See Dick Squirm
The nonstop shockers about Dick Grasso's pay have put the spotlight on the real problems at the NYSE. Is reform on the way?
FORTUNE
Monday, September 15, 2003
By Shawn Tully
Francis Maglio epitomizes the blunt-spoken, self-made folk—the blue-collar royalty—who own seats on the New York Stock Exchange. The former policeman fills with pride when he recalls his three decades as a floor broker at the crossroads of capitalism. "It's a place where, on your word alone, millions of dollars change hands," says the 59-year-old Maglio. In the 1970s, when there was a breach of rules by a broker, the famous NYSE bell would ring and the frenzied trading would stop dead. A revered member would announce that the exchange, which never wavered from strict discipline, was fining or suspending the broker as a hushed throng of blue jackets looked on. "The community was like a village square," he recalls. "I loved the integrity of the place."
Now Maglio thinks the NYSE's integrity is being deeply tarnished, and so do a horde of fellow members who, as seat holders, are the owners of the august institution at Wall and Broad. "We hold the companies listed on the NYSE to a high standard of accountability," he says. "The exchange itself has failed miserably to meet that standard."
The outrage that proves Maglio's point is the notorious $139.5 million pay package the exchange has handed its CEO, Dick Grasso. The pay shock has put America's top financial policeman, SEC chief William Donaldson, tight on his and the exchange's tail. Meanwhile, the steady drip of revelations about Grasso's extraordinary compensation deal could yet force him to resign. As if that weren't drama enough for the Big Board, there is a bigger question in the air: Will Donaldson and owners like Maglio simply demand Grasso's head and a few tweaks of NYSE's self-governance, or will they drive for real reform at the exchange? The pay crisis, after all, has shone an unflattering spotlight not only on Grasso (and the absentee board of directors that lavished treasure on their CEO and chairman) but also on the underlying conflicts that plague the NYSE itself. The issues are meaty: How can the NYSE's board—the ostensible governors of the exchange—be filled with CEOs from the companies it's supposed to be regulating? How can hired hands—even lavishly paid ones like Grasso—discipline the Big Board's actual owners? And most important: Does it still make sense for the NYSE to continue to play the warring roles of business and regulator? (Did it ever?) One way or another, these questions have to be addressed, say what now seems to be a critical mass of SEC staffers, NYSE members, directors, Wall Street veterans, and, yes, ordinary investors. And it's going to happen sooner than you may think.
To recap, this latest Wall Street tempest began on Aug. 27, when the NYSE announced that it would make Grasso a lump-sum payment of nearly $140 million in deferred compensation and retirement benefits as part of a new contract. (Grasso's tenure was extended by two years, until May 2007.) While the exchange requires NYSE companies to follow SEC regulations by fully disclosing the pay of its top officers, the NYSE kept its boss's huge compensation a total secret—from the SEC and even from owners like Maglio, who foot the bill. One director has claimed, in an e-mail obtained by FORTUNE, that board members not on the compensation committee never actually saw the breakdown of Grasso's pay deal. Grasso told FORTUNE he would be "shocked if that were the case."
Donaldson, who ran the NYSE from 1990 to 1995, with Grasso as his top lieutenant, and had never earned more than $2 million a year, was particularly appalled by the disclosure. Says an SEC official close to Donaldson: "When he left the private sector to run the SEC, he took a substantial pay cut. He sees the NYSE as mostly a public-service job and doesn't think it should be compensated like a private-sector job."
According to the official, Donaldson is doubly unhappy because he perceives that the NYSE has been dragging its feet on reform. In March, following Citigroup CEO Sandy Weill's aborted nomination to the NYSE board, Donaldson demanded that the NYSE and other exchanges submit proposals to improve their governance and pay practices. The exchange did announce significant reforms of its own in June but asked for more time to complete a full review of its practices. When Donaldson later learned that the NYSE had granted its gigantic pay package to Grasso without first submitting its revised governance and compensation policies to the SEC, he was outraged, the SEC official said. Most galling, he didn't even hear about the $139.5 million lump-sum payment until Grasso called him the evening before the announcement. The patrician Donaldson and rough-hewn Grasso didn't particularly like each other when Donaldson was Grasso's boss at the NYSE, say knowledgeable sources. The pay problem is only heightening the tension between the two men.
Five days after the announcement, Donaldson fired off a letter to H. Carl McCall, head of the NYSE's compensation committee, demanding the details of Grasso's sumptuous deal. "In my view, the approval of Mr. Grasso's pay package raises serious questions regarding the effectiveness of the NYSE's current governance structure," Donaldson wrote.
Then, on Sept. 9, the deadline for reporting back to the SEC, Grasso and McCall held a dramatic press conference, seated on black director's chairs in a Versailles-like NYSE salon framed by gilded columns. A subdued Grasso stated that he would voluntarily sacrifice $48 million in compensation due to be paid (over and above the $139.5 million) from 2003 to 2007. Once again the SEC and NYSE seat holders (not on the board) knew nothing about the extra $48 million. Grasso claimed that he played no role in setting his own pay—"Each year when I learn of my reward, I say the same four words, 'I'm blessed. Thank you!' "—and that he had absolutely no intention of resigning. "The board has said to me, 'You'll be with us until 2007,' " said Grasso. Nor did he rule out keeping his job even after his present contract expires. "Will I seek the nomination in 2007?" he asked rhetorically. "Tune in in 2007." You can almost imagine Grasso in a powdered wig, intoning, "La bourse, c'est moi."
Grasso clearly hopes that sacrificing the $48 million will help end the uproar. The board has reworked his contract to make his annual pay far smaller in the future. Grasso is also upping his rhetoric as regulator: "We're committed to total transparency going forward," he says, pledging to submit a number of governance reforms to the SEC come October. Adds the not-quite-humbled Grasso: "Should we have disclosed the top officers' pay before? I can't say yea or nay. You can't do anything about the past."
Well, regulators can—and should—do something about the future. Grasso's pay package, of which the NYSE released the details for the first time on Sept. 10, contains so many grisly surprises that the SEC (to say nothing of the exchange's members) is bound to keep hounding Grasso. What's more, those details show that the board was so in the thrall of its high-profile charmer of a CEO that it has lost all credibility to fix the Big Board's problems on its own.
From the Sep. 29, 2003 Issue Article Page: 1 | 2 Next >
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