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

See all articles by P. M. Vasudev

P. M. Vasudev

University of Ottawa - Common Law Section

Date Written: June 29, 2009

Abstract

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

Vasudev, P. M., Default Swaps and Director Oversight: Lessons from AIG (June 29, 2009). Journal of Corp. Law, Vol. 35, June 2010, Available at SSRN: https://ssrn.com/abstract=1427529

P. M. Vasudev (Contact Author)

University of Ottawa - Common Law Section ( email )

57 Louis Pasteur Street
Ottawa, K1N 6N5
Canada
613-562-5800 (Phone)
613-562-5124 (Fax)

HOME PAGE: http://commonlaw.uottawa.ca/en/people/vasudev-pm

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