Sunday, March 29, 2009


Years ago I wrote an article for a business magazine about the CEO of a company that remanufactured engine parts for jets. He had received word that 11 airline jets, some of which contained parts supplied by his company, had been grounded. The groundings were due to engine problems, the causes of which were at that point unclear.

When he received word of the groundings, the CEO was about to sign his annual financial-audit papers. These papers, which the CEO must sign, include a statement that he does not know of any issues that would adversely affect the financial condition of the company.

Should he sign the audit papers or not? All he had, after all, was incomplete information on the jet groundings. What if it turned out that it wasn't his company's parts that had caused the problems, but he caused a panic among his lenders by raising the subject at all?

The first lawyers he consulted advised him to note the jet grounding in the statement. Dissatisfied with this response, however, he consulted another set of lawyers. This time he got the answer he wanted: Don't report the incident and go ahead and sign the papers.

While many readers disagreed with me, I thought then -- and think now -- that the CEO had made the wrong decision. If there was the remotest cause for concern about other jets which used his company's parts and were still in the air, I believed, he had an obligation to make passenger safety his highest priority, even if that meant raising an alarm by reporting the groundings.

His ability to find lawyers who would give him the advice he was looking for strikes me as particularly salient in light of the recent brouhaha over the $165 million in bonuses that have been paid to AIG executives, despite the fact that the company would have collapsed if it hadn't received almost $200 billion in federal bailout money.

The bonuses had to be paid to retain top employees who could turn around the company, one explanation ran, ignoring the fact that 52 of those employees, people whose bonuses had totaled more than $33 million, had already left the company.

Last fall, shortly after the initial bailout money -- a now-trivial $85 million -- had been doled out to AIG, it was reported that the company had spent $440,000 on a California spa retreat for its executives. Strong public outrage greeted the revelation. The sequel, the bonus blowup, has proven even more controversial, enough to draw personal criticism from the president of the United States.

It need hardly be said that to accept a hefty bonus when the company's performance has been so dismal as to place it on the verge of bankruptcy is unethical on the face of it. Virtually nobody at AIG had the kind of year that merits a bonus.

The unethical conduct does not necessarily stop there, however. Apparently the bonuses were a matter of contractual record, and anyone running a company in financial trouble -- and the federal government now owns 80 percent of AIG -- should make it his or her business to be aware of proposed outlays of this magnitude.

The bailout was intended to keep a major company afloat as it found a responsible way to right its business affairs. It wasn't meant to buy new country houses for its executives. Those in the federal government who didn't care, didn't know or made it their business not to know how AIG intended to spend the money fell short of their ethical obligations to AIG, to the Congress and to their ultimate bosses, the taxpayers.

Mind you, like the airplane-parts executive I wrote about, the bosses of AIG ought to have reported this potential problem rather than waiting for it to hit the newspapers and splatter even more egg on their faces. In the current climate, it didn't take a business wizard to tell that people weren't going to be very pleased with the idea of failed executives taking home huge bonuses.

c.2009 The New York Times Syndicate (Distributed by The New York Times Syndicate)


M. Lawrence said...

This reminds me of the classic Arthur Miller play "All My Sons" which, as those who know it will remember, involved an aircraft engine parts maker who pretended not to know that cracked parts were being shipped, and several young WWII pilots died as a result. Jeff, you were right on about this. The fact that this CEO went looking for lawyers to tell him what he wanted to hear exposes the cracks in his own ethical shell. (Funny how we're not surprised that he could find lawyers to tell him to pretend not to know.)So if it ever does come back to bite him, he can always say, "It's not MY fault - my lawyers advised me, etc., etc."
In a poetic way, it's also a reminder of how relevant the Garden of Eden allegory really is. Once we know something (eat the fruit of the Tree of Knowledge) we can't go back to not knowing. What we do with the knowledge we have is the test, as I see it.
I'm sure that CEO thinks the bottom line is all about money. I think the bottom line is that he was being tested and he failed.

toronto condos said...

There are many issues connected to this scandal, of which two issues I find crucial.

One of the is to decide for myself, if the bonuses wouldn't do better if paid, in fact, since the appearances of the DeSantis open letter of resignation. I still haven't decided on that myself.

The second issue, however, is much more important in my eyes, and that is the way the politician behaved during the whole scandal. Here I have made up my mind for sure. This article here shows exactly what I mean.

Take care, Elli