American International Group (AIG) - Research Paper Example

American International Group (AIG) Abstract The financial crisis of 2008-2009 has been widely regarded as one of the worst phases of economic growth. The period saw sharp decline in the economies of advanced nations like USA. This phenomenon began in USA with the emergence of sub-prime crisis and soon engulfed the entire world into a recessionary environment characterised by bankruptcies and fallouts. The present study tries to analyse a business problem that occurred during these periods. The company selected for study is AIG. AIG or American International group was one of the global leaders in insurance till 2008, when the company was on the verge of being declared as a bankrupt. In the present study, five aspects would be used to analyse and provide solutions to a business problem. These five aspects are ‘Position, Sense, Uncover, Solve and Achieve’. The first part deals with position analysis where a brief study of the company’s business profile has been undertaken. ‘Sense’ analysis involves a study of certain problems plaguing the company. Subsequently ‘uncover’ analysis has been carried out which sheds light on the origin of the business problem. The next part of the study involves a ‘solve’ analysis which would present the strategies for addressing the problem. In the following chapter ‘build’ analysis would be carried out which would feature the possible advantages of using the strategies framed in the previous topic. Finally the study would conclude with an ‘achieve’ analysis that would show the manner in which the strategies would be implemented in the given time frame along with techniques to review the effectiveness of the strategies in achieving their objectives. Position Company Profile American International Group better known as AIG in the global parlance, is one of the world’s most renowned organization offering insurance based products to its customers. The company has its business operations in about 130 nations spread across the globe. Customers of AIG include commercial, individual and institutional clients based in various nations. AIG provides life insurance and retirement solutions to its valued clients. The organization is listed on the bourses of the New York Stock, Tokyo and Ireland stock exchange (AIG, “AIG’s Story”). Corporate Vision of AIG The corporate vision statement of AIG is “to be the world’s first-choice provider of insurance and financial services”. The organization aims to generate the best value proposition for its customers, employees, partner as well as the stakeholders in an attempt to contribute valuable inputs for the growth, prosperity and sustainability of communities around the globe (AIG-a, “Our Vision”). Values The values of the organizations are stated below: 1. People (Developing talent and rewarding excellence) 2. Focus on customers (Anticipating customer’s priorities and exceeding their expectations) 3. Performance (Accountability, risk management, enhancing organizational strength) 4. Integrity (Honesty) 5. Respect (Giving value to peers and collaborative association) 6. Entrepreneurship (Grabbing opportunities and promoting innovation) (AIG-a, “Our Values”). The above stated value propositions forms the core of its long as well as the short term strategies. The company aims to achieve these goals through a mix of innovation and customer service. Stakeholders of the Company The stakeholders of the company include employees and the customers. The main aim of the company is to provide greater value to its customers by providing them quality service. The organization also promotes innovation as it believes innovative products and services would help in achieving long terms goals of the organization. The company was adversely affected by the financial meltdown in US during 2008-2009. The impact of the crisis was more pronounced on its profit margins and share price, which dropped to historically low levels. The implication of the crisis on the company was so intense that it was on the verge of bankruptcy when the US government came to its aid. The US government proposed a bailout package for the organization which saved the company from being declared as a bankrupt organization. Following the course of recovery the company in its recent statement stated that it would repay the obligations of the US government. In the wake of recent crisis, thrown up by the global recession, the company adopted a set of objectives to re-emerge as a major player in the insurance sector. These objectives include repaying the debt obligations of the US government, enhancing the enterprise value of the company by consolidating its domestic and international business, reducing levels of operating expenses, reducing the company’s exposure by winding up its dependence on derivatives and other risky financial assets (AIG-b, “Restructuring and Rebuilding”). Sense AIG’s problems started with the financial meltdown of the US economy which resulted in bankruptcy and closure of the once corporate bigwigs of Wall Street like Lehman Brothers, Freddie and Fannie Mac. AIG also faced the heat of global economic crisis which engulfed almost all the nations of the world. The company was on its verge of declaring bankruptcy when the US state Government came to its rescue with a massive bailout package. Some of the other issues faced by the company are as follows: 1. Repayment of the debt taken from the US Government as a bailout package. 