Default Swaps and Director Oversight: Lessons from AIG
Journal of Corp. Law, Vol. 35, June 2010
39 Pages Posted: 2 Jul 2009 Last revised: 28 Jun 2013
Date Written: June 29, 2009
Using the recent events at AIG as a case‐study, the paper tests the efficacy of the framework of contemporary corporate governance – namely, the monitoring role assigned to the boards of public corporations and an emphasis on director independence. The article refers to statutory filings, media reports about the company and statements by executives to construct AIG’s business model for credit default swaps. While these publicly available materials provide an overview of the business, it is not possible to draw a clear picture on the implementation of the principle of management by executives and oversight by the directors.
The article examines the composition of AIG’s board of directors, and finds constant increases in the number of independent directors. Juxtaposing this trend against the monitoring role of the directors presented in corporate theory, the article questions how far the emphasis on the monitoring function of the directors is suited to the ideal of promoting healthy and responsible governance. Recent theory has mostly neglected another key function of the directors – their role as advisors for the corporate business operations and strategy. It questions how far the independence of directors, which is stressed in the debate on corporate governance, is compatible with a meaningful role in their business advisory function.
Overall, the article identifies significant gaps in the framework of governance in current corporate theory, and advocates:
* A more judicious mix of executive and non‐executive directors on boards, * Better articulation of the role of boards and a greater emphasis on their involvement in business strategy and planning, and * Development of an effective standard of care for the directors as a principle that informs the governance of business corporations
Keywords: Corporate governance, disclosures, AIG, board of directors, independent directors, board monitoring, standard of care, duty of care
JEL Classification: B21, D21, D23, K22, K41, M14
Suggested Citation: Suggested Citation