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NYSE CEO Criticized Over Pay

September 16, 2003 at 12:00 AM EDT
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RAY SUAREZ: When the New York Stock Exchange reopened within a week of the 9/11 attacks, much of the credit went to its chairman and CEO, Richard Grasso. He spoke to the NewsHour the night before the reopening bell.

RICHARD GRASSO, Chairman/CEO, New York Stock Exchange: All of the conduits requisite to bringing up the world’s most admired marketplace are in place, ready to go, and we’re ready to send a message to these criminals: They’ve lost.

RAY SUAREZ: But now Grasso’s attracting a very different kind of attention, after a $140 million lump-sum pay-out announced by the exchange three weeks ago. Most is savings, benefits, and incentives that were previously earned over 35 years with the exchange, and deferred.

The big payday attracted a steady drumbeat of criticism, even calls for Grasso to quit. Last week, Securities and Exchange Commission Chairman William Donaldson said the pay package raised “serious questions” about the governance at the stock exchange. Around the same time, Grasso said he’d forfeit an additional $48 million in pay.

But he resisted calls for his ouster, saying he was the right person for the job. Grasso, now 57, has worked at the exchange his entire adult life. A native of Queens, he never finished college. He started as an exchange clerk in 1968, became president in ’88, and chairman in ’95. His job as chairman is twofold. He oversees a profitable operation on one hand, and monitors any misconduct on the other.

Every day, $20 billion changes hands at the exchange. The Big Board, as it’s known, is a marketplace where more than 1,300 buyers and sellers pay for the right to trade on the exchange floor. The exchange’s board of directors, which includes Grasso, monitors day-to-day activities.

Ultimate oversight belongs to the SEC. In recent days, the board of directors has come under fire, amid reports that Grasso himself chose the people who approved his pay package. The directors will consider any changes to the Big Board’s governing structure at their meeting in three weeks.

Meanwhile, the SEC is poring over the details of the Grasso package, Chairman Donaldson is set to testify before Congress at the end of the month.

RAY SUAREZ: This afternoon, the California state treasurer, Phil Angelides, joined the heads of two of the state’s biggest public pension funds in calling for Grasso’s resignation.

Mr. Angelides joins us now, along with Thomas Donlan, editorial page editor of Barron’s National Business and Financial Weekly. Treasurer Angelides, your letter today made no bones about it, right up at the top “it’s time for you to go.” Why did you send it?

PHIL ANGELIDES: Well, I did join with my colleagues at our two pension funds to make a very specific request, and that was that Mr. Grasso resign and the New York Stock Exchange and Mr. Grasso revise this inappropriate pay package. And it’s very simple.

The New York Stock Exchange is a revered institution. One of its primary missions is to help regulate our financial markets. And it must set a very high standard. As you know, our markets have been buffeted by an unprecedented wave of corporate scandal.

This excessive compensation package and the way in which it was approved raise serious questions of credibility and moral authority for the exchange. And the right thing to do is to undertake this cleansing act so the New York Stock Exchange can restore its credibility as a force for corporate reform in America at this critical moment.

RAY SUAREZ: Well, you’ve used the word “excessive” several times now. This was a pay package voted on by other people: Top decision-makers in some of the largest trading houses in the United States. Wasn’t it up to them to decide what Chairman Grasso should get and what he shouldn’t?

PHIL ANGELIDES: Well, that is a perspective, but let me give you what I think is another important perspective. That is that the New York Stock Exchange is really a market for the investing public, the 80 million Americans who invest in this stock market.

And if you look at this pay agreement, what really troubled me most was the fact that in the very years when this country was hit by the greatest wave of corporate scandal since the market manipulations of the 1920s, Mr. Grasso had his biggest payouts. We don’t think it’s appropriate that that kind of excessive compensation be paid by a regulatory entity, you know, the NASDAQ pays their head $2 million a year — when Mr. Donaldson was there it was a million-and-a-half dollars a year.

And while there is a responsibility to shareholders, the greater responsibility of the New York Stock Exchange is to our financial markets. And be clear, after what we’ve been through with Enron and WorldCom and fraud and abuse and excessive compensation, we need investor faith in the fairness, transparency and openness of our markets if we’re going to have economic progress.

RAY SUAREZ: Thomas Donlan, how do you respond to that?

THOMAS DONLAN: Well it sounds really good but it’s part of a movement that Mr. Angelides is part of to make corporate governance part of political process. We have an assertion that the New York Stock Exchange is primarily a public utility. In fact, for more than 200 years it’s been a private club. It’s first and foremost a private club with directors appointed by the members, elected by the members, selected by the members, and they are the ones who should decide how much Mr. Grasso is paid.

Mr. Angelides may say it’s excessive but it’s none of his business. He doesn’t own stock in the New York Stock Exchange. He doesn’t own a seat on the New York Stock Exchange. The members are the ones who should decide what’s excessive and what’s appropriate. They made a decision to pay Mr. Grasso an amount roughly in accordance with the leaders of financial institutions in this country. That is a policy decision that was theirs to make. It’s not for the SEC, and it’s not for Mr. Angelides to second guess it.

RAY SUAREZ: Well, the treasurer of California called the New York Stock Exchange a regulator. You called it a private club. But isn’t it both? Hasn’t the United States given the New York Stock Exchange the mandate to police its own activities?

