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Grasso nyse salary crisis { May 16 2003 } Original Source Link: (May no longer be active)
http://www.washingtonpost.com/wp-dyn/articles/A62106-2003May15.htmlhttp://www.washingtonpost.com/wp-dyn/articles/A62106-2003May15.html
NYSE's Grasso Faces a Crisis
Critics Attack Salary, Exchange's Governance
By Ben White
Washington Post Staff Writer
Friday, May 16, 2003; Page E01
NEW YORK, May 15 -- Working the crowd at a recent financial services industry dinner, New York Stock Exchange Chairman Dick Grasso took some gentle ribbing about recent newspaper stories detailing his $10 million annual compensation package.
"Don't believe everything you read," Grasso said, smiling thinly, before disappearing to shake more hands and slap more backs.
There has indeed been a lot written lately, about both Grasso and the institution he has called his professional home for 35 years. Little of it has been flattering.
Critics have ripped Grasso's pay package and his service on the board of Home Depot, an NYSE-listed company. The NYSE, meanwhile, has been buffeted by accusations that its floor traders engage in anti-investor practices, that its system for trading stocks is antiquated, that it failed to uncover rampant conflicts of interest in brokerage firm stock research, and that its board of directors is dominated by executives from the very firms the NYSE is supposed to regulate.
The thicket of problems represents the biggest crisis in Grasso's career and one of the most serious challenges to the NYSE's status as the world's premier stock exchange.
Some critics question whether Grasso is the right man to lead the "Big Board" through a period of upheaval, when investors are demanding that regulators get tough with corporations and Wall Street firms to stamp out the widespread abuses that cost investors billions of dollars. Grasso, a relentless salesman, has spent much of his tenure luring new firms to list on the Big Board, generating millions of dollars in new revenue for the NYSE. Critics question whether he will now be willing to get tough with these firms.
Grasso, for his part, gives no impression of being a man in a hurry, despite all the pressure on financial markets to reform and thus lure back irate and skeptical investors.
In a wide-ranging interview conducted today in an exchange dining room above the trading floor, Grasso spoke not of immediately quitting the board of Home Depot, but of taking time to ponder the directorship, which critics say poses a potential conflict of interest. He did not promise that the NYSE would quickly adopt all the corporate governance standards it requires of listed companies. Instead, he described a process of hearings, public commentary and deliberation that could take months -- or years -- to produce change.
And he did not say he would instantly disclose his compensation to quell investor anger, but that he will instead let his board weigh the issue.
Indeed, when asked to confirm or deny reports of his $10 million pay package, he simply said, "Thirty-five years and a month ago I walked into this place having left a job in the U.S. Army at $250 to $300 a month and landed an $81-a-week unionized clerical position and thought I'd hit the lottery. Anything above that is perfectly fine." When pushed, he said it has been NYSE policy for 211 years not to disclose executive salaries, although such disclosures are required of firms that list on the exchange.
Grasso, known for his diminutive size and acerbic wit, started working at the NYSE at age 21, after failing a police eye exam. He grew up in Queens, raised by his mother and her three sisters in a two-bedroom railroad apartment. He graduated from Newtown High School in Elmhurst, N.Y., now a stronghold of middle-class upward mobility but then a place of gang fights and racial tension. He never finished college.
Grasso found many kindred spirits at the Big Board, a place dominated not by patrician blue-bloods but by street-smart tough talkers from Queens, Staten Island, Brooklyn and the Bronx. Over 35 years, Grasso rose through the ranks, filling a variety of jobs and earning a reputation as a whip-smart master of trading mechanics and as a trusted friend to just about every constituency, from floor traders to brokers-dealers to Big Board executives.
Mentored by former NYSE chairman John Phelan, Grasso became an executive vice president in 1981 and president and chief operating officer in 1988. When Phelan left in 1990, Grasso was passed over for the top job, losing out to William H. Donaldson, co-founder of Wall Street brokerage firm Donaldson, Lufkin & Jenrette and now chairman of the Securities and Exchange Commission.
When Donaldson left in 1995, Grasso got the top job.
The NYSE, founded in 1792, is owned by its 1,366 member firms. Those firms, which include big brokerage houses and smaller companies, pay for "seats" on the NYSE. On the floor, buyers and sellers trade individual stocks. The NYSE is also the frontline regulator of its member firms. It is supposed to monitor trading practices to ensure that investors get the best prices, and it sets financial and corporate governance standards for companies listed on its exchange.
For much of his time as the head of the exchange, Grasso has been on a mission to build the NYSE as a "brand," maximize listings and steer as much trading volume to the floor as possible while fending off the Nasdaq Stock Market and other new electronic stock markets. Listing fees and share trading generate revenue for the exchange.
