AIG Getting Corporate Governance Religion

"Perception is reality." Granted, that's a cliche, but it's a basic truth for financial services companies. Such companies rely on trust. Hey, after all, they deal with people's hard-earned money.

This year, the board of AIG (NYSE: AIG  ) has undergone a round of shock treatment in terms of public perception. What's really happening to the firm? Are problems much bigger than the Street thinks?

So far, AIG has performed brilliantly in dealing with the fallout. Perhaps the most important move was ridding the firm of its longtime CEO, Hank Greenberg.

However, AIG's board is not finished with its housekeeping. This week, it made another bold move -- hiring Arthur Levitt as a special advisor to the board.

It would have been difficult to find someone else with a better resume for the job. Levitt served as the chairman of the Securities and Exchange Commission from 1993 to 2001 and as chairman of the American Stock Exchange from 1978 to 1989.

While at the SEC, Levitt railed against the conflicts of interest on Wall Street. During the bull market, however, there was very little interest in his warnings. Of course, people began to take heed after the implosions of Enron and WorldCom.

For the next six months, Levitt will help AIG select independent board members, as well as institute new procedures and guidelines. For example, there is likely to be a revamping of the audit committee. After all, the company restated earnings for the past five years -- lowering them by 10%.

Moreover, AIG faces a variety of state and federal lawsuits and probes on its accounting problems. But with Levitt, the company might be in a better position to settle these actions quickly. This would certainly help to lift the black cloud that's been looming over the firm's head.

By hiring Levitt, AIG is demonstrating that it is doing much more than paying lip service to corporate governance. This should not only help prevent future accounting implosions but also help build credibility with investors. The irony is that AIG, once a poor example of corporate governance, stands to become a pillar of corporate governance in hiring Levitt. And to be fair, it might do well to -- the market doesn't like softballing in the face of adversity. And neither do I.

Fool contributor Tom Taulli does not own shares of any company mentioned in this article.

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