AIG Board's Pay Panel Falls Under Shareholder Fire

By JOANN S. LUBLIN and SUDEEP REDDY

Shareholders are taking aim at the board of American International Group Inc.

Activist investors hope to block the re-election of AIG director James F. Orr, chairman of the board compensation committee, in a move that poses a test for the three little-known trustees who control the U.S. government's nearly 80% stake in the tottering insurance titan.

Officials representing big union and public pension funds wrote the trustees late Tuesday, urging them to unseat Mr. Orr, saying he failed to adequately oversee $165 million in retention bonuses approved in early 2008 that sparked a firestorm in recent weeks. The bonuses were paid to employees in AIG's Financial Products unit, which was responsible for the financial transactions that led to the company's woes.

Mr. Orr, a retired chief executive of Unum Corp., joined AIG's board in 2006. He couldn't be reached for comment Tuesday. The pension funds aren't seeking to unseat three other members of AIG's compensation committee because they joined the board last year, said Richard Ferlauto, director of corporate governance and pension investment at the American Federation of State, County and Municipal Employees union, or AFSCME, which is one of the letter writers.

AIG's unusual corporate governance set-up, including the three powerful government trustees overseeing the corporate board, is an outgrowth of the U.S. rescue of the giant insurer. In exchange for a sizable stake, the government offered an $85 billion loan so AIG could avoid imminent bankruptcy last September. The government later appointed three trustees, and in early March the voting rights for the nearly 80% stake transferred to them. Now, the AIG board is accountable mostly to the trustees representing U.S. taxpayers but also to the other shareholders owning the remaining 20% stake. AIG's board remains largely intact since the September rescue.

The letter to the trustees comes from Gerald W. McEntee, president of AFSCME; Richard Trumka, secretary-treasurer of the AFL-CIO; and Denise Nappier, treasurer for the state of Connecticut. AFSCME members belong to public pension systems that hold about 3% of AIG shares not owned by the government, according to the union.

The funds had also planned to target a second member of AIG's compensation committee, Virginia M. Rometty. But AIG said Tuesday that Ms. Rometty, an executive at International Business Machines Corp., and fellow outside director Michael H. Sutton, a former chief accountant for the Securities and Exchange Commission, won't stand for re-election at the annual meeting this year.

The letter also recommends the trustees cast an advisory vote against AIG's 2008 compensation practices. The insurance company is required to give investors such a "say on pay" vote as part of its government bailout.

AIG's annual meeting will be May 13. An AIG spokeswoman declined to comment.

It is unclear when the 11-member AIG board learned about the bonuses. The bonus plan was approved in early 2008 by the board of the Financial Products unit, a person familiar with the matter has said. The full AIG board was told of the plan but didn't vote on it, that person said.

Harvard University economist Martin Feldstein was a director of the Financial Products unit at the time of its vote; he remains on the AIG board. He didn't return a call for comment Tuesday.

The trustees, who each are being paid $100,000 a year, have operated largely in obscurity since their mid-January appointment. They by and large haven't been targets of criticism over the bonus flap, in part because they didn't take control of the voting shares until early March.

The trustees are Jill Considine, Chester B. Feldberg and Douglas L. Foshee. Ms. Considine is a former chairman of Depository Trust & Clearing Corp. Mr. Feldberg is a former chairman of Barclays Americas. Mr. Foshee runs El Paso Corp.

A lawyer for the trustees, Kevin Barnard of Arnold & Porter LLP, said they haven't made any decisions on how they will vote the trust's shares.

"They're considering how they ultimately will vote on a number of issues, including a shareholder proposal on compensation policy," he said.

The funds seeking Mr. Orr's defeat have submitted a resolution suggesting that senior AIG executives hold a significant percentage of equity awards until two years after they leave.

The trustees enjoy wide latitude to make decisions about AIG's board and corporate-governance practices. They are expected to vote on AIG directors and shareholder proposals at the annual meeting. They "have a legally binding obligation to exercise all their rights as majority owner of AIG in the best interests of the U.S. taxpayer," said William Dudley, president of the New York Fed, in recent congressional testimony.

At a recent congressional hearing, AIG Chief Executive Edward Liddy acknowledged meeting the trustees "on a number of occasions" but struggled to come up with their names.

Meanwhile, AIG is revamping the compensation packages for its independent board members. AIG's nine outside directors received cash fees in 2007 ranging from $93,750 for Ms. Rometty to $275,000 for then-chairman Robert B. Willumstad, the 2008 proxy statement said. Starting in May 2007, these directors also began receiving $125,000 of deferred-stock units annually.

The directors, along with full-time staffers at the company, won't get stock grants this year, one person familiar with the matter said. A second person said the board also may cut its cash fees. They "are going to look at the whole thing," that person added.

Write to Joann S. Lublin at joann.lublin@wsj.com and Sudeep Reddy at sudeep.reddy@wsj.com