NEW YORK (Dow Jones)American International Group Inc.?s (AIG) board was lauded as an exemplar of governance when it ousted its ?imperial? chief executive, Hank Greenberg, in March 2005. But over a year later, it appears the alleged bad apple may still lord infectious power over the bunch ? primarily through C.V. Starr & Co. and Starr International Co., or SICO.

Signs of a less-than-thorough house-cleaning abound. Eight of AIG?s 15 directors are holdovers from the days when both the board and executives allegedly enriched themselves through the pair of private holding companies that today own about 13 percent of AIG?s stock. Those two Starr companies are also still linked to AIG through business deals and long-term incentive plans. And AIG?s auditor, PricewaterhouseCoopers, remains onboard despite overseeing the five-year period for which accounting was radically restated.

As AIG labours to disentangle itself from the Starr entities, the story of its board offers a cautionary tale for directors who become too cosy with CEOs. While AIG?s directors struggle to extricate themselves from pay structures and business arrangements with Starr that they oversaw and benefited from in the past, critics are questioning whether they have moved fast enough to sever ties - especially considering strong withhold votes against several of them in 2005. This year, proxy advisor Glass Lewis & Co. recommended that five of the current 15 members be replaced ?immediately,? a call that was not heeded at the May 17 meeting that saw all re-elections ratified.

AIG has made some governance progress. For instance, it was recently upgraded to a ?C? from a ?D? by governance analysis firm the Corporate Library and praised on reforms by the board?s new governance overseer, former Securities and Exchange Commission Chairman Arthur Levitt. And at its May meeting, AIG patted itself on the back for having resolved ?regulatory issues with the SEC, the U.S. Department of Justice, the Office of the New York Attorney General and the New York State Department of Insurance resulting in an after tax charge of $1.15 billion.?

However, these improvements have done little to lift AIG?s shares, which are down about 14 percent since the start of 2006. A recent report by Glass Lewis noted that its annualized one-year returns are 5%, versus 47.8% at competitor Allianz AG (AZ), 52.2% at AXA (AXA) and 38.7% at Hartford Financial Services Group Inc. (HIG).

The gloom persists in part because Greenberg still plagues AIG by competing with it, partly through Starr Technical Risks Agency Inc., a subsidiary of C.V. Starr. The well-connected Greenberg has already inked deals with investing legend Warren Buffett?s Berkshire Hathaway Inc. (BRKA BRKB) and Ace Ltd. (ACE), which is run by his son, Evan Greenberg.

Greenberg has also sued AIG for minutes of board meetings, alleging improprieties related to its settlement with the Teachers? Retirement System of Louisiana. That action is one of many attempts to block the Teachers? lawsuit, which still targets Greenberg and two other executives, alleging that they diverted nearly $200 million from AIG to themselves through transactions involving C.V. Starr and SICO. Greenberg?s spokesman said he wasn?t able to comment.

?Greenberg has been an albatross around the neck of that company,? said Patrick McGurn, special counsel with Institutional Shareholder Services, a Rockville, Md., proxy advisory firm.

McGurn said he doesn?t think it?s the board?s fault for not reconstituting itself quickly enough or driving a fast-enough wedge between themselves and the Starr entities.

?The problem is just that the two organizations are so closely intertwined,? he said. ?They are what Greenberg used to exercise his iron-fisted rule over the company.?

Starr?s financial ties with AIG have run both deep and wide, dating back to 1970 when C.V. Starr, an investment firm founded by Cornelius Vander Starr in China in 1919, sold its assets to AIG in exchange for AIG stock.

The primary link has been through deferred compensation plans for AIG employees using stock held by SICO. This has been called a good governance measure by Greenberg, as it compensated AIG employees without the issuance of new AIG stock.

?It was an innovative and incredibly valuable programme,? said Howard Opinsky, a spokesman for C.V. Starr and Greenberg. ?In ending it, AIG has started using its own shares and diluted the stock.?

SICO is also still a holder of those plans, which leaves Greenberg with some sway over several AIG employees.

While AIG spokesman Chris Winans couldn?t confirm whether any AIG board members retained the SICO plans, Martin Sullivan, a former director who is now president and CEO, and Edmund Tse, a director who is also senior vice chairman of the life insurance division, have been paid under them in the past.

An AIG spokesman said board members weren?t available to speak on the matter.

AIG is currently fighting Greenberg for control of that compensation through a September 2005 lawsuit that claims 290 million of its shares belong to the plans.

Opinsky said less than ten percent of the stock owned by SICO is designated for the plans. But AIG?s Winans said the number of shares held by Starr that should go to AIG executives is the subject of the ongoing litigation, adding that 290 million shares have historically have been earmarked for use in compensation.

The slow unwinding of ties is not entirely Greenberg?s fault. The board is resisting the break with Starr as well ? even in areas that would seem to be at the discretion of directors. For example, on June 30, it cancelled an ?agency arrangement? with the American International Marine Agency, but it won?t be effective until December 31.

And it was only in January, as part of an agreement between the Teachers? fund and AIG, that directors relinquished significant financial stakes in Starr and SICO through a tender offer from Starr.

?AIG has had to give up some fairly profitable lines of business or find new ways to exploit those markets as it separates itself from Starr,? said McGurn, ?so it?s not surprising this has taken so long.?