In the Forbes article, “The ultimate cause of AIG’s problems”, John Foley asserts that the problem behind AIG’s financial problems is its total disregard for any responsibilities it has towards its stakeholders. The author cites an example from 2007 when during a CEO roundtable organized by the Chief Executive magazine, the then CEO of AIG, Martin Sullivan, discussed various ways to improve the insurance company’s profits. According to Sullivan, this could be done through “capital formation” and “asset allocation. Sullivan discussed these strategies and the company’s focus on high finance in great detail but when asked by the writer whether the loyalties of the firm were with the “shareholders, customers, a particular country, employees or some other stakeholder”, Sullivan had no answer. Foley tells this story to explain that the reason why AIG is in such big financial trouble is that the management does not feel responsible to its stakeholders, and its focus is on improving the balance sheet at any cost.
The article has to be read against the backdrop of the current worldwide recession. While the world economy had been tottering for some time, in September 2008, it officially entered a recession with several top Wall Street firms going bankrupt. President Bush announced a 700 billion dollar bailout package to help these companies facing bankruptcy. AIG was one of the companies to receive this bailout money to the tune of $170 billion. Considering that the firm was on the brink of bankruptcy, the $165 million bonus to the executives raises a lot of financial as well as ethical issues. A bonus is normally given when a firm or division or a person achieves exceptional results. The bonus is a way for the firm to share its profits with the people who helped the firm make those profits, the employees. But how can a firm facing bankruptcy, and surviving on a $170 billion loan from the taxpayers, claim exceptional performance? As such, how can AIG justify the multi-million dollar bonuses to its executives? This question has sparked heated debates with President Obama even promising to block the bonuses.
Foley tries to explain, that the problem with AIG is much deeper than just the ethical question of executives getting bonuses when the firm is facing bankruptcy. According to him, the problem with the company is “a lack of values” which is the root cause of the management’s arrogance, greed and disregard for stakeholders. He goes on to say that the problem is not limited to AIG but is spread across the financial services, automotive and mortgage industries, with the managements focusing on unrealistic financial gains and not taking any responsibility for the interests of the customers, employees and shareholders.
In the present article, Foley tries to explain that issue of paying bonuses in the face of bankruptcy has much deeper roots in the culture of AIG and other firms, which encourages executives to make profits at any cost, without any regard for the benefits of its other stakeholders. According to Foley, the bonuses are just a symptom of a much bigger problem. In other words, the ethical question is not that of paying bonuses but of the mindset which focuses on profits rather than stakeholders. As Foley explains in the article, when former AIG CEO and his team of executives made decisions, they were thinking of improving the balance sheets and did not realize the “potential business and social fallout”. The problem with AIG and other hundreds of top Wall Street firms are that they are unable to look beyond profits and loss. The only measure of an employee’s performance is how much he or she can contribute to the bottom line. And any and every means is acceptable as long as it can bring profits to the firm. In all this, the interests of the customers, employees, shareholders and the society at large are ignored.
Foley begins the article with a mention of another problem at AIG a few years ago. In 2005, the then CEO of AIG, Hank Greenberg, had been ousted amidst an accounting scandal that had resulted in the firm paying $1.8 billion in fines. That the current problem occurred so soon after that accounting scandal shows that the problem at AIG is very deep-rooted. When Sullivan took over as the CEO of AIG, the firm was suffering from considerable damage to its reputation. However, Sullivan’s focus was not on improving the firm’s reputation or cleaning the system which caused such a huge fraud. Rather, as evidenced by his presentation at the 2007 roundtable, he was focused on developing the management’s skills in high finance. Sullivan and his team did not seem to understand the concept of corporate responsibility. Or as Foley says, the firm did not have a “soul”. And this is the root cause of all the problems AIG has faced over the years. When a firm does not have a value system that makes it responsible to its stakeholders, all other problems are just fallout of this basic absence of values.
Foley’s article mainly discusses the ethics of focusing on profits at all costs while ignoring the interests of other stakeholders and the responsibility towards society. However, there is another ethical issue which Foley ignores. In the 2007 CEO roundtable, Sullivan had discussed “capital formation” and “asset allocation” as the means of the company’s future success. “Capital formation” involved sending the company’s money to Bermuda for tax reasons and “asset allocation” entailed “moving resources around the world to achieve specific strategic and business goals”. As Foley mentioned, AIG’s value system is the root cause of all problems. Here we see another area where AIG seemed to have extremely loose values. Sending money to Bermuda was a way to avoid taxes. Although legal, it shows the company’s scant regard for an important stakeholder, the United States of America. That avoiding tax was seen as a way to make money tells us something about AIG’s value system. And that he was able to openly discuss it at the roundtable, tells us something about the value system of corporate America.
It is frightening to think that it is not just one firm or one industry that has scant regard for its responsibility to society. Entire corporate America seems to be focused on maximizing profits with little consideration about where those profits are coming from. The world is going through the worst economic downturn since World War II. And it is companies such as AIG and their loose ethics which are mainly responsible for the economic mess we find ourselves in. It is not just AIG, but the entire corporate America which needs a major overhaul of its value systems.
Reference
Foley, J. (2009). “The ultimate cause of AIG’s Problems”. Forbes. Web.