WALL STREET GIBBERISH, 2003 THIRD QUARTER NEWSLETTER

Does this make sense? The Board of Directors of a major corporation approves an extremely generous compensation and retirement package for its Chairman and the corporation’s CEO who has been acknowledged as having done an outstanding job in some difficult situations. When the amount of the compensation becomes public knowledge, there is quite an uproar. The CEO responds by saying there is no reason to be mad at him because all he did was accept what the board, which is supposedly independent, offered. At the point, the board reacts by in effect saying we offered what? And he accepted it? The supposedly outstanding Chairman and CEO must go, and he forthwith he is gone.

It doesn’t make a whole lot of sense to me either, so I think it qualifies as gibberish. There is more to the story, most of which reflects poorly on all the parties involved.

The corporation is none other than the New York Stock Exchange (NYSE), so that makes it Wall Street Gibberish, although not the usual sort. The former Chairman/CEO is Richard Grasso, who earned great praise for his leadership and handling the problems resulting from the September 11, 2001 terrorist attacks that resulted in the stock markets being closed until the following Monday. It was considered quite an achievement that the markets were able to reopen in an orderly fashion less than a week after the terrible loss of facilities and personnel.

The news that Grasso had been given compensation, some of which was deferred from prior years, around $140 million created quite a stir. (Note: In October, the NYSE said that six other top executives were given five-year packages of annual compensation and retirement benefits of more than $140 million in total.) This is not the place to get into a discussion of how much is too much, but there is a problem even for those that say it is up to the board to decide what Grasso’s services are worth. The problem is that the exchange has two major functions that can lead to a potential conflict of interest. One is as a profit-making business to provide a market for the buying and selling of securities. The other is as a regulator of the participants in that market and the companies whose stocks are listed on the NYSE. The members of the Board of Directors are for the most part the heads of brokerage firms and other participants in the NYSE and heads of companies with stocks traded on the exchange. Moreover, Grasso has considerable influence as to who sits on the board.

There is no way the board can be truly independent of Grasso given how they are selected and that he has regulatory authority over their companies. It is clearly not in their interest to have an unhappy and unfriendly head of the exchange.

One indication that the board knew the compensation package was excessive is the way it was structured. Rather than just pay him a huge salary, they tried to hide the total amount by using devices such as deferred bonuses and an extremely generous pension plan. To compound the obvious problem, Grasso revealed that he was entitled to additional $48 million on top of the $140 million, but he would not accept it to show what a good guy he is. After he left, it was revealed that he had a “golden parachute” arrangement that paid him $50 million if he had to leave his job before normal retirement. We should all have that kind of deal.

The board clearly did not do its job. Some of its members have already resigned, and it has been suggested that all of them should do that. They did not serve the investing public’s interest, and by approving the “outrageous” (according to an editorial in Investment News) compensation package, it raised suspicions that the exchange primarily serves its own interests rather than those of the investing public. That type of behavior is totally inappropriate for an organization with important regulatory responsibilities

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