AIG Ethics - Essay Example

AIG is commonly considered one of the major causes of the global economic meltdown. Their failure to have the money on hand to pay their insurance policies helped to increase the scale and severity of the meltdown. Was it simply a mistake, a failure, or even a giddiness understandable in the global climate? Or did AIG face a systemic fracture of its internal culture? This paper will argue that AIG's internal ethical failures led predictably to its decisions and therefore its demise and the cascading effects upon the rest of the global economy, illustrating the critical importance of proper CSR.

The corporate culture of AIG thrived in a highly deregulated global economy, one where speculation has more than eclipsed any real production (Gupta, 2008). “Furthermore, the banks would "hedge" the tranches, another way of distributing risk, by purchasing credit default swaps (CDSs) sold by companies like AIG and MBIA. The swaps were a form of insurance. This was seen as a way to make tranches more secure and hence higher rated. For instance, say you're Goldman Sachs and you have $10 million in AAA tranches. You go to AIG to insure it, and the company determines that the risk of default is extremely low so the premium is 1 percent. So you pay AIG $100,000 a year and if the tranche defaults, the company pays you $10 million. But CDSs started getting bought and sold all over the world based on perceived risk. The market grew so large that the underlying debt being insured was $45 trillion—nearly the same size as the annual global economy” (Gupta, 2008). While it wasn't just AIG that led to the meltdown, AIG was playing in a world where they were expected to subsidize the entire global economy, with insurance payouts in the trillions. Not only could no company possibly pay this insurance debt, but no country could, not immediately. AIG had violated a primary fiduciary responsibility.

It wasn't just the amount being insured, though, but the type of debt. $64 billion of its exposure was to sub-prime packages. These packages, being high-risk, were highly sensitive to changes in their value, which meant that AIG could expect volatile explosions in their assets and responsibilities.

To be fair to AIG, it was less than fifty people that brought down a company of thousands (Ferrell and Fraedrich, 2007, 435-437). But that itself indicates the problem: A company needs to have ethical standards and can't have a small group of people commit an entire company to huge payouts. Doing so is violating the company's social and fiduciary responsibilities. The question becomes, how could “twenty to thirty” people end an entire company?

One issue was leadership. AIG's Greenberg, the heart and soul of the company, was autocratic, with sketchy ethical practices such as extensive political interaction and back-door dealings (Ferrell and Fraedrich, 2007, 435-436). Greenberg himself opposed the AIG Financial Product's units operations, but the problem is that he had undercut his own position. After he was replaced, he created a corporate culture where autocratic, back-door, unethical behavior was expected and allowed. This teaches an important lesson: Current leadership needs to bear in mind that their steady hand won't always be at the helm, so even if they could navigate ethically stormy waters, their successors may not be able to.

AIG's lack of transparency, as we've already seen, let less than fifty people sink a huge company. It also let CEOs and other leadership claim that they didn't know what was going on, or what was being done in the Financial Product unit. A lack of transparency is often used to give plausible deniability: This unit is such a maverick unit and is so complex and hard to manage, it must not be my fault, right? Managers can reap the rewards and distance themselves from the risks. Companies, therefore, have to be very careful not to allow this, and make sure external auditors and checks are allowed to operate (Ferrell and Fraedrich, 2007 439).

AIG's bonus and incentive structure was always a major problem (Ferrell and Fraedrich, 439; Pitman, 2009). Bonuses were given for unsustainable growth rates but not for responsible risk behavior. This may be fine in some companies, but AIG was to no small extent an insurance company. They were being asked to control risk, not to enhance it. And their decision to distribute bonuses even after being bailed out was grossly irresponsible, after having asked for bailout. “[T]hese companies were not forced to declare bankruptcy before being allowed to take the bailout payments. They were...bankrupt...If they're due bonuses at this order of magnitude, that's prima facie evidence that they authored the present catastrophe” (Pitman, 2009). Thus, we have demonstrated that AIG's culture doomed them to collapse.