The AIG Scandal
In doing research for this particular article I came across multiple scandals involving securities fraud, consumer fraud, and unethical foreign activities by multinationals, as well as a host of many other typical unethical behaviors performed by the legal entities we call Corporations. However, none were so blatant and unjustified as the actions taken by American International Group Inc. also known as the AIG Scandal of 2008. you remember that big financial crisis right? the one we called the Great Recession? Well, here are some thing you should know if you are into the subject of ethics and business.
Due to the faltering economic conditions and the failure of the financial system many financial services corporations have lobbied the U.S federal government for loans to mitigate the negative effects that are taking place. AIG lobbied the federal government and was one of the recipients of a series of government loans based on these conditions eventually resulting in what is commonly known as the AIG scandal.
Summarizing these loans:
- In September, 2008 AIG received $85 Billion
- In October, 2008 AIG received $37.8 Billion from the Federal Reserve
- In October, 2008 AIG was granted access to up to $20.9 Billion in loans for use in short-term day-to-day operations.
- In November, 2008 the federal government re-structured AIG’s loans giving the company an overall total of roughly $150 Billion. It is also worth noting that the November restructuring included a $40 Billion cash infusion and the spending of up to $53 billion to buy up mortgage-backed assets.
This series of loans makes the AIG bailout the single largest government bailout of a private firm in U.S history.
The federal government provided the needed loans because it feared that a collapse of insurance and financial services giant AIG would cause a domino effect resulting of the further collapse of the financial industry. However, the government failed to institute guidelines to prevent AIG from spending tax payer moneys in avenues that were not related to general business operations. In fact, there were very little preconditions to the bailout moneys. However, the government might’ve assumed that any lender (including the U.S government – The Tax Payers) would lend any moneys as long as all parties are operating in good faith. And while there was no legal issues arising from AIG’s actions (which we will discuss) it brings up many questions in relation to business ethics and Corporate Social Responsibility (“CSR”).
AIG continued to lobby lawmakers and regulators for more loans with a multi-million dollar budget dedicated to these activities. Further, it admittedly used tax payer money for the lobbying of the federal government and other State governments. In addition, AIG held lavish events for its executives in the days after its initial loans (October, 2008) costing the firm nearly $440,000 for a luxurious weekend at a California spa and was still continuing to plan nearly 160 such events over the next few months costing the firm nearly $80 million.
AIG was also (prior to the public humiliation they received at the hand of congress) planning on continuing its lobbying efforts through the use of tax payer money to reduce restrictions on mortgage-industry licensing on the state level (WSJ). AIG spent and continued to plan to spend millions in this effort.
These actions prompted strong criticism from Congress and more recently, our newly elected President. For example, these actions were called “unconscionable” by Senators Feinstein and Martinez in their letter to AIG CEO Edward Liddy asking him not to use tax payer money for lobbying efforts and to seize such activities at once.
First, one must question whether AIG’s actions were in fact unethical and how do the concepts of Corporate Social Responsibility (“CSR”), Value Neglect and Value Attunement apply to this particular case and why.
During these tough economic times, the boundary rules for ethics cannot be more important. Corporations must demonstrate value to the customers they wish to serve and to their stakeholders in general. These demonstrations must include social values as well as financial ones.
AIG’s history is a troubled one and in 2004/2005 they engaged in activities that would be considered unethical in relation to securities and SEC financial reporting. These events resulted in large fines in the amounts of hundreds of millions of dollars for AIG. Was this an isolated incident or was it a larger indication of the general culture and attitude of AIG executives?
During the most recent crisis in 2008, AIG spent millions of dollars to lobby the government for tax payer money. The firm had a single public objective during these financial crisis – financial survival. Its objective should’ve been to include the use of tax payer capital for operational purposes only.
To demonstrate responsibility to their new stakeholders (MR. and Mrs. Taxpayer Smith) they needed to maximize the use of the capital, reduce un-necessary spending, cutback on expansion efforts and simply avoid collapsing. This was the original intention of the loans and they were made in good faith by the federal government on behalf of the tax payers only for these purposes.
Although there was no legal obligation to implement these actions, there was an intrinsic understanding that the aforementioned were the reasons these loans were given in the first place. AIG however, used that capital to lobby for the reduction of restrictions on state licensing provisions for the mortgage industry, which is believed to be one of the original causes of the financial crisis. They also engaged in inappropriate and un-necessary spending that was not imperative to business needs; more specifically by sending their executives and high performers to an all-expense-paid spa in California costing nearly $0.5 million. Are these actions necessary for the survival of AIG? Are they necessary for normal but restrained business operations?
