TO THE POINT

Off the pedestal into reality

Hank Greenberg's rise to power—and fall from grace—marked by impressive achievements

By Emanuel Levy

Greenberg has been credited with creation of untold innovations and of building an organization that is acknowledged as the world’s largest insurance group.... Possibly a feeling of invincibility of his leadership role...brought about the final confrontation with the independent directors.

It has always seemed improbable that the legendary CEO of the American International Group, who, in 1967 took the company from more or less humble beginnings to the world’s leading commercial insurer, would be finessed into retirement. But, the reality was front-page news on March 15, 2005, when Maurice “Hank” Greenberg succumbed to the evidently unyielding urging of the AIG independent directors, and resigned as CEO. This was in the face of persistent regulatory challenges, spearheaded by New York Attorney General Eliot Spitzer, with the SEC looking on. In the cross hairs was the question of the legality of a financial product called “finite risk” and a transaction viewed as an attempt to disguise negative financial conditions.

Greenberg, who joined the company in 1960 and became chief executive officer in 1967, has been credited with creation of untold innovations and of building an organization that is acknowledged as the world’s largest insurance group. And for personal achievements that elevated him to the top in insurance executive ranks. He was also known as a man of strong convictions and somewhat dictatorial mien. His management style was often considered intense, and perhaps excessive, because he seemed to be involved in every transaction including careful review of the quarterly financial statements. The success of AIG and the opportunities for expertise and advancement induced high numbers of highly talented people to join the company. The move was sound for them and for the company and it was also a means of upward mobility. The AIG alumni can now be found as high-ranking executives with a wide variety of other insurers.

Nearing the age of 80, Mr. Greenberg had not slowed his pace appreciably in fulfilling his obligations with AIG’s far-flung activities, as well as a wide range of public and governmental services with which he was engaged. He was invariably asked by the press about who his successor would be, as if he were a king. Invariably, he declined and would not even intimate the next in line. That prerogative was snatched from him on March 15, when he was told to clean out his desk. Actually, as it was widely and immediately reported, the mantle passed to Martin Sullivan, one of two chief operating officers for the company. The other is Donald Krank. Sullivan joined the company 30 years ago in London, while still a teenager.

For years, stories speculated on the fate of Mr. Greenberg’s two sons, Jeffrey and Evan, both top AIG executives, until each decided to leave. It’s an old story of thwarted ambitions where a father chains himself to the executive desk. In this instance it was not a family-owned business, even though dad had a lion’s share of the stock.

Jeffrey, 53, left AIG in 1995 and after a short time became president of Marsh & McLennan, only to resign in mid-October 2004 when AG Spitzer launched his attack against “bid rigging” and contingent commissions. Spitzer not only succeeded in getting guilty pleas from some employees, he forced the major brokerage firms to renounce the practice of taking money from companies in addition to charging fees for service to their clients on the grounds that it constituted a conflict of interest. Marsh & McLennan was not the only brokerage firm involved and required to reimburse clients. Jeffrey’s precipitous departure was said to have been engineered by the attorney general’s office, and undoubtedly it was.

Evan Greenberg, 50, took his leave from AIG in 2000 and soon became chief executive of ACE Ltd. in Bermuda. Not unexpectedly, Spitzer in his current foray, zeroed in on that offshore company and in mid-March 2005 served it with 43 subpoenas and other investigatory documents, demanding vast quantities of data regarding its practices. But the company is also being pursued by the attorneys general of other states, the District of Columbia and many state insurance departments.

Given all this skein of dismaying accusations by Spitzer, which the elder Greenberg unequivocally disputed and was apparently ready to fight, it is distressing to see him forced into the role of helpless giant. The accomplishments of a lifetime, achieved through dedication, perseverance and brilliance that created untold innovations and advancements which served the interests of the insurance business and the public on all levels, are now blemished by Spitzer’s attack. This is not to say that attorneys should be restrained from legitimate probing, nor that anyone should be immune regardless of age and stature. In the past few years, Spitzer, other AGs and the SEC have shown their mettle and investigatory resolve, and many high-ranking executive gurus across the business and financial spectrum have found that there are limits to how far the rules may be bent. In many of the instances, the rules not only were bent, they were twisted into pretzels. The media have not been starved for scandals and rogues.

Troubles in corporate America

Paced by the revelations of the Enron debacle with absolutely unbelievable manipulation, intrigue, duplicity and ineptitude shown by a large number of executives and the subsequent collapse of their enterprises, terrible questions have been raised about American corporations and their leadership. Enough has been written and spoken about the Enron disaster to shake the confidence in seemingly impregnable organizations and in their highly touted managements. If it were only Enron, it might be considered an aberration, but as the media have been reporting for well over a year, the extent of executive fraud and deception has reached into high level companies such as WorldCom, underscored by the recent conviction for accounting fraud of its former chairman, Bernard J. Ebbers. Other examples are the conviction of the founder of Adelphia Communication, John J. Riggs; the criminal prosecution against executives of Tyco; the accusation against leaders of Global Crossing for falsifying financial records; and the recent suit by the SEC against executives of Qwest Communications International, Inc., charging the orchestration of a $3 billion accounting fraud for the purpose of increasing their own compensation as well as that of others.

