Aging and ailing in the late 1960s, Starr needed to identify a group of colleagues who could lead C.V. Starr & Company into the future. From among that group, his successor would be chosen. Through late 1967, Starr’s senior executives met regularly to discuss the future of the organization, often gathering late into the night at Starr’s tastefully decorated office at 102 Maiden Lane. Starr’s heir apparent had long been Youngman. To lead the reorganization effort, Starr floated the idea to create a new post of AIRCO vice chairman and pondered whom to promote into it. Youngman was not sure such a new post was needed; if it were created, however, he was sure that Tweedy was the best choice and recommended him to Starr.
Starr asked Greenberg to accompany him from New York in the company plane for an AIRCO board meeting in Hamilton, Bermuda. During the flight, Starr seemed focused on preparing for the meeting while Greenberg attended to his own work. Starr gave no hint of what the trip would bring. At the board meeting, while Greenberg was working in a separate office nearby, Starr proposed that Greenberg should be AIRCO’s new vice chairman. The board concurred. Though this disappointed Tweedy, it floored Youngman, who felt that Starr had rebuked his endorsement of Tweedy without giving him fair notice.
That evening, the senior executives were gathered with other AIRCO managers for a cocktail party at the Hamilton villa of Ernest E. Stempel, who had become the group’s expert on life insurance. Starr stood, raised a glass of pink gin, and announced to the group that he had nominated Greenberg as AIRCO vice chairman and that the board had approved the nomination. The gathered crowd applauded, but the news caught everyone by surprise, flattering Greenberg, while embarrassing Youngman. Youngman pulled Starr aside to complain, suggesting that AIRCO was worth less than the price it traded for in the over-the-counter stock market.
Later that night, Starr asked Greenberg and K. K. Tse, his longtime accountant and top adviser, to come to his suite at the Bermudiana, a luxurious resort where Starr always stayed when in Hamilton. Clearly upset at Youngman’s impertinence, Starr instructed Tse to assemble the financing needed to buy back Youngman’s AIRCO shares. There was a concern: if Youngman were named Starr’s successor, he was more likely to arrange to sell off the Starr organization, piece by piece, than to continue to reorganize and grow it. Starr was looking increasingly to the young Greenberg to lead C. V. Starr & Company into the future rather than pass the reins to Youngman or Tweedy. In response, Youngman began to take the cues; Greenberg gained increasing leadership responsibility and demonstrated his interest in creative, disciplined growth for the firm.
Youngman soon made official what had become a fait accompli. He reported his intention to seek early retirement from all his positions in the Starr organization. In a letter addressed to Starr, he wrote: “Things seem to be a little prickly between us, and no way am I going to fight with you. I’ve made a fortune and I think I’d better retire.”1 Youngman offered to sell his AIRCO shares to C. V. Starr & Company. Starr said he would consider the offer and asked the board to do the same. Stempel agreed to negotiate with Youngman about this. Before negotiations could be concluded, however, Youngman sold a significant block of his AIRCO shares to Victor Hurd of Continental Insurance—the rival, former insurer of the Archdiocese of Boston. Though Youngman claimed that he had first obtained Starr’s permission, the other executives were dubious.2 Some considered the sale a slap in the face. It was the first time a large block of AIRCO stock had been transferred outside of Starr’s senior executive group.
The group endorsed Youngman’s decision to retire and appreciated how it cleared the way for Greenberg’s formal ascension. On August 16, 1968, the New York Times reported that both Starr and Youngman were retiring, though Starr would remain a director of C. V. Starr & Company, and Greenberg was its new president and chief executive officer.3 Tweedy had been appointed chairman of C. V. Starr & Company (although he would shortly retire from that post). The position of chairman would remain vacant for many years, as Greenberg, at 43, felt he was too young for such a senior title.
One weekend in the early winter of 1968, Greenberg received a call at 6:00 A.M. from Starr’s valet, Lin Yu-chuen. He said that Mr. Starr would like to see Mr. Greenberg. Both men were spending the weekend at their country homes in Brewster, New York, an hour north of New York City. Starr’s home was nestled in his estate which he called Morefar, a name he excavated from his early days in China. When Starr had asked locals directions to a given destination around town, they invariably would tell him, in fractured English, that it was “more far.” Equally whimsical is the business name used for the property: Back O’Beyond, Inc.
