April 7 (Bloomberg) -- American International Group Inc.’s trustees, appointed in January to oversee the government’s investment in the insurer, may face their first public scrutiny when three of the company’s board members step down next month.

The panel, which controls votes on asset sales, mergers, and selection of top executives, can reshape a board that has been urged to improve supervision. Directors Virginia Rometty, Michael Sutton and Edmund Tse won’t stand for re-election at New York-based AIG’s annual shareholder meeting, scheduled for May 13, the insurer has said.

The trustees are under increasing pressure to shake up AIG after the company was criticized by lawmakers and President Barack Obama for paying $165 million in bonuses following a fourth U.S. bailout. Labor unions urged the trustees last week to block re-election of directors who oversaw compensation.

“The ability of the trustees to act in a shadow arrangement disappeared after the bonus issue,” said Richard Ferlauto, a director of corporate governance at the American Federation of State, County and Municipal Employees. The panel didn’t “anticipate that the board would blow itself up by making dumb decisions on retention awards.”

The Federal Reserve Bank of New York, which extended to AIG a $60 billion credit line as part of its bailout, named the panel with support from the Treasury Department. The trustees are Jill Considine, former chairman of the Depository Trust & Clearing Corp.; Chester Feldberg, former chairman of Barclays Americas, and Douglas Foshee, chief executive officer of natural gas producer El Paso Corp.

Looking for Competence

“They need to pick directors who are not political cronies and who are competent,” said Phillip Phan, professor of management at the Johns Hopkins Carey Business School in Baltimore. “This is the moment that they can show themselves to be effective representatives of the taxpayers.”

Peter Bakstansky, a spokesman for the trustees, said he “didn’t disagree” with the observation that his clients were working unseen from the public. They were assigned in January, got voting rights last month and “haven’t made any public comments” yet, he said.

“They will vote their shares at the stockholder meeting; I don’t know of any plans to nominate individual directors,” Bakstansky said. “They are not managing the company; the assignment is to vote the stock in a way that maximizes shareholder value and pays back the amounts owed to the Treasury and Federal Reserve.”

Candidates for director positions are identified by the nominating and corporate governance committee of AIG’s board, chaired by George Miles, the insurer said last year in a regulatory filing.

First Impression

The overseers may not have made an immediate impression on CEO Edward Liddy, who was unable to name all the trustees at a March 18 congressional hearing after saying he had met them “on a number of occasions.” Liddy is chairman of the board of directors.

“Oh, there are three trustees,” Liddy told Representative Judy Biggert, a Republican from Illinois, at the House Financial Services subcommittee hearing. “I can get you that list.” Christina Pretto, a spokeswoman for AIG, declined to comment, and Zachary Cikanek, a spokesman for Biggert, didn’t immediately return an e-mail or telephone calls.

The panel has met regularly with senior AIG managers, including Liddy, in person and over the telephone since January, Bakstansky said. Calls to the individual trustees were referred to Bakstansky.

The three individuals wield the 77.9 percent stake of AIG held in a trust, AIG said in a March regulatory filing. They each earn $100,000 a year, the New York Fed said in January.

New York Fed

Two of the trustees have experience at the New York Fed. Feldberg was an executive vice president in charge of the Bank Supervision Group for nine years through 2000.

Considine served a six-year term on the New York Fed’s board, where she was chairman of the audit and operational risk committee. She was the New York State superintendent of banks from 1985 to 1991.

Foshee was chief operating officer at oilfield services provider Halliburton Co. before joining El Paso in 2003.

The trustees “have a legally binding obligation to exercise all their rights as majority owner of AIG in the best interest of the U.S. taxpayer,” said William Dudley, president of the Federal Reserve Bank of New York, in a March 24 congressional hearing.

‘Capable Public Servants’

“These are very capable public servants,” Treasury Secretary Timothy Geithner said at the hearing.

Half of the insurer’s eight directors that are expected to remain after May were appointed last year, a period in which AIG posted almost $100 billion in losses tied to the housing market.

Unions including AFSCME said last week that trustees should block the re-election of James Orr to the board, because he serves on the insurer’s compensation committee. Former CEO Maurice “Hank” Greenberg, who controls the largest stake of privately held AIG shares, said last week the entire board should be replaced as part of a revised rescue. A message left for Orr at the Rockefeller Foundation wasn’t immediately returned yesterday.

The trustees should consider board nominees who have demonstrated the ability to fix failing businesses, said Gustavo Dolfino, president of Whiterock Group LLC, a New York-based executive search firm.

‘Looking for a Challenge’

“They should look for people with the knowledge to guide the company through a restructuring process, people experienced with turnaround,” said Dolfino. “People who are looking for a challenge.”

Stephen Bollenbach, the KB Home chairman and former Hilton Hotels Corp. CEO, was named to the board in January 2008. Suzanne Nora Johnson, a former Goldman Sachs Group Inc. vice chairman, joined in July after AIG was pressured to bolster the company’s financial leadership.

Richard Holbrooke, the diplomat who is now the U.S. special envoy to Pakistan and Afghanistan, stepped down from AIG’s board in July, as did Ellen Futter, president of the American Museum of Natural History in New York.

AIG was first rescued in September with an $85 billion credit line after a liquidity squeeze caused by credit-default swaps the insurer sold to banks. The company agreed in September to hand over a controlling stake to the U.S. and to replace Robert Willumstad as chairman and CEO. Liddy was picked by then- Treasury Secretary Henry Paulson.

The insurer’s bailout expanded to $122.8 billion, $152.5 billion and then $182.5 billion as the government sought to prevent losses at banks that did business with AIG. The company said it owes about $46 billion of a $60 billion Federal Reserve credit line as of last week.

To contact the reporters on this story: Hugh Son in New York at hson1@bloomberg.net;

Last Updated: April 7, 2009 10:04 EDT