Should Willumstad break up AIG?

Posted by: Diane Brady on June 16, 2008

AIG’s new chief executive Bob Willumstad has a lot to mull over as he steps into leading a company with record losses and a stock price that has been sliced in half. One question is whether his best move may be to break up the company.

Like General Electric, American International Group is remarkable for its breadth, with a $110 billion empire that stretches from aircraft leasing to esoteric lines of insurance. It did fine when the units could draw on the parent’s AAA credit rating but, as the creditworthiness has deteriorated, so has the argument for keeping the insurance and financial services giant together.

Internally, there are already some signs of discontent with the status quo. The head of its International Lease Finance Corp. unit, Steven Udvar-Hazy, is certainly not happy with the higher costs that came his way as the credit rating dropped. The blogosphere has also started buzzing about a break-up as the rating agencies have downgraded AIG’s debt rating.

But the issue is also a philosophical one. The major selling point of a conglomerate-style company is that any one blow can be easily absorbed, given the breadth of its operations. Instead, some wonder if AIG’s size prompted it to make bigger bets than it should—resulting in consecutive losses totaling $13 billion over the past two quarters.

Hank Greenberg was an unusual leader in his ability to keep track of even the furthest reaches of his empire (in part, of course, because he built it). Sullivan appears to have lacked that ability. Among other things, he arguably took his eye off his company’s core business (actual underwriting!) to dive into the once-sexy realm of financial products tied to subprime mortgages. The result: $20 billion of write-downs while some other parts of the business were allowed to languish.

Willumstad, a former Citigroup president, knows all about the challenges of dealing with sprawling financial-services giants. Then again, some argue that his old employer should be broken up, too.

Reader Comments

Patrick

June 16, 2008 9:56 PM

Yes, he should.

Sabari Chalayil

June 17, 2008 1:47 AM

Nowhere else in this world does the wheels of evolution go full circle as in corporate America, it would appear. Great leaders build large and profitable businesses. Then their successors go off in quest of continued growth and do things that they do not understand. Obviously they trip and fall. The bigger they get, the harder they fall, to use a cliche!

On a cynical note, why are great CEOs followed most of the time by succcessors who cannot seem to measure up? Does it have to with the way they choose their successors, intentioanlly or otherwise? What does it all say about the role of Boards in sucession planning?

lydia

June 17, 2008 5:04 AM

yeah,he will

Richard

June 17, 2008 6:20 AM

Why did the board have to wait until the CEO was fired in order to conduct a "business review"? Was Sullivan uncoachable? I don't think so. Again, we are seeing a potential example of a board failing to take action to guide senior business leadership in addressing business issues.

One of AIG's major weaknesses is lack of strategic focus. As a conglomerate, what is its intended goal. "To make money" is not a sufficient objective; everyone wants to do that. The strategy needs to be something that everyone, and I mean everyone, in the business can get their heads around and contribute to its achievement.

The US life insurance business is not adequate in size to take on industry leaders. An acquisition is in order or otherwise, this should be sold.

As you point out, ILFC worked when the funding was cheap vs. other competitors. Seems clear that ILFC should be sold as this business is a specialty line and otherwise not clearly aligned with the rest of the business.

Another critical weakness is its inability to get past the Greenberg ouster. There are quite a number of employees (including senior management) who secretly wish for their old boss to get back in there and run the place. Sullivan tried to turn the culture from that old paradigm, but wasn't driving the change fast enough or deep enough. More critically, AIG does not have the internal controls and routines to manage itself. This worked when Greenberg was around because he was the smartest guy in the room and called all the shots. Ask any current CEO and he/she will tell you that demands for information by stakeholders of all type (regulators, analysts, shareholders, employees, etc.) require a seasoned team of leaders. The days of the imperious CEO are over.

AIG can be salvaged, but it will take the commitment of the board of directors to oversee a hugh transformation in culture, strategy and management.

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