Starr, an avid tennis player, installed several tennis courts on the grounds, as well as a swimming pool. In 1964, Starr built a nine-hole golf course for his guests. The limited technology of the day resulted in fairways that approach flat greens surrounded by carved-in sand traps. In response to requests from guests, Greenberg oversaw the addition of the back nine, completed in 1974, using the more modern earth-moving equipment that cut through acres of forest to drive rolling fairways, contoured sand traps, shallow ponds, and undulating greens.4
Starr decorated the course with 30 bronze statues that represented a dozen sculptors, including the angular chanting singers of David Aronson, the voluptuaries of Chaim Gross and, his favorite, Milton Hebald, who specialized in figurative representation of human anatomy.5 Off one pond lays a statue of a boy fishing; in a nearby sand trap, another boy flies a kite. Starr’s friend, Helen Graham Park, an architect, observed that Starr “was vastly amused when someone accused him of building the golf course so that he could have the fun of decorating it.”6
After Lin’s call that winter weekend morning, Greenberg drove from his home up the hill to Morefar. He steered his car between the stone pillars marking the entrance to the estate, turning down a long lane that led to Starr’s house. Lin took him to Starr’s bedroom, where Starr lay in bed, ashen and frail. Starr asked Greenberg to sit by his bed.
“Hank,” Starr said in a hushed voice, “I’m going to die shortly. I want you to know that I am at peace. I need not worry about the company’s future any more. Now I know things are in good hands.” Greenberg nodded, as a tear formed in his eye. Starr squeezed Greenberg’s hand while Greenberg tried to comfort the man who had recruited him just eight years earlier and provided the opportunity of a lifetime. Starr had not said much in that last meeting, but Greenberg got the sense he said what he wanted to say.
Despite his condition, Starr was planning a trip to Hong Kong that winter of 1968. His doctors advised against it and even asked Greenberg and other close confidants to intervene. But Starr would rather have died on his way to Asia than sitting idly at home. He was scheduled to fly to Hong Kong on a December 21 flight. The day before that, however, Starr died in his apartment on the Upper East Side of Manhattan.7 He left behind legions of devoted business associates and protégés worldwide, along with a few distant relatives and his estranged ex-wife.
Tse flew in from Hong Kong, met by Greenberg and Tweedy at John F. Kennedy Airport. On the drive into Manhattan, Tweedy, Starr’s personal lawyer, explained that Starr’s will named as executors of his estate the three of them, along with the other existing directors of C. V. Starr & Company, including Freeman, Manton, Roberts, and Stempel.8 These directors were Starr’s closest friends, each of whom he hand-picked for service, and entrusted them to administer his estate, valued at approximately $15 million (some $150 million in today’s dollars).9
Tse asked about the interment. Starr wished to be cremated, Tweedy said, but had not indicated what to do with his ashes. Tse suggested reposing them at Morefar. After conferring with the other directors, the group agreed and chose a site atop a hill, deep into the estate, beyond what would become the fourteenth green of the golf course. The spot was within a grove of trees and overlooked a reservoir that had reminded Starr of China. Starr had long considered building a home there, so it seemed to be the natural place for Starr’s ashes.
The entrance to the grove is flanked by two chiseled marble markers. Both are adorned, in Chinese and English, one with Starr’s name and dates, the other: “The Spirit Never Dies.” On one side of the grove, on a bluff, the memorial features a boulder under a 4 × 8 plaque with Starr’s name and dates in raised letters. Nearby, fitted into natural stone jutting out of the mountain, is a bust of Starr, which Milton Hebald, his favorite sculptor, made from memory, perched toward the front of the rock. Friends who accompanied Greenberg to the Starr memorial remarked that his countenance, once there, would change. One observed: “He looks as if he is in church—or synagogue.”
