American International Group Inc. Chief Executive Officer Peter Hancock won short-term relief at the risk of longer-term challenges by striking an accord with activist investors who want to shrink the company, former CEO Maurice “Hank” Greenberg said.

“By doing that, he let a fox in the henhouse” to avoid a proxy fight, Greenberg said in a phone interview Friday, a day after AIG nominated hedge fund manager John Paulson and a representative from Carl Icahn’s firm to the insurer’s board.

Greenberg built AIG into the world’s largest insurer before leaving in 2005, and criticized management as the company lost most of its market value and then sold prized assets to repay a 2008 government rescue. Icahn says AIG is still too big, and he wrote to Hancock in October demanding that he split AIG into three companies, one offering life insurance, another backing mortgages, and a third providing property-casualty coverage.

“I think that’s a mistake,” Greenberg, 90, said of Icahn’s plan in a televised interview on Jan. 26. “I agree with Peter” about the benefits of a diversified company.

Icahn, 79, didn’t immediately return a message seeking comment. He said in a statement Thursday that he looks forward to working with the board and that “smaller and simpler is better.”

Hancock said in a conference call Friday that he was pleased to have an accord that “will add an extra degree of scrutiny,” at AIG. “We have reached a solution that averts a very distracting proxy fight,” he said.

–With assistance from Lily Katz.

Topics AIG