Coup at the NYSE
The corporate governance movement is turning corporations into political institutions. That's what happened at the board that fired Richard Grasso
Terence Corcoran
Financial Post
Saturday, September 20, 2003
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So Dick Grasso is gone, chewed up in the great destructive force that is eating away at the soul of U.S. capitalism. The corporate governance movement, never far from dependence on political demagoguery, certainly reached its lowest point on Wednesday when it succeeded in removing Mr. Grasso as chairman and CEO of the New York Stock Exchange.
There was no good reason to fire Mr. Grasso, unless you're motivated by the multitude of governance slogans that were deployed to justify his dismissal. Was it conflict of interest, a governance failure, cronyism, the regulatory issue, greed? Or was it the socialist cant trotted out by government-run pension monopolists from California and elsewhere, claiming Mr. Grasso's compensation was a moral injustice because it exceeded some multiple of the average wage of the average American?
In an atmosphere shaped by media frenzy and an ideological environment that is sinking daily, the average observer probably saw Mr. Grasso's removal as justifiable execution. The man was paid way too much, the system stinks and let's move on.
Well, the system is certainly moving on. The news reports are now full of stories about how to fix the NYSE -- an institution that, by most measures, was one of the most successful capitalist creations in history up until two months ago. No crime had been committed, no wrongdoing unearthed. But NYSE was being treated as if it were another Tyco. Americans and the rest of us may not like where the new NYSE ends up.
Nor do most of us have enough of a sense of the political and ideological chaos that is driving the movement. The people and forces that pushed out Mr. Grasso have ideas and agendas that aim to radically reform private enterprise in the United States and around the world. Pushing forward is an unruly mob of reformers -- economic demagogues in politics and state pension plans, regulators in government and securities commissions, multitudes of academics and media theorists who thrive on glib quotes and fast, unproven theories, plus market players who hope to seize the environment to win their own business battles.
We get a bit of a sense of this emerging mess in the current disarray at the NYSE, and the emerging plan -- by regulators and others -- to take over the exchange and subject it to a host of new regulators and governance fads. It begins with the fact that Mr. Grasso was fired by a board of directors for accepting a compensation package given to him by the board of directors. One of the products of modern governance theory is boards of directors that become political beasts populated by politicians with their fingers in the air checking political wind direction.
One of those NYSE directors, H. Carl McCall, is currently lead director of the exchange, a post he assumed after he voted to fire Mr. Grasso as chairman.
Who is H. Carl McCall? He is former New York State comptroller and manager of the state's pension plan. He chaired the NYSE board compensation committee. When it came time to comment on Mr. Grasso's compensation package, Mr. McCall seemed unaware of the details. As The Wall Street Journal said, Mr. McCall "somehow lost track of the fact that he'd signed off on $140-million in accumulated pay and benefits for Mr. Grasso." According to The New York Times, Mr. McCall also played a dual roll through the dump-Grasso mania. In public, he had been one of Mr. Grasso's most vocal defenders, while privately he said Mr. Grasso's package -- which he had approved -- was "indefensible."
With political players like Mr. McCall leading the exchange, what can the future hold for the world's most successful stock market and self-regulatory agency? Many are now calling for removal of the whole board. They probably should be fired, not for overpaying Mr. Grasso but for gross capitulation to public opinion at the expense of the exchange.
At the New York State comptroller's office, Mr. McCall's successor, Alan G. Hevesi, played a key role in pushing the media call for Mr. Grasso's dismissal. His comments, and those of California's state treasurer, were instrumental in shaping the public opinion environment that promoted the board to abandon the NYSE and fire Mr. Grasso.
So now the NYSE has no CEO, no chairman and a board that cannot be trusted to look out for the exchange's interests. Even more appalling, the board caved in to pressure to dump Mr. Grasso without having a succession plan in place.
The headless NYSE is now about to get rolled over by regulators. The exchange's traditional dual rule as exchange and regulator is under attack. Maybe the regulatory role should be separated out, although the reasons for doing so seem to be mostly grounded in rhetoric about alleged massive conflict between running a business and acting as regulator. The idea that "regulation" is something that can only be handled by politicians and bureaucrats is largely a fiction promulgated by people who like to regulate. General Motors and Home Depot have a million internal regulations governing their products and services that are just internal rules or regulations designed to best serve their customers. There's nothing much special about financial markets, except the degree to which the business can be turned into a them-us, rich-poor, capitalist-worker dichotomy.
At the Securities and Exchange Commission, the urge to regulate is following it's usual growth path. The main worry appears to be the competitive pressure between the NYSE's current trading system, which depends on floor traders and specialists, and electronic trading systems and other exchanges. Instead of letting the competition play out, the SEC appears set to impose a one-size-fits-all system on all stock trading.
William Donaldson, head of the SEC, who played a heavy-handed role in fostering Mr. Grasso's departure, is reported to be interested in a "central market" and a more "harmonized" market structure. The comparable model for this, apparently, is electricity, where the trading system is considered one big utility into which many different players converge. Another SEC official was quoted in The Wall Street Journal yesterday saying there's a need to correct inequities in the market system. "We need to look at these issues holistically and not on a one-off basis." When a stock market person starts talking about holistic solutions to problems, it's past time to start worrying.
Finally, there's the question of demutualization. Should the exchange be sold to investors, who would supposedly have a greater interest in good management and good governance? This, too, seems to be based more on theories of governance than actual practice. But here the theory runs up against the political agenda from the people who run the state pension plans. Sean Harrigan, president of Calpers, which runs California's teachers and employee pension plans, wants a replace the NYSE board with a smaller board composed of investors. "I'd say half should be investors -- and I don't mean the securities industry. I mean a component that represents true people who own stocks -- the working people of America who use the capital markets to fund their present, their future retirements and their kids' education."
A privatized or demutualized NYSE might focus the exchange, but it could also leave it in the hands of an even more politicized board that will be shaping policy in response to the prevailing hype rolling through the media. The direction being taken today by corporate governance activists suggests that being a publicly trading company may be the worst of all possible worlds. The best place to be is where the NYSE has been through its history: a private business. When they fired Mr. Grasso, they killed that option. |