Before his death, Starr had been organizing a year-end celebration for some of his best friends and colleagues. That list included Freeman, Greenberg, Manton, Stempel, Tse, and Tweedy. The location was a hotel Starr had purchased in Stowe, Vermont, called Stowehof, a jewel of a cozy alpine New England inn. Though Starr had not taken up skiing until his mid-40s, his enthusiasm for sport and an interest in real estate led him to acquire a small ski resort in St. Anton, Austria, and what became one of the most famous resorts in the United States. Starr got into the business after he had taken ski lessons from the renowned Austrian skier Sepp Ruschp, who had immigrated to Stowe in 1936.10
Skiing at Stowe was a novelty in the period after World War II, when the mountain had a fledging business. Ruschp and Starr installed two new ski lifts and upgraded the dining facilities. For its era, the facility was state of the art and began to draw skiers to the region. By the 1950s, to showcase the results, they began to host high-profile events, including inviting the 1952 U.S. Olympic medalists to ski for a weekend. Starr’s Mt. Mansfield Company was profiled in a 1955 Sports Illustrated cover story as the leading ski resort in the eastern United States.11
Thomas J. Watson, Jr., the CEO of IBM, also a skier and denizen of the Vermont slopes, offered to buy Mt. Mansfield Company from Starr. Though unwilling to part with such a magical retreat, which was a labor of love that lost money, Starr thought Watson’s firepower worth a partnership. So he agreed to sell him a 20 percent interest.
At Starr’s funeral, the C. V. Starr & Company directors discussed plans for New Year’s Eve. They unanimously agreed that Starr would have wanted the big destination party he had planned to occur, even in his absence. So they all piled up to the slopes to pay another tribute to the man that they all continued to call Mr. Starr.
The outing mixed disaster with farce and tragedy. That weekend, government officials raided the resort, on a tip that it had been hiring illegal Austrian immigrants among the ski instructors. The staff, however, most of whom were Chinese, thought they were the targets. So they fled, leaving the executives to run the place themselves.
The next day, newly installed gondolas broke loose and tumbled along the trails, so Greenberg had to ski down the mountain to warn others and prevent injuries. One of the saunas erupted that night, causing a fire. At lunch the day after that, Greenberg sat with two children of the company’s medical doctor, Richard McCormack. The kids were eagerly awaiting their father’s arrival. A ski instructor soon whispered into Greenberg’s ear that Dr. McCormack had suddenly passed away from natural causes. It was left to Greenberg to break this devastating news to the children.
It was as if the gods were rattling.
After Starr’s death, Greenberg got a call from Tom Watson, owner of 20 percent of Starr’s beloved Mt. Mansfield Company. Watson wanted to discuss buying the rest of Mt. Mansfield, suggesting that C. V. Starr & Company would not want to own the resort anymore. Greenberg said they should discuss that. When they met, Watson acted as if there were no question but that he was buying the company. Greenberg slowed the conversation down.
“I’d be happy to hear your offering price,” Greenberg said. “But before you tell me, I want it to be the same price at which you’d be willing to sell.”
Watson nodded at the buy-sell proposal and then made his bid. Greenberg turned the tables and repurchased Watson’s 20 percent—and would spend the next two decades developing the property into one of America’s leading resorts.
During 1967 and 1968, Greenberg had formulated a new vision for the reorganization of Starr’s insurance companies—C. V. Starr & Company, AIRCO, the AIU, and the rest—and advisers were toiling at year-end to prepare the documents necessary to implement it. Greenberg’s goal was to establish one substantial company with a strong U.S. identity that would translate into a unique franchise with a defined corporate mission. Combining the various agencies, companies, and subsidiaries would create significant savings by eliminating duplicative operations such as claims processing and combining them into a single unit. The structure would help attract capital, which the growing companies needed in increasing amounts, as well as the special breed of independent and innovative managers and executives Greenberg envisioned as its lifeblood. In addition, there were still minority shareholders in many of the companies in the group, including American Home, National Union, and New Hampshire. That meant occasional difficulties in deciding how to allocate new business—to the wholly owned or majority-owned companies, for example.