I believe that they were not because they are not vital to the success of the business, and do not hold the stakeholder’s interest at heart (now to include the entire U.S tax-paying population and not a few stockholders, employees and executives).
I would consider investments in reducing risky loans, reducing overhead, retention strategies, reasonable branding and marketing strategies, reducing costs of financial products and many others to be business necessities. I would exclude executive parties, state lobbying for reduction of licensing requirements and events that are not created to increase sales from that description.
One must note that the concepts of ethical practices under CSR are traditionally viewed as “costly” (Orlitzky and Swanson p.3, HR Management Ethics[“HRME”]), but under these circumstances engaging in CSR would’ve actually saved the firm from internal collapse (that remains to be seen), increased the satisfaction of all stakeholders and protected AIG from the public affairs nightmare they experienced in the last few months (AIG shares are sold at $0.59/share at the time of writing of this paper, with a 52 week high of over $54.00, which is much lower than some of their counterparts and has more to do with the scandal than the economy).
However, AIG executives have shown (As they have shown in the securities scandals of 2004/2005) that they exhibit normative myopia to an extent that creates almost an ideal situation for value neglect; A case which is generally considered extremely rare by ethical scholars (Orlitzky and Swanson, p.9, HRME). As discussed in chapter one of HRME, Executive Normative Myopia is the central keystone that leads to neglectful corporate social performance through the formal and informal suppression of value information. This manifests itself by decreasing the probability of detection of social issues and defects within the corporate structure.
For example, AIG executives continued to receive exorbitant bonuses and salaries that did not fit the needs of the business during these economic conditions, yet they planned to lay off thousands of employees and reduced their company investment portfolio (now they have government mandated restrictions included in the stimulus package passed during the last 2 weeks with regards to compensation).
One can easily detect that AIG executives encourage myopia within their organization by simply continuing to have this spa weekend get-a-way on the calendar and planning to attend it, while the tax payer simultaneously loans them the capital needed for survival, and suffers the consequences of their incompetence.
Also, continuing lobbying efforts that would be opposing to stakeholders interests (reducing restrictions on licensing in the mortgage industry) signaled to employees that AIG is willing to benefit from the taxpayer and reduce the social value attained by said stakeholder by being socially irresponsible.
Whether employees where formally or informally asked to suppress “Value Information” is unknown at this time, but as more information becomes available one would be able to easily make that judgment. However, overall it is clear from the examples discussed above that AIG has, without a doubt, engaged in executive normative myopia resulting in mass value neglect.
How to Change AIG?
As per the processes of value attunement, there are several methods that can be used to begin the process of changing AIG’s corporate culture into a more socially responsible culture and AIG into a more socially “attuned” organization. The target areas would be:
- Recruitment and Selection
- Performance Appraisal
- Training and Development
However, it is worth mentioning that in order for any of these solutions to be implemented effectively and in order for change to occur, non-executive stakeholder support is not enough. I believe that in order to change AIG’s neglectful culture for the long-term, potent socially responsible leadership must exist and promote these concepts through the aforementioned tools. This would be the only way to gain enough momentum to create “critical mass”- a physical concept that states that in order for change to occur in a particular system, the original ‘weight’ of the change must exceed a certain mass. Once it does, then the system dynamics tend to favor the change and not the status quo and tends to be self-perpetuating. One needs to implement a system to achieve critical mass at AIG Inc. due to its size and importance. This cannot occur without potent executive social receptivity as Swanson and Orlitzky mention in chapter one of their book.
Recruitment and Selection
AIG will need to change its hiring practices to screen for professionals who exhibit high cognitive moral development and who possess the personality trait of being “agreeable” or open to socially receptive suggestions and cultures. In addition, AIG will need to concentrate its efforts on hiring a more diverse workforce. A diverse workforce will be less susceptible to ‘groupthink’ and might be able to resist pressure to neglect socially responsible behavior.
Although screening for morality and agreeableness traits can be risky from a legal perspective, but when weighed against the hundreds of millions of dollars AIG has spent on fines and the negative publicity it has received recently, it would not only serve the community at large but it would most likely save AIGs stakeholders from many things that are un-necessary. The socially responsible recruitment and selection strategy, however, must be a top-down project starting with the board of directors, to the chief officers and all the way to the bottom line managers. This must be the case because a corporation is not a democracy and change cannot occur from the bottom up as our authors also reveal in chapter one.
