ANALYSIS:The level of arrogance shown has become synonymous with AIB over the past year, writes SIMON CARSWELL

FEW WINNERS emerged from the embarrassing, protracted and very public tug of war between the Government and Allied Irish Banks (AIB) over who should replace outgoing senior management at the bank.

The Government faced down the bank over its plan to pay the new managing director, Colm Doherty, a salary that was higher than the State’s €500,000 cap, but the Minister for Finance’s desire to have an outsider take the helm has not been fulfilled.

The appointment of an insider at Bank of Ireland at the start of the year had caused the Government considerable political strife.

The fact that Doherty’s proposed €633,000 pay as managing director only emerged as a contentious issue between AIB and the Government as late as this week suggests that it was little more than an afterthought for the bank.

The more pressing issue was on winning approval from the Government on the appointment of an internal team to take control. The idea of the bank thumbing its nose at the Government in the expectation that the €633,000 annual salary would be rubber-stamped showed a level of arrogance that has become synonymous with AIB over the past year.

The compromise between the two sides was eventually reached seven months after the process began to find a replacement for the departing AIB chief executive Eugene Sheehy, who will now retire at the end of the month.

As had been widely reported, Dan O’Connor, who has been chairman of the bank since July, is taking over as executive chairman and will assume a more hands-on, strategic role at AIB Bank Centre.

He will oversee the bank’s plans to raise further capital to buffer against rising loan losses, which the bank said yesterday would be €5.3 billion for 2009 – €1 billion higher than expected – due to mounting bad debts on the €24.1 billion loans heading into the National Assets Management Agency (Nama).

O’Connor will also manage the implementation of Nama as it affects the bank and the restructuring plan which the bank has just submitted to the EU to win approval for the bank’s €3.5 billion bailout by the Government.

The Irish Association of Investment Managers, the influential body which represents some of the largest institutional investors in AIB and the other Irish banks, had stressed its concerns about the need to maintain good corporate governance in advance discussions with the bank.

The association was concerned about the perception that Mr O’Connor would be filling both the roles of chairman and chief executive.

AIB’s senior independent director Seán O’Driscoll, who played a central role in the appointments, stated publicly that Mr O’Connor would not be assuming both roles. Mr Doherty is being left to the day-to-day management of AIB, which is the role of chief executive in all but name.

The bank stressed that his pay would be “considerably lower” than both the usual chief executive’s salary and Mr Doherty’s previous role as head of capital markets where he was paid a salary was €633,000.

Dr Michael Somers, who is retiring as chief executive of the National Treasury Management Agency, will be deputy chairman and chair the risk committee.

The bank’s statement on the management reshuffle was of note for more two reasons – it stated that the changes were “part of a wider series of management changes with the emphasis on attracting external talent”. To that end, outsiders will be appointed to fill the key roles of AIB finance director and chief risk officer.

The other notable point is that Mr O’Connor’s appointment will be temporary, easing concerns by the Association of Investment Managers on his role.

In the meantime, Mr Doherty will closely watch the Minister’s future intentions for the chief executive job.