It was not easy to assemble such a diverse organization under a single corporate roof. There were a vast number of different enterprises in the Starr organization, with far-flung roots and structures in scores of countries. The organization was also therefore fragile, Starr having just died, a young Greenberg in command, and a mix of assets that might appeal to assorted insurance companies or takeover artists. Such an integration could not be accomplished all at once, but every phase had to be meaningful, and the company had to be protected throughout the transition from takeover risk. So Greenberg asked the largest shareholders, together owning about one-third of the total, to sign a shareholders’ agreement restricting their right to sell shares outside the group. Most did so.
As a first step in the reorganization, in December 1968, the month Starr died, AIRCO transferred its assets—including shares in American Home, National Union, and New Hampshire, as well as the American Life Insurance Company (ALICO)—to the subsidiary Morgan Stanley had created to acquire National Union one year earlier, the one its creators called American International Enterprises. But Greenberg thought that “enterprises” sounded too speculative. Chewing it over with Matthews, still a partner at Morgan Stanley then, and reflecting that Starr and his team had always liked being part of a group, the name American International Group emerged, and AIG was christened.
The next step, completed in June 1969, was for AIG to acquire from the public all the shares of American Home, National Union, and New Hampshire that it did not already own. Matthews and M. Bernard Aidinoff, a partner with the law firm of Sullivan & Cromwell, devised a way to do that in one fell swoop: AIG would offer shares in itself in exchange for all shares in each of those three companies, using a single offering plan circulated to all target shareholders. Dubbed a “triple exchange offer,” the document describing the deal ran 200 pages, with a stack of exhibits—charters, licenses, projections, contracts—standing a foot tall.
The team’s elaborate disclosure documents described the complex array of companies involved and how the valuations of each were made. The valuations resulted in a package of securities offered to each of the target shareholders: so many AIG common shares or other securities for so many shares of each target.12 The offer worked; when AIG closed the triple exchange offer, it ended up owning 95 percent of American Home, 95 percent of National Union and 85 percent of New Hampshire. In second-step mergers, the remaining minority shares were acquired for cash, giving AIG total ownership of each.13 As a result, AIG became a public company with a relatively large number of shareholders and its shares were registered with the Securities and Exchange Commission.
Planning to implement the operational side of the transaction had been under way for nearly two years. It involved melding the operations of the three companies as well as integrating ALICO, which operated life insurance businesses in scores of countries outside the United States. Senior executives responsible for each area coordinated their parts of the business and worked to develop an integrated control system across the global businesses. They agreed on how to combine branch offices, employee training programs, claims processing facilities, investment departments, and back-office operations. As a result of that extensive planning, when the deal was consummated, the worldwide business operation became one and went into operation with few noteworthy operational errors. AIG estimated the aggregate value of the 1969 triple exchange offer at $242 million (about $2 billion in today’s dollars).14
In 1970, Greenberg led the same team that closed the 1969 triple exchange offer to design a further big step in the integration process. As a tribute to Starr, the business of the AIU was renamed Starr International Company (fondly called SICO, pronounced cee-ko); it was incorporated and most of its insurance assets put into a subsidiary. Those assets, along with most of C. V. Starr & Company’s insurance assets, were then transferred to AIG in exchange for AIG shares. The assets left out of the transaction included Starr Tech and a few other small specialty agencies, in fields such as aviation and marine insurance, not suitable for the envisioned scale of the new public company.
In the 1970 exchange, SICO received AIG shares with a market value that far exceeded the book value of the insurance assets—in the amount of $110 million. SICO and its shareholders, who were the dozen top executives that Starr had installed in his organization, were legally entitled to that amount. But Greenberg made a bold proposal to his fellow SICO stockholders: that they should not keep that value entirely for themselves but rather set it aside in a legal structure designed to ensure that the core assets could not be extracted for personal use by SICO owners.15
The AIG shares would be put in a restricted account to be used for specific limited purposes, such as rewarding AIG employees and making investments as well as securing corporate control among the closely knit group to repel hostile takeovers by outsiders. These shares would be owned by a charitable trust rather than any individual person or corporation. The SICO shareholders unanimously agreed, solidifying a sense among themselves that they—Freeman, Greenberg, Manton, Roberts, Stempel, Tse, et al.—were a “band of brothers,” fraternal partners in an exciting international insurance group inspired by the late Mr. Starr.
