AIG’s troubles – the cultural roots

In all the commentary and discussion about the source of AIG’s problems I’ve yet to read or hear what may be the most important contributor – the company’s culture.
There’s no question AIG was long considered one of the world’s best run insurance companies. AIG is legendary for its intramural hypercompetitiveness. The company would rather one of its subsidiaries lose an account or prospect to another internal subsidiary than to an outside firm. The rewards (up till now) for winning those competitions have been huge – the top execs at AIG become Starr Partners, a highly lucrative status.
AIG’s hundreds of subsidiary companies compete against each other for insurance business, talent, resources and recognition. The rules are few, but ironclad – chief among them return an underwriting profit (make sure the combined losses and admin expense is less than premiums). All investment income accrues to the parent organization, where various investment entities compete to deliver the best results.
By several accounts, one result of this business model has been a consistent under-investment in non-revenue driving IT, and a lack of emphasis on paying claims. AIG was one of the first insurers to embrace the web to sell to consumers and small businesses; it also infuriated regulators and medical providers when it screwed up the consolidation of workers comp medical processing by eliminating regional processing centers. Bills were lost, repeatedly processed incorrectly, and paid to the wrong provider.
The company’s auto business has grown substantially over the last decade, yet many insureds are none too happy with the company. An article several years ago highlighted complaints from some of AIG’s commercial clients; here’s an excerpt:
“AIG was losing more than $210 million on auto-warranty claims, provoking the ire of the company’s longtime chairman and chief executive, Maurice R. “Hank” Greenberg, according to court documents. As a result, in mid-1999, a newly installed team at AIG’s auto-warranty division began to reject thousands of claims — including half of the claims that its own contractor, a claims-handling company, recommended be paid, according to court papers.”
I had the pleasure of working for AIG a bunch of years ago. At that time, AIG’s CEO and Chairman, Hank Greenberg, used to have Presidents’ meetings every month where the presidents of AIG’s subsidiaries would present (very briefly) a summary of how their business was doing. My sub was not doing particularly well, which is probably why I was asked to attend the meeting representing my boss’s boss.
Greenberg started at one end of the large U shaped table, with the first of about 25 presidents. After the brief presentation (two minutes or so) he’d grill them – with the temperature on ‘sear’. Fortunately, I was second on the flame, and still in shock when he asked me who I was and what I was doing there. After about thirty seconds of my babbling, he dismissed me as too low in the hierarchy to be worth his time and moved on.
I proceeded to watch as a couple dozen middle aged execs went thru their inquisition sessions. Most seemed to be doing a pretty good job, delivering solid results and expanding revenues, and a couple were doing very well. Despite that evident success, all were scared, several terrified, and at least a couple so distressed that I found them in the men’s room throwing up.
Although Greenberg departed several years ago, according to several insiders this culture still exists – the hypercompetitiveness, coupled with huge rewards for success and caustic tongue lashing from your superiors for anything but success. The combination of the two may have contributed to the company’s recent problems. Execs who are scared of their bosses are not likely to be first in line to tell them that the great investment in mortgage-backed securities or rate swaps has blown up. The turmoil in the executive suite may have distracted top management from tracking these issues as closely as they should have. The constant hectoring from Greenberg (after he was kicked out as a result of Spitzer investigation) certainly soaked up C-suite bandwidth that would have been well-applied to assessment of investment strategy.
That’s not an excuse, but may be a lesson.