AIG: The Success of Failure

"Go for a business that any idiot can run -- because sooner or later, any idiot is probably going to run it." Peter Lynch

On Tuesday night, we learned that AIG's (AIG) former Chief Executive, Martin Sullivan, whose "retirement" was announced on June 15th, will be receiving a $47 million severance package. Poor AIG. Imagine how much better the shareholders would have fared if, instead of Sullivan, the board had promoted "any idiot" to the CEO position 3 years ago.

What exactly did Mr. Sullivan do during the past few years as CEO to "earn" such a ridiculous severance package? According to AIG's press release, "Martin successfully led AIG through the crisis it faced when he became CEO in 2005, and he has made significant contributions over the past three years in executing AIG's strategy and building on its global franchise."

"Significant contributions...in executing AIG's strategy"? Seriously? Does that mean that the management and Board got together three years ago when Sullivan was promoted to CEO and laid out a 3-year plan that included wiping out $70+ billion in market value, taking $20 billion in write-downs, destroying the balance sheet, and being investigated by the Justice Department? That's what I call setting the bar low!

It gets better. In 2005, the year in which he became CEO, Mr. Sullivan "earned" a tidy $13.8 million. In 2006, Mr. Sullivan's total compensation jumped to an astounding $23.5 million. Despite AIG's net income falling an eye-popping 55% in 2007, Mr. Sullivan still pulled down $12.3 in total compensation. Add to this the $47 million severance package, and Mr. Sullivan has pulled down a cool $96.6 million over the past 3.25 years! If we ignore present value and we assume income growth of 2% per year, it would take the average U.S. household 184 years to make as much money.

AIG is a huge financial services company that was generating $9.8 billion in the year before Sullivan became CEO. Let's assume for simplicity's sake that Peter Lynch's "any idiot" was hired as CEO in early 2005, and rather than actually showing up at the office, he spent all of his time on geocaching, Mad Libs, and naked karaoke. A business of AIG's scale could easily grow 3% per year for a few years just through benign neglect. In this example, net income would have totaled $34 billion between 2005 and the first quarter of 2008. Under Sullivan's tenure, net income actually totaled $22.9 billion over this period, so Sullivan actually underperformed "any idiot" by $11.1 billion as CEO. Imagine what the Board would have paid this guy if he had actually added value!

Of course, the Board didn't recognize in 2005 and 2006 just how ugly things would become, but AIG had to take an $11 billion charge in the fourth quarter of 2007 and the company reported a $5.3 billion loss that quarter. Still, Sullivan received $12.3 million for 2007?! Even more outrageous is the fact that $4 million of his severance package is a BONUS for the portion of 2008 that he worked! A $4 million dollar bonus in a year in which he was "down-sized" and in which the company has so far lost $7.8 billion. You can't make this stuff up.

Let's take a look at AIG's stock price. Over Sullivan's tenure as CEO, AIG's stock collapsed by 40% (ignoring dividends). The S&P 500 was actually up 15% (also ignoring dividends) over this same time period, so AIG underperformed the market by an amazing 55% when Sullivan was CEO. "Any idiot" would be hard-pressed to fail so gloriously.

This is beyond comprehension. In Saudi Arabia, citizens who pick-pocket get their hands chopped off. In the U.S., CEOs pick-pocket their companies, and it's shareholder value that gets chopped. The system is badly broken. Incentive pay does not work in its current form, and institutional investors are generally too lazy to use the power of their votes to do anything about it. No wonder the typical individual investor is disgusted with Wall Street and the executive pay issue.

In a fair and just world, here's what should happen:

• Sullivan should be fired rather than allowed to retire. Tarring and feathering should at least be openly debated.
• He should have to forfeit all prior compensation that was based on results that we now know were inflated.
• He should receive no severance for such terrible performance. Actually, he should have to live in the average household and toil at the average household wage for 184 years with all of his earnings going to shareholder restitution.
• He should be sentenced to community service during which time he would have to learn and then teach remedial math to under-priveleged subprime loan originators.
• AIG investors should vote out the entire board of AIG and replace them with far more qualified candidates, such as corpses.

The bottom line is that AIG shareholders were ripped off. I would have been willing to do as poor a job as Mr. Sullivan for half the pay.

Disclosure: The author is short lazy institutional voters, AIG's board, and asinine severance packages.

Comments

[Its theBoard]

And all this while the NEW CEO was Chairman. Talk about feathering your future nest!!

[xrjx]

Typical type of article seen on seeking alpha--overly simplistic; lacking any material analysis of the fundamental issues; sensationalistic. Keep trying for those headlines Ken. Maybe someday you'll become a real journalist.

[Ishortyou]

In respect to insurers, they need to keep and save all the cash possible including stop paying dividends, deleverage AGGRESSIVELY from all their risky liabilities specially those CDS-CDO's, RMBS-ABS of uncertain value, in order to remediate their book values, once their book values are sound they need to reinstate their triple A rating again to write new low risk public bond insurance business. They can also open or extend a line of credit to make sure to continue operations and dissipate doubts. This will also prevent further downgrades from rating agencies.

They are already doing these, so it will take some time to deleverage their books from uncertainties and rewrite new business again. This coming back will be the best advertisement to recruit new clients.

[PBloom64]

Nice article. Loved the humor. It's amazing what these guys get away with!

[fedup_0701]

Overly simplistic?

I think it is obvious that someone is missing the "simplistic" concepts at AIG. Maybe the board could use a lesson in breaking down simplistics because if you can dig in to the "details" and find a way to justify running a company into the ground and justify paying a bonus and salary to the CEO when the stock price drops in half then something is wrong with your "details"

How do they sleep at night? .... Probably on pillows stuffed with the average investors money.

[pinkpound]

This is so true - and repeated across numerous companies and organisations. What will it take before institutions and individuals demand that this nonsense ends? In normal circumstances this would result in criminal prosecution rather than the receipt of such gross, undeserved 'rewards'.

[hfw]

Good article Aig has to bring back Greenberg(MRG) as CEO. He will fire the CFO and the current Board.Give him a two year contract with yearly reviews. I believe I speak for existing shareholders and former employees.

[paso]

Agreed, but whilst Sullivan should be held accountable for whats happened so should the remuneration committee who approved his package. I presume this included former chairman and now new CEO amongst its members?

Its simply not right for someone to be so handsomely rewarding for destroying $bns in shareholder value.

[GSG]

This is absolutely amazing! It truly disgusts me. Another winner is AIG United Guaranty. They're taking a beating and instead of trimming down their top echelon, they're fattening up their officers. Instead of hiring people who can do the work, they continue to hire officers. What idiots! It has gone downhill since Greenberg left. He may have been a difficult man, but you knew what to expect, and if you didn't perform, he would tell you. Come back Hank!!

[crankyinvestor]

Just another Hot-shot Failure