SICO not only used the shares for investment and other purposes, it also began a tradition of providing long-term incentives to AIG employees worldwide. Through a series of long-term profit participation plans SICO began in 1975, participants’ long-term performance were tied directly to the engine that drove value for AIG shareholders: growth in AIG’s earnings per share. Under each two-year plan, a participant could have AIG shares contingently set aside under a formula directly related to AIG’s earnings. Participants became entitled to receive such shares upon retirement from AIG at the age of 65.
By tying the contingent, long-term reward from the SICO plan to increases in AIG’s earnings, SICO developed a private company ownership mentality among outstanding employees in the public company. Participants could increase ownership in AIG without requiring AIG to issue stock, without diluting AIG’s shareholders, and without costing AIG anything. The arrangements nurtured a culture of long-term commitment and loyalty of employees to AIG that was distinctive among U.S. corporations. It also avoided the pitfalls of executive compensation practices that emerged in corporate America decades later, when executive compensation became skewed to create incentives for taking excessive short-term risk.16
AIG had no ownership of SICO, only SICO’s board could approve transfers of the AIG shares it owned, and SICO’s board always reserved the right to terminate the program for any reason. It would have terminated the program if AIG were ever required to treat the payments as compensation expenses on its books. SICO’s board sought recommendations from AIG’s senior corporate executives about which employees to reward and the SICO board had to obtain final approval of the recommendations by a vote of its voting shareholders. No one was guaranteed inclusion; even those participating in a given two-year plan had no assurance that they would be included in the next.
Though novel and perhaps inspired, the program had some parallels. Many entrepreneurs use their own stock to compensate employees of companies they own stock in, including Ray Kroc, founder of McDonald’s.17 The SICO program shared some features with what would later emerge after 1974 as employee stock ownership plans (ESOPs).18
At AIG, the program contributed to the spirit of the company in which employees and employer looked out for one another in an atmosphere of camaraderie and mutual loyalty. Through this program, many AIG employees became wealthy based on the value of their stock in AIG. To illustrate, at its creation in 1970, SICO’s stake in AIG was worth about $110 million; by 2005 it was worth $22 billion—and throughout that time it had been regularly transferring meaningful numbers of its AIG shares to worthy AIG employees.19
Another advantage of this creative private/public structure was that it retained substantial control over AIG in SICO’s management, protecting against the wave of hostile takeovers that swept through corporate America in the late 1960s.20 SICO, after all, owned 30 percent of AIG’s stock, a significant voting block against a hostile bid. Public companies can face periodic threats of unfriendly and unproductive battles for corporate control. During the 1960s, hostile bidders became increasingly imaginative. In the insurance industry, the prominent corporate takeover artist, Saul Steinberg, had used his relatively small company, Leasco, to win a hostile takeover battle for the estimable Reliance Insurance Company.21
And Greenberg still recalled an earlier visit to his office by Victor Hurd, that restive chairman of Continental Insurance. Continental had nearly 30 percent of the AIU pool and, after Youngman had sold his AIRCO shares to Continental, a stake in AIG. Hurd wanted to buy the rest of AIG. Greenberg thanked Hurd for the overture but declined, saying his company preferred to remain independent. Though Hurd left quietly, he was free to initiate takeover efforts, perhaps seeking private deals with other unfriendly shareholders to increase his stake. Accordingly, vesting substantial voting control of AIG in SICO offered a way to protect AIG from hostile bidders, whether Victor Hurd, Saul Steinberg, or anyone else.
The challenge of designing an effective structure for Starr’s old collection of insurance businesses had been met. AIG’s stock price quadrupled between May 1969 and August 1972. The company’s vision was coming into focus and its culture coalescing around it.
Notes
1. See Walter Guaazardi, Peter Grose, et al., “Worth the Risk: The Story of American International Group, Inc.” (AIG March 2009 draft), chap. 13, p. 3.
