AIG Board Fails to Meet Its Duty in Power Struggle

By Declining to Back its Chairman, Board Takes a Step Back to the Dark Days of Pre-Sarbanes Oxley

Last month,  Harvey Golub resigned his position as chairman of the board of the besmirched insurance giant AIG. His action brought an end to an ongoing dispute with Chief Executive Robert Benmosche. The crux of the clash between the two men revolved around a fundamental issue faced by corporate management and boards of directors: Who has the power, responsibility and authority – the management or the board – to determine and implement the mission, values and vision of the organization?

It appears that for some time Golub (at right) and Benmosche had been in a power struggle to determine who would set the vision and future direction of AIG. This dispute came to a head over AIG’s need to sell assets to raise cash to repay billions of dollars of government bailout funds. The board approved Benmosche’s plan to sell an AIG unit to UK insurer Prudential PLC for more than $35 billion. However, when the shareholders of Prudential reacted negatively to the transaction, CEO Benmosche pushed to complete the deal at a lower price. The board did not approve the lower price and instead recommended an IPO for the unit to raise cash.

The Golub–Benmosche dust-up is an example of a new type of corporate power struggle. There have always been power struggles among the management of corporations, but seldom have there been such struggles between the board and the management of a company. This type of conflict has been rare, because traditionally the board of directors was made up of friends and associates of the CEO. Indeed, it was accepted practice for the head of the company to be both CEO and chairman of the board. Pampered with status, prestige and healthy pay packages, the board became little more than a cadre of yes-men armed with a rubber stamp for the CEO and his plans.

If we should have learned anything in the past 15 years of exposed corporate fraud, greed and mismanagement, it is that this type of cozy arrangement between the board of directors and management can lead to nothing but problems. Can you imagine the potential for problems and abuse if the President had the power to appoint every member of Congress and they were beholden to him for their job? In essence this is the way the board/CEO relationship operated in the past.

After the abuses caused by the collusive nature of the relationship between the boards and management became obvious, Congress passed the Sarbanes-Oxley bill. The essence of the legislation was to clearly define the responsibilities of the board as representatives of the stakeholders of the company. (Not just shareholders, but everyone who can be affected by the actions of the company.) The legislation made it clear that the CEO and management worked for the board, not vice-versa. Not only were the responsibilities of a director clearly defined, but those directors who shirked their duties were exposed to civil and even criminal repercussions. Directors became legally liable and responsible for the actions of management.

The recent power struggle between the board and the CEO of AIG shows that old habits die hard and that both company managements and boards are struggling to come to grips with the new environment.

CEO Benmosche was obviously chaffing under the concept that he worked for the board and not the other way around. As Paul Hodgson, senior research associate at the Corporate Library, was quoted as saying in a Market Watch (July 18, 2010) report, “The relationship between an independent chairman and a CEO is supposed to be cooperative. But the point of having an independent chairman is that they can stand up to and change the mind of the CEO if they need to. I am not sure U.S. CEOs, particularly CEOs like Benmosche, have got that piece of the theory yet.”

Unfortunately, Chairman Golub and the other AIG directors did not live up to their responsibilities either. Golub offered the lame excuse for abdicating his duty as an independent chairman of the board by writing, “…it is easier to replace a chairman than a CEO.” The remainder of the board also demonstrated their lack of understanding or courage to exercise their rights and responsibilities as directors. It is believed that Benmosche (at left) went behind the chairman’s back and told the board that he could not work with Golub. It was a pure, old-fashioned power play. And as Hodgson noted, “The next thing we hear is that the chairman is stepping down. It is strange that the board would ask the chairman to step down rather than backing him up. The chairman is in charge of the board.”

It is important for the board and management to have a collaborative and cooperative relationship, but the AIG’s board abdication of their specific responsibility to “advise and consent” on the actions of management is a step back to the old ways and sets a bad precedent. As Gary Wolfer, senior vice president and chief economist at Univest Wealth Management, was quoted by Bloomberg (July 14, 2010) as saying, “Having a clearer field, it’s going to be the Benmosche Show going forward.” That is not the way it should be and could lead us back to the problems of the past.

So, what is the best relationship between a board and management?

One could list all the organization obligations of the board, i.e. select management, ensure effective planning, determine and monitor company progress, etc, but, there is a more subtle function of the board. The board should lead the way in fostering an environment of interaction, cooperation, support and parallel interests between the board and management. But that said, the directors should never lose sight of that fact that management works for the board, not the other way around.

Of course it is not the duty of the board to manage the company, but it is the duty of the board to manage the managers of the company. The board hires management and should give them the power to manage. Management’s duty is to develop the mission and vision of the company and the plan to achieve such. The board should use the combined experiences of board members to review, advise and approve the vision and plans of management. Once the board has approved the vision and plans, then management must be fully empowered to implement them without interference from the board.

The board’s responsibility then switches to monitoring, measuring and holding management accountable for the plans they themselves developed. If the environment in which the plans were developed and approved changes or if management wants to make fundamental adjustments to the plans, then these should be taken back to the board for advice and approval.

Using this type of structure, general board meetings should be a fairly simple exercise. The management reports on actions taken and results achieved to date. In addition, management lists those activities planned prior to the next board meeting.

Taking this approach to the board responsibility will create a positive, cooperative attitude that will enable both management and the board to be on the same page. Something that AIG management and the board were not able to achieve.

And the Moral of the Story is …

It is a new world of corporate governance for both the management and directors of a company. Serving as a corporate director has, for the past decades, been not much more than a cap on a career and good times with good buddies, but that has changed.

After what has been a century of little more than lip service to the obligation of the board of directors to represent the interests of stakeholders, Congress has codified the responsibilities of the board of directors. Not only are the responsibilities of the board clearly defined, but they are backed up with specific liabilities and penalties (some even criminal) for board members who fail to fulfill their obligations.

The corporate governance legislation brings reality (or should) to what has been theory, but not practice—that the board of directors is in charge of the company. The management works for the board, not the other way around. It is now clear – backed up by law – that the board’s duty is retain qualified management and then to approve, review and oversee the plans and activities developed by management. The board does not (and should not) manage the company, but in the new world the CEO is appointed by and beholden to the board.

This is a better way to protect the interests of stakeholders, but it is a lesson that apparently the board and CEO of AIG have not yet learned. Shame on both!

9 responses to “AIG Board Fails to Meet Its Duty in Power Struggle

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