AIG, Bonuses, and Remedies. Where should the Government Look for the Money? What is the Solution?
I pointed out in my prior post on this subject, that the employees that ran AIG into the ground must have acted outside of their authority to assume, on behalf of AIG, risks that could (and did) bankrupt the company. Only the Board of Directors could have authorized this activity.
Anyone who has ever worked at the executive level of a large company knows how they work. Managers are charged with meeting their budgets and revenue projections. Management sometimes does not look too deeply into how that is accomplished, but they look carefully at the numbers.
This is not a universal problem, but the pressure from shareholders for short term gains sometimes leads to very poor decisions or lack of oversight. AIG Senior management and the Board of Directors have a serious problem. They failed to supervise a part of the business that was essentially betting the company in the quest for quick profits. So we have the perfect storm – to borrow a phrase. The employees were taking actions to bet the company on risky business transactions (presumably without authority); management either allowed this activity or intentionally looked the other way, or didn’t want to ask too many questions while the profits poured in; and/or the Board of Directors failed to ask the right questions or ignored the answers. When everyone is making money senior managers don’t usually rock the boat.
Years ago when I was a young corporate lawyer, a colleague gave me some good advice. He said, “You might see the train charging down the track, and you know that the bridge is out. But if you stand on the track and try to stop the train, you’ll just get run over and the train will still crash. Best to stand aside, watch the wreck, and help pick up the pieces.”
I can tell you from experience that it is virtually impossible to stop a company about to do something foolish when there is a motivated group pushing the action. The drivers of the action will go right around you and accelerate down the track.
I find it difficult to believe that the Board of Directors of AIG knowingly allowed employees to bet the financial health of the company on these transactions. But why didn’t they ask how these profits were being generated? Or did they, and the answer did not fully disclose the risks to the company. In either case the Board of Directors and the senior management at the time should be liable to the company for negligent supervision, and probably for intentionally taking actions outside of their authority. The management of the business unit needs to be held accountable for either violating corporate policy, or the Board members need to be held liable for allowing the high risk actions.
So, who is entitled to receive bonuses? The senior managers that failed to supervise? The employees that drove the train and crashed the company? The Board of Directors that allowed a business group to risk the company? None of these people deserve a bonus! So, what is the solution? All of these senior managers and Board member likely breached their duties to AIG, and the shareholders, and should be liable to the company for the damages caused.
AIG shouldn’t ask for the bonuses back from the guilty – they should demand the return! Additionally, AIG needs to look carefully at whether those people that were responsible, including the board members, should be held liable for the damage they have caused.
And now the AG is investigating. It should get interesting very quickly.