THOMAS DONLAN: Well, it’s quite the opposite. The United States took from the New York Stock Exchange the freedom to police its own activities without any supervision or governmental supervision. The SEC only came into existence in the 1930s.

And that’s when the New York Stock Exchange became partially a regulator. What the phrase “self-regulatory organization” really means is that the SEC has delegated authority under the law that created the SEC to the New York Stock Exchange to run its own affairs. It’s too bad I think that we have… we’ve turned this into a political issue.

RAY SUAREZ: Go ahead, Mr. Angelides.

PHIL ANGELIDES: Let me say something. I’m standing here today as the representative of 1.8 million Californians whose retirement savings we invest in the market. In fact, the California public employees retirement system has about $46 billion invested in New York Stock Exchange listed companies.

It’s more than a private club. The New York Stock Exchange has responsibility for regulating broker-dealers. It sets listing standards and corporate governance standards for its companies. It’s the one that has told companies to have independent directors, independent compensation boards. It just seems to me that it needs to lead the parade not be an impediment or a wrong signal in terms of corporate reform.

Let me add one other, I think, important point. And that is signals are important from the leadership of our financial markets. Before I was treasurer, for 15 years I was in the private sector. I have a lot of regard for what the private sector can do in wealth creation, innovation, risk taking, and I believe that executives and leaders of companies who take risks ought to be rewarded.

But heading what is in many respects a regulatory organization is not the same as building Microsoft or building Apple or taking real risk in the marketplace. And when the leader of the New York Stock Exchange, which regulates companies, hauls down $140 million — and I might add the biggest chunk of that when the market, in fact, was being buffeted by scandals not curbed by the exchange — I think that’s a bad perception for ordinary investors and the investing public who do look to the exchange for leadership.

RAY SUAREZ: Well let’s say you’re technically right and the exchange does run its own affairs legally with no outside interference — what about Mr. Angelides’ point about appearance?

THOMAS DONLAN: Well the appearance that the stock exchange does nothing and is a monopoly that needs to be regulated I think is a false appearance. Mr. Angelides is suggesting that there’s no comparison between the New York Stock Exchange and a company like Microsoft that’s in a highly competitive marketplace.

In fact, the New York Stock Exchange is in a worldwide competitive marketplace. Other exchanges both here and abroad, would be happy to take away its listings to compete for its listings. Under Mr. Grasso’s and Mr. Donaldson’s leadership the New York Stock Exchange has successfully defended its listings, its ability to provide a marketplace that companies voluntarily choose to list on, to list themselves on.

People trade in stocks of companies not because they trust the New York Stock Exchange but because they believe in the companies.

RAY SUAREZ: Well, Mr. Angelides has also referred several times to these recent… most recent years being tough ones for the market and the marketplace in general, for all securities’ holders. Is there not at least a public relations problem when your head pulls down some gaudy sums during a time when other people are losing their shirts?

THOMAS DONLAN: Of course there’s a public relations problem. And I wouldn’t pretend that this isn’t something where Mr. Grasso might be thrown to the wolves to satisfy the baying of the public relations problem but that doesn’t mean that we should approve of it or think that making a political issue out of a… out of private governance is the right way to go.

Mr. Angelides really wants the New York Stock Exchange and its head to be part of his corporate governance and corporate reform movement. And any stick will do to beat that dog.

RAY SUAREZ: Well, is that enough? If Dick Grasso goes, Mr. Angelides, is that going to answer the problems that you feel are there at the New York Stock Exchange?

PHIL ANGELIDES: Here’s what has to happen. I do believe that this boil has to be lanced and Mr. Grasso should resign in the interest of the financial markets. I also believe that the contracts should be revised to be rationally appropriate. But then I believe the New York Stock Exchange needs to restore its credibility at this critical time in our markets.

You know, the fact is investors do rely on the exchange to be an open and honest forum for the exchanging of commodities for stocks. It is the place where 84 million ordinary investors do count on honesty and probity. And I also think that signals from leadership are important.

You know, Mr. Grasso deserves much credit for improvements to the exchange. But let’s put this in perspective. Yes, it’s great that he got the exchange up and running after September 11, but we also have to impart a sense of fairness in this economy. Who were the firefighters, the police officers, the other heroes of 9/11 who got paid $5 million for essentially getting their operations up and running?

So I do think for a healthier American economy, openness, transparency and fairness are important even at the New York Stock Exchange which I think is equal parts public trust, more than it is frankly a private club.

RAY SUAREZ: Time for a very quick response.

THOMAS DONLAN: The comparison to the firefighters is totally inapt so is the comparison to… of Mr. Grasso’s income to the income of corporate raiders. The whole thing is to lump all of this together as one thing and to make Mr. Grasso a symbol that we would throw to the wolves so that people like Mr. Angelides can have more impact on corporate governance, they can scare the New York Stock Exchange into doing their bidding.

If anyone should be fired, it should be the directors of the New York Stock Exchange who made the decision to pay Mr. Grasso. Some of them have even said they didn’t know how much he was being paid. I think that’s a declaration of incompetence.

RAY SUAREZ: Thomas Donlan, Treasurer Angelides, thank you both.