The fall of an NYSE chieftain


After much speculation, Richard Grasso resigned his position late last week as Chairman and CEO of the New York Stock Exchange, following a 14-9 board of directors vote to request his resignation. Through the lens of the national media’s coverage, the story is a simple tale of gluttony and deserved expulsion. Grasso abused his power as Chairman and CEO so as to install a flawed board and derivatively a flawed compensation committee. The flawed board then granted a life-long staffer, lacking even a college diploma, $187.5 million in deferred compensation for his 20 years of service. $187.5 million was too much and Grasso’s token gestures like agreeing to forgo $40 million were insufficient. “After all,” according to the conventional wisdom, “the leader of the NYSE must be a person of the highest integrity. Lesser mortals – ones willing to use their influence to increase their compensation – cannot be trusted to regulate the nation’s largest corporations. And so Grasso had to go.”

The press has shifted its focus to the rest of the NYSE board. Consistent with the common line, members of a flawed board cannot be trusted to regulate listed companies either. Despite the talk in the press, there will be no mass exodus. There may be a few sacrificial lambs or a superficial restructuring, but most of the board will remain. Why? Because Dick Grasso didn’t lose his job because he profiteered off a system of weak NYSE corporate governance.

Grasso, weakened by the public disclosure of his compensation package, lost an internal power struggle. A tally of the board votes reveals the nature of his fall. On the public-oversight side of the board, the vote was 6-5 that Grasso should stay. On the financial-services industry side, the vote was 9-3 that Grasso should go. The nine voting to dispense with Grasso included the heads of J.P. Morgan Chase, Goldman Sachs, Bear Stearns, Blackrock, Credit Suisse Group, Merrill Lynch, Morgan Stanley and Fleet Specialist.

Truth be told, the reason Grasso was issued a pink slip by the most powerful players on Wall Street – individuals who would scoff at $9 million a year pay packages – was that it was the perfect opportunity for them to get rid of him. The revelation of his compensation package weakened Grasso’s traditional support base. The sum was large enough and the compensation structure obfuscated enough to draw the ire of smaller member institutions that had traditionally supported Grasso because he resisted changing to an entirely electronic exchange format, which would favor larger institutions with technology-spending scale economies, and consistently postponed or tabled discussions about a public offering of the exchange, which would at minimum be more disruptive for smaller private members than their larger public brethren. Being chieftain of the small members of the exchange had helped Grasso maintain control of the NYSE for years. Maybe he thought that smaller NYSE members would never learn of his compensation package or if they did, they would not care. He was wrong.

Richard Grasso’s political miscalculation cost him his cherished position as Chairman and CEO of the world’s preeminent financial exchange. Perhaps he can take some small comfort in knowing he will have $187.5 million to fund his retirement.

Frederick Pollock III’s financial news-analysis appears weekly.

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