2. Handing the issue of accounting disclosures 3. Repositioning the image of the company that has of late received a severe beating due to the scandals and the impact of financial crisis. The study would try to analyze the issue of repositioning the image of the company whose brand image has received a severe beating due to the impact of global financial crisis and accounting scandals. Analysis The accounting problems of the company began in the year 2001 when the Securities Exchange Commission learnt that the company had undertaken a fraudulent transaction by manipulating the balance sheet and offering favours to a certain client. The SEC imposed a Ten Million US Dollar fine on the company along with court proceedings in which rigging based petitions were filed against AIG and its other associates who were involved in the scandal that rocked one of largest insurance firms of the world. In the year 2005, the company stated that it had committed a serious fraud by not terming a reinsurance deal as a deposit in the balance sheet. The scandal led to drastic consequence for the company where it suffered net losses worth US $ 1.32 Billion (Young, p.13-14). The following parts of the study would try to analyse the problem statement of the company chosen for the study. It would also suggest a plausible set of recommendations for the company to find a solution to the crisis situation. Uncover Problems at AIG began with the advent of the sub-prime crisis in USA. The sub-prime crisis and the subsequent global meltdown were the main reasons for the current problems in the company. Apart from core insurance based products AIG also had a range of other financial products. One such product category was credit default swaps: these were basically used by different organizations to protect themselves against the default of certain securities. Most of these instruments were highly rated (AAA) by credit rating organizations. The problem of the company started when the mortgage based residential market began to fluctuate. This affected the valuation of these securities whose stock values began to deteriorate rapidly. As a result of the problems in valuation, AIG suffered huge losses in the form of unrealised market valuation. The decline in valuation of the swaps also increased the cash requirements of AIG which took a toll on its revenues. AIG also suffered unrealised losses from its lending programs. The company was known to invest its resources in mortgage based securities of the residential sector. These investments were made in the form of short terms loans of various securities. The collapse of the mortgage business led to a sharp downfall in the fair value of its investments in the real estate category. Problems of the company compounded with the collapse of large organization like Bear Sterns, Lehman Brothers and Freddie and Fannie Mac. The future dates saw tightening of the economy which led to the deterioration of the credit market in the nation. In September 2008, AIG’s credit rating was further downgraded which led to a cash crunch of approximately $ 20 Billion. The company was faced with an acute cash shortage to meet its debt obligations and was on the verge of being declared as a bankrupt organization, when the US Government came out with a massive bailout package for the company to bring it out of the present financial crisis (AIG-c, “Pre-September 2008: The AIG Crisis”). The crisis situation at AIG had a severe impact on its positioning, both in the minds of the customers as well as the employees. Its image took a severe beating when the company paid attractive bonus and other benefits to its top executives at a time when the firm was on the verge of declaring bankruptcy. According to a report, AIG had spent approximately $ 165 million as perks to its senior executives. This enraged the taxpayers, whose money was intended to bail out the company was being used to satisfy the greed of its top officials and senior executives. These actions reflected lack of values and scanty regards of the company towards its stakeholders (Foley, “The Ultimate Cause of AIG's Problems”). The dramatic turn of events at the company not only created a bad image in the mind of the customers, it also had tremendous effects on its employees as well. Present and prospective employees found the organization unattractive to pursue their future career interests as they believed that the organization had become increasingly tainted. Most of its employees started to look out for careers openings in other firms as they did not have any faith on the organization’s leadership in repositioning the organization. Massive attrition was reported from the company whose employees even opted for lower pay packages in other organizations as they viewed the environment at AIG highly unstable for pursuing their careers interests (Price Water House Coopers, p.2). The analysis of the problems at AIG reveals the need for a complete change in the organization structure of the firm. Corporate Restructuring is one aspect that can largely help the company in regaining its lost image. Certain other possible solutions could include aspects like change in organization structure from a vertical structure to a horizontal structure and implementing a ‘change management’ process in the organization. Solve In order to craft a successful repositioning of the company, it should adopt a ‘change management’ strategy. A change management strategy is defined as the strategy that organizations undertake to initiate a complete change in the management structure of an organization. The choice of this strategy assumes importance since the analysis of the problems reflects the short sightedness of the top management of the company in dealing with a problem. It also displays considerable disregard of the top management towards stakeholder’s values and interests. The recent accounting frauds further cemented the negative image of the company’s top management. This calls for the need of a complete change in the top management of the organization. An effective change management process includes the following components: 1. Communications 2. Involvement of the individuals 3. Proper Discussion (Gustin, p.209). The company can also initiate a change in its organizations structure. Presently AIG operates using a vertical organization structure (Holtzman, “The Economic Crisis and Organizational