Hoang Tung Duong F15C F15-327
Report: American International Group (AIG)
1. Introduction
American International Group, Inc. (AIG) is one of the world's leading insurance and financial
services organizations, established in 1919. AIG’s prominence in the global insurance market has
been overshadowed by significant corporate governance failures, particularly during the 2008
financial crisis. This report examines AIG’s background, key governance failures, the impact of
these issues, and the subsequent aftermath.
2. Background
Headquartered in New York City, AIG operates in over 80 countries and provides a range of
insurance products, including property and casualty insurance, life insurance, and retirement
solutions. The company's expansive reach and complex financial operations have made it a
significant player in the insurance and financial services industries. However, AIG faced
substantial challenges during the 2008 financial crisis, which revealed deep-seated governance
issues.
3. Corporate Governance Failures
AIG's corporate governance failures were highlighted during the 2008 financial crisis,
particularly in its dealings with credit default swaps and risk management. Key failures included:
Risk Management Deficiencies: AIG's risk management practices were insufficient,
leading to excessive exposure to subprime mortgage-backed securities. The lack of
adequate oversight allowed for high-risk financial products that jeopardized the
company's stability.
Board Oversight Issues: The Board of Directors failed to recognize the scale of the risks
being taken, with a lack of effective oversight over management decisions regarding
financial products.
Compensation Practices: AIG’s executive compensation structure encouraged risky
behavior, with bonuses linked to short-term performance metrics without consideration of
long-term risks.
4. Impact and Aftermath
The impact of AIG’s governance failures was catastrophic, culminating in a $182 billion federal
bailout to prevent the company's collapse. This bailout raised significant concerns about moral
hazard and the consequences of inadequate regulatory oversight. AIG's reputation suffered
immensely, leading to a loss of trust among stakeholders, including policyholders, investors, and
regulators.
In the aftermath, AIG undertook several measures to address these governance failures:
Restructuring: The company underwent significant restructuring, divesting non-core
assets and focusing on its core insurance operations.
Enhanced Risk Management: AIG implemented comprehensive risk management
frameworks and improved oversight of its financial products.
Board Revitalization: The Board of Directors was restructured to include more
independent members with relevant industry experience, enhancing oversight and
governance practices.
5. Conclusion
American International Group’s corporate governance failures during the 2008 financial crisis
underscored critical deficiencies in risk management, board oversight, and compensation
practices. The profound impact of these failures prompted AIG to revamp its governance
framework and implement reforms aimed at enhancing accountability and restoring trust. AIG's
commitment to robust corporate governance is essential for its future stability and success in the
competitive insurance market.
