Fixing a Tarnished Market
The New York Times
September 21, 2003
There is no more evocative monument to the vibrancy of American
capitalism, and to New York City's claim to be the world's financial
capital, than the graceful, colonnaded building that houses the New
York Stock Exchange on Wall Street. The imposing structure
exudes a sense of reassuring permanence, befitting a marketplace
that has served, through boom and bust, for 211 years.
So much for the aspirational architecture. Inside, utter disarray reigns.
The controversy that led to Richard Grasso's resigning last week,
when it became clear that he would never outlast the furor created
by the disclosure of his absurd $187.5 million deferred compensation
plans, has given the investing public a peek into the Big Board's
clubby boardroom. It's been a frightening sight.
The recent corporate scandals have taught us, if nothing else,
that when reckless chief executives are able to raid their institutions'
treasuries at will and enrich themselves beyond reason, it's a sure
sign that corporate governance has been corrupted to an alarming degree.
And the ensuing absence of any meaningful protection for the institution's
stakeholders and its longer-term interests encourages other
types of mischief.
If the New York Stock Exchange were an ordinary company,
its practices would be appalling enough. That the exchange is a quasi-public
organization charged with policing the stock market makes its
conflict-riddled organization a threat to the entire financial system. It must be
overhauled, and soon.
Even before the controversy surrounding Mr. Grasso's pay,
the Securities and Exchange Commission had rightly been
pressing for such an overhaul, and a plan is due in a few weeks.
After Mr. Grasso's fall, Congress and William Donaldson,
the S.E.C. chairman and a former head
of the exchange, cannot afford to be timid in their ambitions.
No longer can Wall Street's trading community - the member
firms that own the exchange - be allowed to regulate
themselves. Mr. Grasso was paid tens of millions by the
people he was charged with policing. Many of these directors,
some of whom he picked for his compensation
committee, now claim they had no idea just how much
he was due. Believe this, and you are still left with a case
of negligent oversight. Any director involved in approving
Mr. Grasso's compensation should resign.
The exchange needs a new chairman who is a proven
reformer, with stature in both New York and Washington,
to guide its transition. Arthur
Levitt, the former S.E.C. chairman who forced needed
change on the Nasdaq market in the 1990's, would be
a solid choice. The 27-member board also needs to be
reconfigured. It should no longer be dominated by Wall
Street traders, but by institutional investors and the broader
public.
Ultimately, the exchange's commercial enterprise - the
business of executing trades and soliciting companies
to list their shares - must be separated from its regulatory
duties. Regulators must be answerable to the public, in
requiring fair pricing from traders and transparency
from listed companies, and not to the exchange's owners.
The conflict between the two missions, as the restructuring
of the Nasdaq recognized, cannot be reconciled.
As part of their effort to restore investor confidence,
the S.E.C. and Congress will have to make fixing the
Big Board a top priority. It will do
no good to reform companies' behavior if people
remain leery about the integrity of the marketplace.
Copyright 2003 The New York Times Company
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