Corporate Culture on the Example of AIG - Essay Example

? Introduction Corporate culture shapes up the working practices, behavior and even ethical conduct of the employees within an organization. However, when this culture gets plagued by defective policies, faulty leadership and subdued organizational objectives, demise of the company is sure. Similar happened with American International Group (AIG) - one of the world’s leading insurers. This case analysis is built up at delving deep into corporate culture factors which paved the way for AIG’s doom, conduct of AIG executives worsening the situation and alternative route AIG could have taken to prevent its downfall. Role of AIG’s corporate culture in its downfall Corporate culture of a firm constitutes the environment in which employees work, rules and regulations which mold their working practices and even the leadership under which employees learn to differentiate between right and wrong. AIG’s culture was not up-to-the-mark in terms of true leadership, correct human resource policies and even ways and means to capture and exploit business opportunities. Hank Greenberg, the CEO of AIG was into lobbying and made use of back-door tactics to get hold of contracts and business leads. His ethical philosophy was misleading from the very beginning of his youth when he used to violate rules while he was in army. Activities which were not allowed by senior officials were done by Greenberg silently and he supplied the proof of doing something different to army officials (Jennings 19). This instance makes clear that Greenberg was a man who did not care about ethics. He had his own way of doing things which he himself wished to, and also maintained a pseudo personality ready to pretend that he is abiding by the rules. As such, under his leadership, the employees of AIG too developed this habit of fulfilling their personal interests and supplying wrong information and proof to the outside world that everything is under control. Moreover, culture at AIG was not one that placed greater emphasis on company’s mission. It focused on profits and growth first. Stakeholder wealth management principle came second. This is evident from the fact that AIG employees were paid bonuses and incentives for their excessive and unnecessary risk taking activities. Dazzled by short term gains and exponential growth, the company and top management overlooked what it owes to its investors, shareholders and stakeholders. Before any growth comes the benefit of people whose money is with the company. Rewarding system at AIG was crippled as it encouraged unethical risk taking endeavor of its overexcited employees of Financial Products Division. The corporate culture at AIG was developed into a form that had started taking undue advantage of its reputation and standing in the financial market. High-profile joint ventures, global outreach, revolutionizing business concept and astronomical growth in the beginning- all blinded the officials and employees at AIG to move ahead at lightning speed without conforming to the risk management rules and ethical compliance obligation. It did not offer complete disclosure of credit investment information, entered into risky ventures, came up with a host of derivatives and products and get itself engaged in deals and businesses which seemed lucrative superficially. Lack of transparency, complete disclosure and complex jargon of financial market mislead the public at large. This was all attributed to how employees at AIG were learning from its leaders, how their compensation plan was devised which did not account for risks but only unaccrued income. Lastly, stakeholder wealth maximization principle was totally lost from the corporate charter of the company. Ethical conduct of AIG executives Jennings (15) highlights multifarious unethical behavioral dimensions which lead to an ethical breach of duty. At AIG, these dimensions were numerous and have reached to a very high level- level which was irreparable and punishable. The executives not only presented misleading and false impressions, but also gave preference to personal interests over corporate mission. Greenberg himself was involved in acts of personal decadence which was inherited by his employees. One more serious handicap of ethical conduct policy at AIG was that everyone could see breach of ethics but everyone was also condoning to report such shameful behavior. It was like a following-the-crowd behavior where the philosophy was, “when everybody is making money, why shouldn’t I?” Executives were in a way promoted for their unethical behavior by means of incentives. They were following what was legal, but not what was ethical. They kept on relying that if they are doing wrong; let the ethics policymakers correct them. Till the time it is done, they will follow the parameters of law and not ethics. Greenberg’s allegation on the overall financial system, accounting practices and external factors reveals another facet of the ethical behavior of employees at AIG where the entire blame is put on the broader system and one escapes by saying he/she is making up for deficiencies in the system. What could AIG have done differently? Woes of AIG stemmed from governance of corporate remuneration, excessive risk taking, maintaining quality of Board and not involving external parties and auditors in its strategic decision making. In order to prevent what happened, AIG could have: Just performed with equity or insurance instruments. Even though subprime market seemed lucrative, it should not have crossed the minimum reserve limit and not operated with derivatives on leveraged instruments. Further, they did not even do proper homework as to market research, credit worthiness of home loan debtors and functioned with illiquid assets. Observed the tenets of transparency, integrity, objectivity and due care in its practice of executive remuneration governance (Ethics World 2011). Mismatch between regulatory constraints and decision making ability of Board and Executive power could have been resolved if short term gains have not been prioritized over long term sustenance of the firm. Aligned the remuneration of executives with level and intensity of risks the employees the firm to. Not only short term risks but also realized and non-realized risks should also be accounted for in the remuneration package of executives, especially in financial market where slight variations in market can lead to drastic changes in prices. Though implicit, but stakeholders of the firm, namely external auditors and supervisory bodies adopted slackened attitude in measuring and judging what was real and what was pretended by the AIG Board. Just like Enron Corporation, AIG also made excuses by saying that they were doing what they felt was right and did not knew any improved means of doing things. Excessive goodness or benefit signals that something big is going wrong and this was the thing which regulators and auditors could not detect well in time. Works Cited Ethics World. Executive Compensation. 29 Oct 2011 . Jennings, M. Marianne. Business Ethics: Case studies and selected readings. USA: Cengage Learning, 2009, 11-19. Read More