Dominating the board of directors – no longer business as usual at AIG

Probably the best part of being an author is getting to discuss the issues you write about with an informed group of people. That was the case at the Metropolitan Club in Washington, D.C., where I was the luncheon speaker last week, talking to a very sophisticated audience that knows both Wall Street and Washington.

There were lots of questions—Hank Greenberg may be gone from AIG, but everyone still wants to know what he is doing and how he is doing. While I spoke about many facets of AIG, most of the questions were about Greenberg. One question I hadn’t heard before was: Is there any connection between Greenberg’s settlement with the SEC and the fraud case again him, which was filed back in 2005 by then-New York Attorney General Eliot Spitzer? A judge recently called that case “devastating” and told Greenberg’s lawyer he saw big problems with establishing a defense. In August 2009, Greenberg agreed to pay $15 million to settle SEC accusations that he altered AIG's financial records to inflate its earnings.

At the time, the SEC did not talk about whether the settlement might have any impact on the related civil fraud charges brought by Spitzer. I noted that in that settlement with the SEC, Greenberg publicly declared that he never engaged in fraud and had no responsibility over accounting issues. That irritated the SEC, which said corporate leaders can’t use accounting gimmicks and sign off on distorted financial reports. Greenberg then released a subsequent statement saying that the size of his fine was “a reflection of the importance of the charge to the SEC.”

I also was asked about last year’s bonus controversy, which I think is finally becoming old news. And even though AIG seems to be on the road to recovery, I was asked if the company still plans to rebrand itself. My answer was probably not, since key subsidiaries, both the Asian ones and ALICO are being sold off and the core business has been renamed Chartis. So AIG remains only as the name of the holding company.

Perhaps the most interesting part of the event was when I was chatting after lunch with people who wanted their books signed. Someone mentioned that when Greenberg was CEO, he put Barber Conable, former congressman and head of the World Bank, as head of the audit committee of AIG’s Board of Directors. Conable reportedly then hired another accounting firm to advise the committee. (PwC had been AIG’s long-time auditor) and Greenberg reportedly strongly objected. People probably don’t remember that the audit committee said that it couldn't vouch for AIG's accounting in 2001 and 2002. The committee said it couldn't be sure that the audits had been carried out according to normal standards or even that PwC was in fact "independent," according to the Washington Post.

Today, because of Sarbanes Oxley, boards are much more independent. And thanks to the current crisis, they will be even more independent. All the D&O insurance in the world won't protect directors and their reputations. Challenging a CEO instead of signing off on whatever he wants is becoming the norm. The Wall Street Journal reportedly recently that a special board committee at AIG, which includes directors with experience in restructuring and workout situations, has engaged investment-banking firm Rothschild as an independent adviser. If AIG’s board had been that independent, proactive, and knowledgeable in financial matters ten years ago, it could have stood up to Greenberg’s domination of the board and AIG today just might be in a very different place.