Commentary: Quit While You're Ahead, Hank

Investors are fretting about the lack of a definitive succession plan at AIG

Maurice R. "Hank" Greenberg has had a stellar run at American International Group Inc. (AIG )In his 37 years at the helm, the 79-year-old insurance titan has built AIG into a $81 billion powerhouse. And his tenure has withstood turbulence. Even with this year's flurry of hurricanes, net income at the New York insurer grew 22.3% in thefirst nine months, to $8.03 billion.

But the winds of change aren't blowing hard enough through the halls of AIG itself. Investors are unhappy with the investigations that have buffeted the company in recent months -- not to mention a lackluster stock price. While no institutional investor is yet calling publicly for Greenberg to step down, it is clearly time for AIG and its board to get serious about setting a time frame for succession. Says one major institutional investor: "A straightforward plan for Hank's retirement might clear the air."

And with the probes appearing to veer closer to Greenberg, the sooner the better, some investors say. A recent report in The Wall Street Journal alleging that federal prosecutors are investigating the AIG chief for possible securities violations has heightened concerns on Wall Street, although an AIG spokesman says the U.S. Attorney for the Southern District of New York has not yet been in touch with the chairman and CEO. The new questions follow a spate of probes by the Securities & Exchange Commission, Justice Dept., and New York Attorney General's office that have some investors worried about broader problems. Even the announcement on Nov. 30 that AIG had struck a $126 million settlement with the SEC and Justice Dept. over a series of controversial transactions has failed to put to rest the growing qualms. AIG did not admit or deny any wrongdoing under the settlement.

While none of the allegations yet warrant a shakeup, the lagging stock is making investors restless. True, they were perfectly willing to overlook Greenberg's autocratic management when the share price was rising. But not anymore. In recent years, AIG stock has badly underperformed the industry. Total returns have dropped 35% since late 2000, when the stock peaked at 100. That's double the drop of the S&P 500 Insurance Index.

The disappointing performance is prompting some shareholders to take a second look at the house that Hank built. One issue is how Greenberg's long-lasting hold on the top job has undermined the talent pool at the company. Over the years, scores of star managers have left AIG, say executive recruiters. The issue wasn't just being denied a shot at the top job; it was also the Hank-centric culture that gave them little room to shine. AIG has recognized this and taken some small steps to give other execs a more public profile. But the risk remains: Investors might have little confidence or knowledge in the new management when Greenberg finally does retire.

Moreover, some believe that the culture Greenberg has created needs a shakeup. Not only did some regulators cite a lack of cooperation, bordering on arrogance, in their investigations, but practices such as AIG's byzantine compensation structure hold little place in this age of improved governance.

That's why it's time for AIG's board to start identifying and grooming likely candidates. Yes, Greenberg in 2002 established a stable of more visible contenders by bringing execs into a newly created office of the chairman. But he has since deflected retirement questions -- other than to say that he's fit and eager to continue and that he has drafted a secret letter stating who he thinks should succeed him. That will go to the board upon his departure. At least two men have a good shot: Martin J. Sullivan, 50, and Donald P. Kanak, 51, both of whom have extensive international experience and hold the joint titles of vice-chairman and co-chief operating officer. AIG says independent directors will pick a successor. But neither the board nor the contenders have any idea when that might be.

Greenberg may be overestimating his staying power. Such CEOs, says University of Michigan Ross School of Business professor Noel Tichy, are "usually not the best judge of when it's time to leave." Much of Greenberg's record remains impressive. All the better, then, to leave with his legacy intact.

By Diane Brady

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