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The Chairman
Victor Niederhoffer

3/15/2005
CEO Resignations

Quote of the Day: "You don't look at a claim and automatically say something happened, therefore it has to be paid." -- Charles Schader, AIG senior vice president and chief claims officer (AIG's Greenberg Felled as Probes of Insurer's Practices Mounted, Bloomberg News)

Today's announcement that Hank Greenberg's "resignation as CEO" brings to mind the many times that my partner Dan Grossman and I have vowed that we would never buy an insurance policy from that entity because when you have a claim they have a million attorneys who will fight you tooth and nail. One has to admire, however, the tenacious way that Hank responds to criticism, saying things like "What the Hades is wrong with you that you would question our transparency? You talk to any capable analyst!" Or, " We have 250 compliance officers around the world. We have a whistleblower phone."

I am also reminded of the many business associates I have had who were too smart by half. Greenberg guided the company into such things as kidnap and ransom insurance, corporate board liability coverage, finite coverage insurance (with the Sage himself, but don't worry about the Sage -- he's anti-Bush), and a willingness to cover almost anything at the right price.

But there is opportunity in disaster. I found this out first hand after my own debacle in 1997 when a million vulture funds immediately called me up to find out if I had any good investments I needed to sell, and whether I would accept an all-cash offer for my house.

Googling the subject "resignation as CEO", I find 1,730 references. For "step down as CEO,"  6,140 references (I particularly liked, "Eric B will step down as CEO of 3Com in a move that could be seen as the end of a year-long tumultuous restructuring program"). What's needed is a study of such companies' performance after the resignation announcement, classified by price move before the announcement, day of the announcement and degree of tumult of the investigation to date.

(We have a similar study going on here by our newbie, "Mr. Dude" Pomada, of performance relative to Wells notice receipts).

Philip J. McDonnell adds:

Robert Parrino of the University of Texas has studied CEO succesion and found that companies whose CEO left underperformed the market by 6% in the three years before the succession. For the 3 years after the succession they underperformed by 3%.

Some of his published papers:

M. Huson, P. Malatesta, and Robert Parrino. 2003. Managerial Succession and Firm Performance. Journal of Financial Economics.

Robert Parrino, Richard W. Sias, and Laura T. Starks. 2003. Voting With Their Feet: Institutional Ownership Changes Around Forced CEO Turnover. Journal of Financial Economics 68, 3-46.

Robert Parrino. 1997. CEO Turnover and Outside Succession: A Cross-Sectional Analysis. Journal of Financial Economics 46, 165-197.

Parrino's web page

George Zachar notes:

The WSJ C1 piece "How a Hot Insurance Product Burned AIG" makes five references to Berkshire and zero to the Sage.

No story this damning during GE's glory days would have been written without at the very least a passing reference to Jack Welch, the oh-so-public face of the firm.

Ditto Disney/Eisner. Or Microsoft/Gates-Ballmer.

Like the dog not barking in the Holmes story, this is darned suspicious.

Dan Grossman augments with an baseball analogy:

With Maurice "Hank" Greenberg likely as not to stay on as non-executive Chairman, and controlling the three Starr entities that own more than 15% of AIG stock and with the support of other large stockholders, and having the power to depose Sullivan if he decides his choice of successor was a mistake, and being a well-known control freak who has micromanaged the company since 1968, perhaps this CEO departure will be a little different from the others.

When a manager is ejected from a baseball game, it is said that he usually continues to manage from the alleyway behind the dugout.

V. F. adds:

You hit the nail on the head with AIG's payment practices.  Last October, my fiance was in a minor fender bender with an AIG-insured driver.  Nothing more than a simple $400 claim for repairs we paid out of pocket and that the AIG appraiser approved.  So we have in hand the appraiser's report and a police report showing the covered party at fault -- and I am into my fifth month petitioning the company and filing protests with the state insurance department to receive payment. The way they are acting, you would think we were trying to resolve some highly controversial claim subject to legal interpretation. The worst claims settlement I've ever experienced.

Larry Williams comments:

DELAY
DENY
DON'T PAY

Heard directly from the mouth of the president of an insurance company, so I refused to do non-related insurance business with him. That's the attitude of a hustler, not a businessman.