stakeholders who had claim on AIG: the shareholders, which included employees
such as Jake DeSantis; current and future employees – many of them would not be
The instructor might encourage students to come up with additional arguments to identify
which of these stakeholders were the most important, and whether the bonuses should
U.S. Taxpayers were concerned about possible misuse of the bailout loans and the
accountability of the firms who received these loans. U.S taxpayers could be considered
the most important because AIG had shown that it was already misusing funds when it
Edward M. Liddy, AIG’s CEO was concerned about keeping AIG financially viable and
out of bankruptcy, in this sense looking out for the shareholders. Edward M. Liddy was
the most important stakeholder because he was facilitating the bailout process and
AIG Managers and other employees were concerned about earning a living and keeping a
job. AIG managers were the most important because they were stuck in the middle with
no one to support them. Mr. Liddy abandoned his managers during questioning before
An argument can be made that the bonuses were necessary for three reasons:
1. The bonuses were a contractual tool that allowed AIG to redirect managers’ salaries to
2. The managers worked for an annual salary of $1 in response to the bonus offer. These
3. Disputes over the bonuses could have led to private, legal contests if they induced
managers to work for $1 and then AIG refused to uphold the contract. Disputes like this
Using concepts from the last part of Chapter 9, students should also reference the role of
external governance control mechanisms. External governance control mechanisms
Instructors may have to restrain students from discussing the underlying issue of lack of
regulation of investment banking in general, and the credit default swap (CDS)
The U.S. government proposed a 90% tax on any bonuses paid out to employees of firms
who received government bailout money. Both New York’s and Connecticut’s attorneys
general threatened legal action against the executives who received the bonuses. These
The main purpose of the tax on the bonuses was to recover misused Federal money
distributed for the purposes of a bailout. This was intended to serve as a deterrent for
Although the government may have felt obligated to act in this instance, due to public
and political pressures, external governance controls might not be as effective as controls
put in place by companies such as AIG. In the AIG case, students should be urged to
Secondary Concepts that might be discussed as well:
NOTE: there are no Powerpoint slides accompanying this part of the discussion.
After the discussion of specific case questions, students might benefit from a brief review
of how a firm strategizes for competitive advantage – specifically how strategy is derived
Referencing Chapter 4: Assessing Intellectual Capital
Consider the concepts of intellectual capital, human capital, and social capital, all of
which are intangible assets that a company such as AIG needs to have in order to compete
successfully. Intellectual capital is a measure of the value of a firm’s intangible assets, its
Human capital involves the individual capabilities, knowledge, skills, and experience of
the company’s employees and managers. This knowledge is relevant to the task at hand,
Success in retaining human capital could also be attributed to the nurturing of the “social
ties” or social capital. Social capital includes the network of friendships and working
AIG had built itself up to a global insurance giant by acquiring and developing assets that
were essential to its performance. Given the nature of AIG’s business, most of those
Referencing Chapter 10: Creating Effective Organizational Designs
Organizational structure refers to formalized patterns of interactions that link a firm’s
tasks, technologies, and people. Structures help to ensure that resources are used
Structure identifies the executive, managerial, and administrative organization of a firm
Factors that facilitate the effective coordination and integration of key activities include
having a common culture and shared values, horizontal organization structures,
An effective organizational design can encourage the flow of information and enhance
working relationships between functional departments and activities. However, achieving
the coordination and integration necessary to maximize the potential of an organization’s
human capital involves much more than just creating a new structure. Different structures
In the case of AIG, the firm was in trouble because of the actions of just one of its
divisions, Financial Services. As of 2013, AIG is in several lines of business, primarily
The original structure of the firm was meant to enhance the overall operation of the
insurance business, coordinating and integrating the various activities so each could
benefit from the tasks, technology, and people involved. Although it appears that the
In this case, the actions of that one division had a significant impact on relationships
See http://www.theofficialboard.com/org-chart/american-international for a current
organizational chart of AIG. Compare that with the expanded chart from 2008 at
NOTE – ADDITIONAL READING, VIDEO NEWS STORIES:
By April 2009, the outrage in Congress over the AIG bonuses seemed to be lessening:
http://www.politico.com/news/stories/0409/20844.html
And by July 2009, AIG was planning to issue its second round of bonuses to Financial
Products executives, and was asking Kenneth Feinberg, appointed by President Obama to
employees necessary to make this happen:
http://www.washingtonpost.com/wp-
dyn/content/article/2009/07/11/AR2009071100419.html?hpid=moreheadlines
See a July 2009 video report about this, and whether bonuses work to retain employees,
here:
http://www.youtube.com/watch?v=u3FNaHTke0w
Many people have made suggestions about reducing “excessive” executive
compensation, such as increasing shareholder’s influence, reducing board members’
What does the AIG story tell us, ultimately, about the role of corporate governance?
3. 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.
NOTE – NO POWERPOINT SLIDES ACCOMPANY THIS DISCUSSION. The
teaching notes that follow are provided by the case authors:
For this example, we draw on the dialectical inquiry. This is a conflict-inducing decision
making process. In the paragraphs below we outline two alternatives. The government
Alternative 1. THESIS: Government Position
The main reasoning behind the government response is accountability and stopping
misuse. From the perspective of the government, issuing bonuses to managers of the
Alternative 2. ANTITHESIS: AIG Manager Position
The main purpose of the bonuses was to compensate managers and to free-up resources
going to salaries to use for recovery from the CDS problem. From the perspective of the
managers who signed the bonus contracts, the bonuses are legal, ethical, and necessary
Alternative 3. SYNTHESIS: Developing a More Optimal Solution
Alone, these positions do not appear to provide an optimal solution. One of the reasons
the positions are in such stark contrast is the lack of transparency. The government did
1. You could draft a public document outlining AIG's commitment to the bailout process.
2. You could relabel the distribution of the bonuses a compensation package or deferred
salary reimbursements. Either seems more accurate than a bonus, and may increase
transparency of the intent in the eyes of the taxpayer. Bonus often implies a reward given
3. You could communicate with the managers. A pay-out of this nature may meet some
public resistance, particularly if AIG does this unilaterally. Under a scenario where there
is resistance or one could avoid public embarrassment, since AIG has been under close
Epilogue
AIG paid over $1 billion in different plans and compensation packages over the course of
the year following its initial Federal loan acceptance. Some of this continued to impact
Dialectic Teaching Tip
Many of us can benefit from the dialectical inquiry in our professional and personal lives.
A recent conversation with a colleague speaks directly to the potential benefits. His
This is a practical example to explore with students. A possible synthesis is that the
Suggestion: Ask students to reflect on a professional or personal decision that could have
