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Grasso Handpicked Pay Panel By Ben White NEW YORK, Sept. 11 -- New York Stock Exchange chairman and chief executive
Dick Grasso says he has no input over his own pay but simply leaves that
decision up to the exchange's board of directors. Those directors, however, are largely selected by Grasso. "I'm very proud to say that I've been very well compensated," Grasso said at
a news conference on Tuesday, defending his compensation, which included a $140
million lump-sum payment this month. "But I'm equally and perhaps more proud to
tell you that I've never had a two-way dialogue" with either the compensation
committee or the full NYSE board over the amounts he would be paid. He did not mention that most of the compensation committee members who
approved his packages -- and awarded him millions more he declined to take --
were put there by Grasso himself. The exchange does maintain a separate nominating committee to fill board
vacancies, but it operates based on recommendations from the chairman. "Dick
gives the nominating committee ideas, and they tend to take them," NYSE General
Counsel Richard Bernard said in an interview today. Since taking over the chairmanship in 1995, Grasso has recommended every
member of the compensation committee that sets his pay, according to Bernard.
This is a unusual practice that governance and shareholder activists say
creates an obvious conflict of interest, both because Grasso could theoretically
select directors he thinks are likely to pay him the most and because the
directors are beholden to Grasso for their assignments, which generally include
payments in addition to normal directors' fees. In addition, many of the directors came from big securities firms that the
NYSE is supposed to oversee in its role as a federally chartered self-regulatory
organization. The chairman of the compensation committee from 1999 to 2003, years in which
Grasso earned his biggest paydays, was Kenneth G. Langone, a friend of Grasso's
and founder and board member at Home Depot. Grasso has served on Home Depot's
board but agreed in June to step down. This governance structure, critics of the exchange say, has created an
organization whose chief executive exerts greater dominance over his board than
does the CEO of almost any other public company in the United States. "The
standard wisdom is that over the past several years, Dick Grasso has run the
NYSE with an iron first, picking directors and making all decisions, large and
small, himself," said Sarah Teslik, executive director of the Council of
Institutional Investors and a frequent critic of the exchange. In the face of mounting criticism, the NYSE has moved to change some of its
governance policies. But critics say it has not gone far enough. In June, the NYSE announced that the governance committee would vet nominees
for the compensation committee. But Grasso will still be allowed to recommend
candidates. Many other companies have taken all authority to select compensation
committee members away from the chief executive. NYSE General Counsel Bernard said today that no thought had been given to
taking this authority away from Grasso. H. Carl McCall, the former New York state comptroller who became chairman of
the compensation committee in June as part of NYSE's corporate governance reform
effort, defended the $139.5 million payout to Grasso on Tuesday. He said it "is
not a one-time event and represents the years of his chairmanship and represents
reasoned decisions by compensation committees and by the New York Stock Exchange
board over that time." The NYSE is still conducting a review of its governance practices and plans
to submit a report to the SEC later this fall. SEC Chairman William H. Donaldson
has made governance reform at the exchange a priority and has said through
spokesmen that he will not have any more comment on Grasso's pay until that
report is submitted. In a letter to the exchange last week, Donaldson said Grasso's pay raised
"serious questions" about the NYSE's governance. And Grasso's comments Tuesday
that he views himself as two-thirds businessman and one-third regulator raised
questions about the effectiveness of the NYSE as a securities industry regulator
and an enforcer of corporate governance standards on the 2,800 companies that
list on the exchange. Under federal law, the NYSE is charged with conducting annual reviews and
consistently monitoring its 400 member firms, both large securities brokers that
deal directly with the public, such as Merrill Lynch & Co. and Morgan
Stanley, and smaller specialist firms that conduct trading on the exchange
floor. The exchange enforces its own set of rules, designed to protect
investors, as well as federal securities laws. Its enforcement division is charged with investigating wrongdoing and
punishing offenders. Sanctions range from small fines to expulsion from
membership. The exchange also conducts market surveillance intended to spot
insider trading. The surveillance staff monitors trading in shares around major
news events and investigates unusual trading patterns. Because offenders in this
area are generally not exchange members, the NYSE typically refers
insider-trading cases to the SEC or the Justice Department. NASD, the other self-regulator and former parent of the Nasdaq Stock Market,
conducts a similar market surveillance program over shares that trade on Nasdaq.
NASD also conducts reviews and investigates wrongdoing at brokerage firms that
are not NYSE members. Some of the biggest securities firms are members of both
the NYSE and NASD. In those cases, the self-regulators often team up. Academic experts say the federal securities laws drafted in 1933 and 1934
envisioned a system in which the self-regulatory organizations would be on the
front lines of the securities business and therefore in the best position to
spot abuses that could harm investors. Under this system, SROs are supposed to
punish smaller offenders themselves while referring more serious cases to
prosecutors and regulators at the SEC. They are also charged with writing rules
for the industry, which must then be approved by the SEC. But critics now wonder whether the NYSE's structure, in which its chief
executive is essentially paid by the industry he is supposed to oversee, has
turned the exchange into a limp regulator. Investor groups and academics point to abuses that went largely unchecked
during the recent market boom, including tainted advice from stock analysts
eager to generate banking business for their firms and the awarding of hot
initial pubic offering shares to favored executives. Most of the firms at the heart of these scandals are NYSE members. And while
the SEC has ultimate authority to investigate and litigate these abuses, critics
say both the NYSE and NASD should have spotted the problems first. As it happened, it took the New York state attorney general, Eliot L.
Spitzer, to bring attention to many of these problems. More recently, critics
point to alleged abuses in the mutual fund industry, a scandal which has so far
touched at least one NYSE member firm, Bank of America. Again, it was Spitzer
who uncovered the problem. In addition to member firms, the exchange sets corporate governance and
certain financial standards for its listed companies. It has no legal authority
in this area, but it can punish firms that fail to meet the guidelines. But some
securities experts worry that the exchange may lose its moral authority based on
revelations about Grasso's pay and the NYSE's own governance problems. "How persuasive is the exchange going to be in terms of convincing companies
to change their governance or in enforcing its own governance standards if those
companies can at least try to complain about the exchange's behavior?" said
University of Texas law professor Henry T.C. Hu. Privately, regulators outside the NYSE say the exchange will have to make
major alterations to its governance practices or have those changes thrust upon
it. "They will have to change," one regulator said today. "How can they
not?"
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