Count me amongst the people that were shocked by the AIG bonuses that came to light earlier this week. Having practiced in corporate bankruptcy for the past several years, it never fails to surprise me that so many struggling companies make large “bonus” payments to their executives, during a time in which the company is losing money and clearly heading for bankruptcy.
As a company begins to suffer financial losses and heads towards bankruptcy, the company’s executives have two options. They can forego bonuses and excess compensation in an attempt to keep the company solvent, or they can grab whatever they can before the company tanks. The problem facing our society right now is that executives in many large companies have no real ownership stake in the company in which they work. While “stock options” may provide some ownership interest, as stock prices of failing companies begin to plunge, the executives’ interest in seeing the company make a profit begins to fall as well. Since greed is always a strong motivator, the executives often begin to focus less on helping the company and more on helping themselves (i.e. overpay themselves now so that they can survive once the company is in bankruptcy and they are out of a job).
Fortunately, under bankrutpcy law, the trustee of a bankrupt debtor can sue the debtor’s former officers and directors for any excessive salary and/or bonuses they received during the one year period preceding the bankruptcy filing. Say what you will about the policy behind “preference actions” (a policy which I’ve criticized many times before), at the very least they provide an incentive for the executives to follow their fiduciary responsibilities to the company, instead of their selfish desire to overpay themselves.
If AIG ultimately fails and ends up in bankruptcy the consequences to the overall economy may be pretty bad, but at least the bankruptcy trustee will target AIG’s former executives and their undeserved bonuses.
Scott Schuster, Esq.