2. Ibid., chap. 13, p. 4.
3. See “C. V. Starr & Co. Elects Leaders,” New York Times (August 19, 1968).
4. Among notable golfers who have played at Morefar are PGA veterans Tom Kite, Gary Player, Tom Watson, Doug Ford, Hubert Green, Curtis Strange, Willie Turnesa, and Gary McCord. (Strange holds the course record: 63.)
5. These descriptions of the artwork appear in “C. V. Starr & Co., Cornelius Vander Starr: 1892–1968” (1970), p. 15 (memorial tribute to Mr. Starr prepared by the company he left behind).
6. Ibid., p. 31.
7. See “Cornelius Vander Starr Dies; Founder of Insurance Group,” New York Times (December 21, 1968).
8. The other two directors at the time of Starr’s death, and therefore Starr’s executors, were John Ahlers and Francis Mulderig.
9. See “Report of the Independent Committee of the Starr Foundation” (March 1, 2007).
10. See “In the Business of Downhill, Mt. Mansfield Races to New Heights,” Contact (October/November 1991): 4.
11. “Skiing: A Builders’ Year,” Sports Illustrated (December 19, 1955), http://sportsillustrated.cnn.com/vault/article/magazine/MAG1130572/1/index.htm.
12. American Home shareholders were offered 2 AIG common shares per share; New Hampshire holders either 1.78 AIG common shares or 0.68 of a share of AIG $4 convertible preferred per share; and National Union holders $42 in principal amount of a convertible debt security. (This was chosen instead of common shares to enable holders to defer recognizing tax in the exchange until conversion; the other two exchange offers were nontaxable anyway.)
13. New York had a cash-out statute at the time; Pennsylvania and New Hampshire enacted them at the request of those companies. See “Taking Risks,” chap. 7, p. 7.
14. See “Insurance Group Sets Stock Offer,” New York Times (December 5, 1968).
15. The arrangements were finalized in a valuation agreement among the participants dated September 19, 1970, in accordance with opinions and advice of Morgan Stanley as to business issues and Sullivan & Cromwell as to legal matters. See “Report of the Independent Committee of the Starr Foundation” (March 1, 2007), appendices 116, 118, 121–124.
16. Compare Sanjai Bhaga and Roberta Romano, “Reforming Executive Compensation: Focusing and Committing to the Long Term,” Yale Journal on Regulation 23 (2009): 659 (footnote 23 highlights AIG’s approach to executive compensation begun in the 1970s as akin to the authors’ contemporary proposal designed to avoid the pitfalls that plagued executive compensation plans of the early 2000s).
17. Cunningham interview with Carla Hills, Washington, September 1, 2011 (reporting on statements made by PricewaterhouseCoopers to the AIG audit committee in March 2005); John F. Love, McDonald’s: Behind the Arches (New York: Bantam Books, 1995), 363 (also noting debate over financial accounting for such an arrangement); U.S. Treasury Regulations 1.83-1 through 1.83-8 (addressing the tax consequences of such arrangements).
18. Louis Kelso pioneered the ESOP in 1956 and elaborated on its significance in several later books, including The Capitalist Manifesto (New York: Random House, 1958), coauthored by Mortimer J. Adler; and Democracy and Economic Power: Extending the ESOP Revolution Through Binary Economics (New York: Ballinger, 1986), coauthored by Patricia Hetter Kelso. See Andrew W. Stumpff, “Fifty Years of Utopia,” Tax Lawyer 62 (2009): 419. ESOPs gained momentum after passage of 1974’s Employee Retirement Income Security Act (ERISA), which provided favorable tax treatment.
19. A decade after the triple exchange offer that took AIG public, it switched its listing to the New York Stock Exchange (on October 10, 1984); it subsequently listed in other international stock exchanges as well: Tokyo in 1987, London in 1988, the Paris Bourse in 1990, and Zurich and Geneva in 1991. See Contact (October/November 1993): 11.
20. See “The Conglomerate War to Reshape Industry,” Time (March 7, 1969).
21. A good discussion of the Leasco-Reliance takeover by Judge Jack Weinstein appears in the case of Feit v. Leasco Data Processing Equipment Corp., 332 F. Supp. 544 (E.D.N.Y. 1971).