Structure”). This form of organizations structure leads to a considerable gap in between the top management and the ground level executives. It also leads to delays in decision making as information passes through multiple levels. The choice of this strategy also assumes significance as AIG is presently operating under highly turbulent phases which generate the need for faster decision making which is not possible in a vertical organizational set up. The adoption of a horizontal organization structure would help in quicker decision making. It would also lead to the involvement of lower level executives in the decision making as it would impart greater responsibilities on the employees to perform and increasingly view their tasks as responsibilities rather than routine work. The adoption of this strategy would help in motivating the employees of the organization whose morale has taken a severe beating after the crisis at the organization. It would also make room for greater accountability of the top level management with regards to their commitment towards ensuring the interests of the shareholders. Build The strategies mentioned above also require considerable expenditures on the part of the organization. Hence, it becomes imperative for organizations to conduct a cost benefit analysis of the strategies that have been implemented. The process of reforms at AIG would require a huge cost as implementing a transformation of the management would include business process reengineering, promotions etc. Cost accountability also assumes significance as much of the resources would be drawn from the bailout package which is actually taxpayer’s money. In spite of the cost incurred, it would be beneficial for the company to implement a ‘change management’ policy. This is because the company is in dire need of repositioning which can be only implemented if there is a change in its management system. Moreover, the recent actions of the top management have reflected the attitude of the top management with regards to their scant regard for company values and ethics. The change at the top management level would introduce a new spirit in the organization which would help in bringing about changes needed to revive the organization. Achieve The process of initiating and implementing a ‘change management’ requires considerable efforts on the part of the employees and the management. The process requires a time bound action plan along with repeated analysis of the outcomes of the strategies that are to be implemented in the organization. The initial years would include group formations. Sufficient freedom must be provided to the groups with regards to decision making. After a possible feedback, the process should be spread out to the entire organization. In the next stage, the number of hierarchical levels should be reduced so as to lower the number of intermediaries between the top management and the individual employees. Steps must also be taken to ensure that different department are integrated so as to ensure smooth flow of information. One of the most important aspects in the entire process is feedbacks. Since the process of change management is very crucial and time taking, hence feedbacks assumes considerable importance. Analysing feedbacks would help in getting information about the negative points of a particular process. Timely action could hence be taken to ensure the effectiveness of the project. The Balanced Scorecard Approach represents a technique which could be used to analyse the effectiveness of the strategies that are being implemented. Balanced Scorecard Approach was introduced by Kaplan and Norton. The main aspect of this tool was that it included the non-financial aspects while analysing the performance of a particular process. The four perspectives of a balanced scorecard approach are stated below- 1. Financial perspective 2. Customer perspective 3. Internal Business Framework 4. Growth and Learning (Kaplan & Norton, p.25). The use of Balanced Scorecard Approach would help in getting periodic feedbacks. The inclusion of financial, non financial as well as customer perspectives would help in getting a holistic review of the strategies that needs to be adopted and implemented by AIG in repositioning its image in the minds of the customers and stakeholders, so as to make it an attractive destination for investment. References AIG. About AIG. 2010. AIG’s Story. November 3, 2010 < http://www.aigcorporate.com/aboutaig/index.html>. AIG-a. Code of Conduct. 2010. Delivering on our Commitments. November 3, 2010 . AIG-b. Restructuring Progress. 2010. Restructuring and Rebuilding. November 3, 2010 < http://www.aigcorporate.com/restructuring/keyrestructuring.html>. AIG-c. About AIG. 2010. Pre-September 2008: The AIG Crisis. November 8, 2010 < http://www.aigcorporate.com/aboutaig/pre_september_2008.html>. Foley, J. Leadership. 2010. The Ultimate Cause Of AIG's Problems. November 8, 2010 < http://www.forbes.com/2009/03/19/aig-failure-sullivan-leadership-governance-soul.html>. Gustin, J.F. Safety Management: A Guide for Facility Managers. The Fairmont Press, Inc. 2008. Holtzman, Y. Vision to Reality: The Reut Blog. 2009. The Economic Crisis and Organizational Structure. November 8, 2010 < http://reut-blog.org/2009/01/01/israel-economic-crisisaig-edward-liddy-organizational-structure-reut-institute/>. Kaplan, R.S & Norton, D.P. The balanced scorecard: translating strategy into action. Harvard Business Press. 1996. Price Water House Coopers. Bermuda Insurance Quarterly. 2009. Bermuda firms pick up AIG pieces. November 8, 2010 < http://www.pwc.com/en_BM/bm/publication/assets/BIQApr09.pdf>. Young, D.R. Actuarial Accounting: A Cautionary Report. 2009. How AIG Came under Scrutiny. November 4, 2010 < http://www.casact.org/education/spring/2009/handouts/young.pdf>. Bibliography Robitaille, D. Root Cause Analysis: Basic Tools and Techniques. Paton Professional. 2004. Read More