Richard Grasso is gone. But the changes at the New York Stock Exchange are only beginning.
Grasso, as chairman of the stock exchange, was a regulator whose pay was set by some of the people he oversaw. He resigned after it was announced that he was owed US$48 million over the next four years, in addition to the US$139.5 million lump-sum payment he recently took in deferred compensation, savings and retirement benefits.
Those payments had been spelled out in the employment contract with Grasso that the board of the exchange had authorized only weeks earlier. But not even Carl McCall, the former New York State comptroller, who is the chairman of the board's compensation committee, had understood how much money was involved. And he had signed the contract on behalf of the board.
Changes in the governance of the exchange appear to be inevitable, both in terms of structure and personnel. The board is likely to see a big turnover as those viewed responsible for the debacle over Grasso's pay are pushed aside.
One big question is whether the Big Board will be able to hold on to its role as a regulator of brokerage firms and to a lesser extent of the companies whose shares it trades. The second is whether it will be able to fight off regulatory changes that could hurt its competitive position against other exchanges.
Those issues will ultimately be decided by the Securities and Exchange Commission (SEC), and perhaps by Congress. Grasso's fate may have been sealed when William Donaldson, the SEC chairman, said the commission would have to deal with "insufficient and inappropriate governance practices" at the Big Board. The exchange clearly needs to get those behind it.
A significant question is whether the current board can accomplish that.
A former Wall Street executive said that he thought the board should name an outsider with an outstanding reputation and give him a mandate to make extensive changes, including forcing changes in the board's membership.
Whoever runs the exchange will need to communicate with the SEC as it decides whether to change trading rules that the Big Board argues assure a fair shake for small investors, but that some electronic exchanges contend make it difficult for them to trade quickly when customers want fast action even if they do not get the best possible price. The side that loses that fight before the SEC may carry it to Congress, so a good reputation on Capitol Hill would clearly be a plus.
That executive will also have to decide whether to keep the regulatory apparatus at the Big Board or spin it off into a separate organization. The exchange has invested large sums in marketing campaigns contending that being listed on the exchange proves a company has met corporate governance standards that "are among the highest" in the world, and its reputation as a regulator has played an important role in that effort.
"This is an important component to the brand of the NYSE," a Big Board official said, speaking on the condition of anonymity. But there will be pressure on the exchange to prove that its new management and board can be trusted with such responsibility.
In the end, Grasso, the first career employee to ever run the exchange, proved to have done a masterly job in keeping the Big Board competitive through widespread technological changes and in assuring that the exchange had the machinery needed to trade huge quantities of shares. A short bald man, he became an internationally known symbol of American capitalism and even appeared on Sex and the City.
But the seeds of his destruction were laid in the late 1990's, as a great bull market led to soaring pay checks for corporate chief executives and to accounting abuses in many companies. The exchange did not, as it might have, take the lead in pressing for better corporate governance practices. In part, that may have reflected the fact it was competing with the rapidly growing Nasdaq stock market for listings, but in retrospect it appears to have been a missed opportunity.
Nevertheless, even if the exchange passed on regulatory initiatives that it could have taken, and if its own corporate governance practices now appear to have fallen far short of the high standards that it said it required of listed companies, it is also true that the Big Board under Grasso avoided major trading scandals. There was nothing like the Nasdaq trading scandal of the early 1990s that led the SEC to impose new management on that market in 1997.
"Obviously there have been some slip-ups, but in general, they have a pretty good regulatory operation," said Annette Nazareth, the SEC's director for market regulation.
But the board did not do a good job of governing itself, at least by the standards that prevail in the wake of Enron and other corporate scandals.
In 1996, his first full year running the exchange, Grasso was paid US$3 million, more than US$1 million more than his predecessor, Donaldson, had earned. The exchange had never disclosed the pay of its top officials, and did not do so then. Nor were there disclosures as his pay surged to more than US$30 million by 2001.
Those figures in fact understate his compensation. Extraordinarily generous pension benefits were accumulating along with his pay, much of which he deferred. When it was disclosed that he was taking out US$139.5 million, about US$80 million of that came from pension benefits, which a Big Board consultant advised the board were six times as generous as those at major financial services companies.
With executives from major Wall Street firms sitting on the compensation committee, the disclosure of such pay and benefits seemed to many to raise questions of whether the exchange's regulatory authority was compromised.
Grasso, so good at assuring that the exchange could do its job of trading shares, seemed to be unable to understand how bad that looked, even after it became public. In an interview, he said his only regret was that he deferred so much pay. Had there been no US$140 million headline number, he thought, the outrage would not have arisen.
It is a harsh standard to say that an employee should do something about being paid too much. It is safe to say that few if any of those criticizing Grasso have ever turned down a raise. But in an era when suspicion of corporate executives is high, such pay seemed unseemly. It was part of Grasso's job to preserve the exchange's reputation, and by taking so much money he left it vulnerable to the disclosures that became inevitable as governance reforms became necessary.
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