Every organization must include, as part of its performance evaluations metrics that measure its employee’s performance on multiple dimensions. Therefore, a value attuned criteria must be developed. We see evaluations that are separated in terms of overall corporate performance and individual performance as well. We also see it in sales-centric organizations where sales professionals would be measured not only on their new sales, but by the up-selling of current accounts, minimization of the cost of doing business, work ethic and others. To include social responsibility within the evaluations of internal stakeholders can, if implemented effectively, create a positive environment for social responsibility and corporate ethics.
If included in the performance appraisals of top executives it would’ve been very possible that the hundreds of events, lobbying efforts and the spa weekend would’ve been eliminated from company activities the moment they received tax payer funds for their organization. After all, many top executives tend to still be driven by personal and professional growth (that includes financial). However, one must be aware not to create a “tournament” appraisal model, where individuals compete on who is most socially responsible. This can be counterproductive and can create a negative atmosphere, where social responsibility would be just another metric to measure oneself. In other words, a widespread value attuned culture is the objective and not the creation of “stars” in the social responsibility arena.
Based on the appraisal criteria, AIG must then award ethical behavior not only with recognition, but with financial incentives that taps into the capitalistic passion of many executives and employees. “Organizations should reward behavior consistent with attunement” (Orlitzky and Swanson, p13, HRME) because this can set clearly what the rewards are for engaging in such activities. Performance appraisals set the standards, but when these standards are met (or not) there must be consequence – be it positive or negative.
If AIG’s executive compensation was based on “attuned” appraisals it might have provided a major incentive to be socially responsible and not to engage in value neglect. At a minimum, it might’ve prevented the blatant disregard for corporate ethics but not necessarily encouraged ethical behavior. This is supported by our author’s note that the concept of “value neglect” is well defined and easy to understand, but the concept of value attunement tends to be less defined and vaguer (Orlitzky and Swanson, p8, HRME).
Training and Development
Although not a preventative measure, training and development can be used to mitigate value neglect in an organization. In the least, it could prevent individuals from engaging in socially irresponsible behavior because they ‘didn’t know any better’. In the case of AIG, training in how a corporation must deal with economic hardships should’ve been provided to help executives understand that there cannot be lavish events and excessive lobbying when the tax payers money is used to pay their salaries — keep their organization afloat. This is especially applicable when the loans were extended in good faith and on the presumption that the moneys will be used for operations.
Overall AIG’s must use training as a mitigating tool for new and upcoming management and executives to build a new slate of CSR-centric professionals that will take the organization in new directions and new profit in the near future.
AIG’s immediate remedies stem from the application of general business ethics, and the prevention of continued value neglect, while continuing to strive for a value attuned culture within their organization. In the time of writing of this article, AIG had in fact cancelled hundreds of un-necessary corporate events, cancelled the spa vacation, refrained (and stated so publicly) from lobbying the government to reduce licensing restrictions and finally, AIG is aggressively working to repay back the tax payer’s capital by selling off its high performing business units.
Although, these are immediate solutions to the current issues they do not solve the much larger issue of general ethical apathy and normative myopia of AIG executives. Therefore the fundamental tools of value attunement must be extensively applied, a change of direction must be implemented and CSR must be adopted.
In this case, the failures lied in the chief executives who were myopic in nature, high level executives who followed suite, and a board of directors who were also myopic or ‘unaware’ –either is not in the best interest of stakeholders.
A replacement of the Chief Executive Officer with a more socially responsible professional might go a long way to begin the process of creating a socially attuned organization. Again, in this scenario, the change must occur from the top-down. However, this can only be looked at as the beginning of the process. Through excellent selection and screening processes, increasing diversity to eliminate group-think the adoption of ethics-based performance appraisals, compensation and the increase of training and development one can reach critical mass and would be able to change the ethical direction of a large organization. Support from top-level executives is not only imperative but success cannot be achieved without it.
AIG’s ethical failures are not unique, but seem to be common during these economic times. Major banks, financial power houses, investment brokerages and many other financial product organizations are and have been engaging in similar activities before and after the bailout was introduced. This is what prompted congress to set limits on executive compensation and add other restrictions to any entity that will be receiving economic hardship loans or grants.
Finally, these trends, although negative and not in the best interest of global business, excite me greatly. If industry is engaging in such apathy, then there will be great room for ‘attuned’, knowledgeable and strategic Human Capital professionals to improve such cultures and prove through empirical studies the value of a attuned, socially responsible organizations.