Integrity Matters
September 10, 2003

NYSE chief's big payday smells fishy

Question: (E-066)

Dear Jim:

The board of the New York Stock Exchange decided to pay its top administrator a gigantic amount of money. Perhaps you will comment on the $140 million accumulated back pay and benefits paid to Richard Grasso, chairman and chief executive. Who will pay for these obscene fees? It is the little people, yet again.


Chairman Richard Grasso's acceptance of the $139.5 million has reignited the debate over standards of governance at the world's largest stock exchange. His package is greater than the NYSE's total net income for the past three years. Though perfectly legal, the huge payout feeds the public's perception of Wall Street as a rigged game that enriches a few big players, while small investors get bilked.

Who is responsible for this gigantic compensation? It's the Board of Directors of the New York Stock Exchange. The board appears to have acted very generously, possibly irresponsibly, certainly insensitively. For starters those rewarding Grasso (the compensation committee and board) are individuals and organizations over whom he has regulatory authority and responsibility. This has some parallel to a group of motorists directly rewarding the police officer who has the authority to enforce traffic laws.

Where the money is coming from might become clearer when we know that a group of 1,366 seat-holders of the NYSE is planning a lawsuit for force Grasso to renegotiate his controversial pay package. If they feel on the hook for Grasso's wind-fall then some of their customers -e.g. individual investors -may feel the sting of costs that can be legally passed along.

Here is what we do know: Free markets must regulate themselves or governments
will. It does not take a rocket scientist to recognize that oversight committees and other similarly chartered organizations have a responsibility to protect themselves and the public from both real and perceived-of conflicts of interest. Whether Grasso is overpaid is not the concern of this column. However, the appearance of becoming compromised in the pursuit of oversight harms the enterprise and can demoralize an investing public already discouraged by the bombardment of news that continues reporting scandalous behaviors throughout our society.

By way of summary, here are some of the integrity-related leadership issues:

Grasso's first duty is to set a good example. His pay package does anything but. It serves as a tacit endorsement of NYSE companies that have paid executives lavishly while their firms have languished. His acceptance of a big payment financed by the companies he regulates creates the appearance of a conflict of interest.

Worst of all, though, Grasso's pay undermines the NYSE's own efforts to promote corporate reform. It has offered a number of proposals to encourage corporate boards to stand up to their CEOs and hold top executives more accountable. Yet the nine-figure compensation suggests a board only too eager to please its own chairman.

Greed is hardly new or surprising. But its display by a public watchdog such as the New York Stock Exchange suggests Wall Street may still have a long way to go to clean up its act. When leaders ignore the importance of maintaining a proper balance between self-interest and social responsibility, the free market is at risk.

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