The amounts involved in these actual and alleged frauds reached unbelievable heights, causing severe distress to businesses, employees, pension plans (as in Enron) and many other innocent victims. Even though regulators have been zealous in their pursuit of corporate fraud, a The New York Times article, “In White-Collar Crimes, Few Smoking Guns,” observed that because the manipulations are adroit and the defenses are creative, the government, with all its investigative expertise and courtroom skills, is often unable to win convictions. The Times’ story states that while “there is no dispute that shareholders lost billions or that the company went bankrupt,” on the win side, regulators succeeded in collecting large dollar fines as well as some restitution for those who suffered loss and damage.

It is utterly amazing that these awful events have not resulted in public outcry. The letters to the editor columns, at least those in major publications viewed by this observer, have rarely commented on the seriousness of rampant frauds which rip them off. The public seems more upset over baseball players’ use of steroids and whether such use should bar them from the Hall of Fame or from credits for home run records.

Yet, what has been going on in the world of big business should have a chilling effect on how Americans put their trust in those executives who reach the high ranks in commerce and who control these enterprises which they invest in, buy from or adulate. To get a real inside view of the caliber of the executives who ran Enron, their machinations and utter disregard for the survival of the business, in favor of the millions they are able to purloin through manipulation and theft, I recommend reading Conspiracy of Fools—A True Story, by Kurt Eichenwald of The New York Times. Those who read it, and understand the elements of deliberate fraud that converted a highly successful communications company into a heap of ashes, will also learn that regulators, such as the SEC and other government officials usually do not become aware of the true status of a company until there is a whistle blower’s tip. In Enron’s case it appears to have been Ken Lay, the chairman who offered information to key government officials whom he knew.

It was probably a tip that brought Attorney General Eliot Spitzer into the Marsh & McLennan “bid rigging” probe that led him to the contingent commission practice among major brokers and to the participating companies, including AIG. Attorneys general have available to them the battering ram of subpoenas, issued by a court, that demand either the appearance of someone for interrogation or the production of whatever internal records they deem essential. In today’s cyberspace world, e-mail has become ubiquitous—an essential means of rapid communication. It also offers a record that can make it difficult, if not impossible, to dispose of revealing or incriminating evidence. That’s how Spitzer was able to win guilty pleas from employees at, for example, Marsh & McLennan and AIG in the “bid rigging” probe.

The investigation at AIG called attention to the existence of a rather long-standing system of “finite-risk” insurance that deals in financial protections. According to news reports in The New York Times and The Wall Street Journal, these unique coverages came under official scrutiny as far back as 2002 and were interpreted by regulatory authorities to be a means of disguising deficits in the accounts of insured companies. Questions are even now being raised by the regulators about a “finite” deal between AIG and General Reinsurance, a reinsurer belonging to Warren Buffet’s Berkshire-Hathaway. This “financial reinsurance” concept and its various applications are too complex for easy exposition. But Spitzer and the SEC consider it unacceptable.

That evidently is where the eruption within the AIG independent board of directors is centered. The implication is that while Greenberg had prepared confrontational arguments against the position of the New York AG and the SEC, the independent directors did not favor open warfare. The directors, probably, fearing the ability of the regulators to divert and disrupt AIG’s normal operations and possibly injure the company’s public posture and its shareholders, chose to force Mr. Greenberg to strike his colors.

Spitzer, as has been noted, is adept at forcing retirements or dismissals of those who do not cooperate to his satisfaction, Jeffrey Greenberg being a prime example. One news story reported that it took only one phone call between Michael G. Cherkasky, who succeeded Jeffrey as president of Marsh, and Spitzer, to seal the $850 million fine assessment that had been in contention. Marsh had been dickering for a $650 million penalty. It is interesting to point out that Cherkasky and Spitzer served together as prosecutors in the 1960s.

Maurice Greenberg, a veteran of the WWII D-Day landing, who also served in Korea, has an outstanding record of public service, including international trade. He has been sought after as a speaker at conferences around the world and has been involved in legislative and governmental affairs. Possibly a feeling of invincibility of his leadership role at AIG brought about the final confrontation with the independent directors. An imposing presence, Greenberg was quick to grasp concepts and to offer articulate responses to questions and challenges. His departure constitutes the end of an era, because few of today’s top insurance executives started their careers and advanced through the ranks of the business.

Greenberg occupied an insurance pedestal. Too bad he did not step off of his own volition. *

The author
Emanuel Levy, editor of Insurance Advocate from 1958 to 2004, joined the weekly insurance news magazine in 1946 after serving with the United States Army. He has appeared as a speaker at meetings and seminars across the country sponsored by producers and other industry associations, and is the recipient of many awards and citations. He served on the faculty of the College of Insurance for the annual orientation course for incoming insurance regulators and staff members, lecturing on the debate over state and federal regulation of the insurance business. He wrote insurance articles for the Economist Magazine, and for many years was insurance section editor of the World Book Encyclopedia’s annual historical review book.