Critics say Grasso has been very slow to embrace reform. They note that he supported the nomination of Citigroup chief executive Sanford I. Weill for a non-industry slot on the NYSE board of directors even though Weill's firm was at the center of an investigation into alleged bias in stock research. Weill withdrew his nomination after New York Attorney General Eliot L. Spitzer, who spearheaded the probe, called it an "outrage."
Grasso said today that the Weill nomination was a bad mistake.
The Big Board at present has a 27-member board consisting of three NYSE executives (including Grasso, its chairman), 12 securities industry representatives and 12 people from outside the industry. Critics of exchange governance, however, say many of the 12 directors considered to be from outside the industry actually have deep ties to Wall Street. One example often cited is Larry W. Sonsini. He is considered an outside director, but his law firm is the top legal adviser to companies seeking to go public. J.P. Morgan Chase & Co. chief executive William B. Harrison Jr. is also considered a "public" director.
Kenneth Langone, lead director of Home Depot Inc., chairs the NYSE's compensation committee.
In response to criticism and pressure from the SEC, the NYSE board has appointed a committee to examine the NYSE's governance practices. It is to hold hearings on the issue next month.
One possible outcome, Grasso said, could be the creation of a new board panel consisting only of directors from outside the securities industry to set executive salaries. But he did not give a timetable for when the change might occur.
The structure of the board is up for debate as well, Grasso said, as is the question of whether he should be allowed to serve on boards of listed companies. Grasso said he did not think there was anything wrong with such arrangements but added that he would not join any new boards and would consider stepping down from the Home Depot post.
He said the issues need to be studied because the exchange is a unique entity. "In the light of what we've just asked our listed companies to do, I think common sense says let's take a look at -- we are different, we are not a public company -- but let's look at whether there are things we need to do to look more like companies that we are asking to make these types of changes," said Grasso.
Ed Kwalwasser, the exchange's executive vice president for regulation, who also sat in on the interview, said his staff members are conducting their own probes, interviewing dozens of floor traders and executives from the seven "specialist" firms that operate on the exchange floor, to determine whether they acted improperly to make profits at the expense of investors. The interviews are expected to take a few months. The exchange will then decide whether to proceed with any charges.
Grasso said the comprehensive specialist probe demonstrated that the exchange is living up to its duty to oversee broker-dealers and listed companies. He also pointed to the NYSE upgrades of its technology, which he said will get better trading prices for investors.
"We are here to serve one community," Grasso said. He added that it is not the traders and the members of the NYSE he is talking about. "It's 85 million investors. If you do a good job for them, everyone else will benefit. That's our charter. You won't find that written anywhere, but that's our ethic, that's really what drives us. Whether it's a piece of technology, a product, a regulatory rule, you ask a simple question: 'Is it going to benefit the least sophisticated user of the market?' "
Ken Morris, former head of international equity sales trading at Morgan Stanley, called Grasso's nod to improved governance "self-serving and token," saying it is designed to appease regulators. He added that he did not expect to see the exchange adopt more investor-friendly practices any time soon.
"The days of the specialist and the floor being a closed society, protecting itself and hiding its activities are numbered," Morris said.
Others said that Grasso's reported salary indicates a lack of understanding of the new environment. Benn Steil, an expert on financial markets at the Council on Foreign Relations, called the reported $10 million package "excessive." Because Grasso has spent his entire career at the NYSE, there is no reason he should be paid the same as a Wall Street chief executive, he said.
"For an economist, the question is, what's the opportunity cost? If Grasso picked up and left, what could he be expected to be paid in his next job?" he said. "I think you could make a fair case it would be considerably less than $10 million. . . . If the exchange paid him $2 million a year, would he walk? If not, why are they paying him so much? It leads to all kinds of questions about the exchange's governance."
Grasso said the NYSE is moving as quickly as it can to adjust to the new environment.
"Everything is on the table, how you structure committees, composition of committees. . . . Should stock exchange senior officers sit on boards of public companies? . . . Dick Grasso didn't start the trend. My predecessor sat on three, his sat on three, and his sat on four. . . . Now in today's environment you have to ask the question, how will you ever convince people that Dick isn't conflicted? So [the board] has to step back and say, should we allow it to happen?" said Grasso.
"I'm not the imperial CEO some people would like to think I am, okay? That $81 unionized clerk, that is where I started, okay? And I don't forget that," said Grasso.
Researcher Richard S. Drezen contributed to this report.
© 2003 The Washington Post Company
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