Big Board Ouster

RAY SUAREZ:

When trading began on Wall Street this morning, the man often seen standing at the podium overlooking the world's most powerful stock market was not there. Richard Grasso, New York Stock Exchange chairman and CEO, resigned late yesterday, after an emergency meeting with the exchange's board of directors. His decision came in response to a public uproar over a $140 million lump-sum payout he received last month. Most of it was savings, benefits, and incentives Grasso previously earned over 35 years with the exchange, and deferred. Grasso said he would forfeit an additional $48 million in benefits due to him by 2007. In a statement last night, Grasso said he was leaving reluctantly, but said: "I believe this course is in the best interest of both the Exchange and myself."

For more, I am joined by Gretchen Morgenson, reporter for the "New York Times," and John Coffee, director of the Center on Corporate Governance at Columbia University Law School, where he also teaches securities law. Gretchen Morgenson, the news of the Grasso payday came out much earlier this year, but the events seemed to have picked up speed and intensity in the last 24 hours. What was happening behind the scenes?

GRETCHEN MORGENSON:

Well, part of the problem, ray, was that this was dribs and drabs type of release of information. It wasn't all at once. And then we heard these odd stories that the directors of the Exchange didn't even know what they had handed over to Mr. Grasso in this $140 million contract. That is part of the problem and part of the outrage from the news and why it sort of kept building.

RAY SUAREZ:

How did it happen that he finally had to throw in the towel yesterday? Earlier in the week, Chairman Grasso was talking in a way that looked like he was going to stay and fight for his job?

GRETCHEN MORGENSON:

Well, there were increasing chorus of voices asking for his resignation. Politicians started to call for it. Then when you had the large pension funds that service the public and that invest public money calling for his resignation, I think that really was the beginning of the end because when he lost their trust, really it was all over for him.

RAY SUAREZ:

John Coffee, those pension funds that Gretchen mentions referred in their letters to the chairman to resign referred to him as a regulator, while many inside the exchange called him the head of a privately held corporation. Which was it and was it that culture clash that finally led to his demise?

JOHN COFFEE:

Well, he is both. The New York Stock Exchange is both a business entity, one that competes in a global world market with other market centers, most of which are privately owned and very competitive, and he is a public regulator charged by law with protecting the interest of investors. And that requires a very special governance structure in whom the public at large can have greater confidence. There's a tension between both those functions.

RAY SUAREZ:

Does the departure of Mr. Grasso end the story or now that we have pried open the lid and looked inside, is there more to come at the New York Stock Exchange?

JOHN COFFEE:

I'm sure there's more to come. Indeed the stock exchange was already in the process of beginning to change its governance structure. It recognized some problems. It was going to report on October 2 with proposals I would call modest or moderate in scope. I think the SEC is going to prod them do much more. From the perspective of the SEC the real fear was not that Mr. Grasso got too much money, but that he received the compensation from all of whose members came from the securities industry. If the securities industry can use compensation as a carrot or a stick to reward or punish the chief executive of the chief regulators, we have a conflict problem. That will require some governance changes that make the New York Stock Exchange more controlled by its public directors rather than by its industry directors.

RAY SUAREZ:

Well, earlier today, one of the lead directors of the exchange, Carl McCall, talked about splitting the job of chairman and CEO of the New York Stock Exchange. Is that the kind of thing that the SEC and others have been looking for?

JOHN COFFEE:

That's the first and simplest thing. Although, I'm not sure even that is going to be proposed by the New York Stock Exchange. Mr. McCall was named lead director. That's a substitute for having a non-executive chairman of the board. When one person such as Mr. Grasso occupies both roles– chief executive and chairman of board– he is inherently the imperial Caesar of the organization. If you have a non-secretary executive chairman, then you turn the chief executive into more of a constitutional monarch, someone who is subject to the oversight of the chairman and the rest of board. And given the regulatory functions of the New York Stock Exchange it's important that the C.E.O. Become more of a constitutional monarch even if we wouldn't apply that business model in every situation.

RAY SUAREZ:

Gretchen Morgenson, how come much so much of the attention was focused on Mr. Richard Grasso when he did not vote himself the pay package or the various raises and inducements he has been given over the years?

GRETCHEN MORGENSON:

He became the voice, the face of the exchange especially in the late '90s. He really was front and center and brought the exchange into everyone's homes, as you said, in the opening bell in the morning. So he really was the lightning rod for the controversy. But the board is absolutely the problem here. They gave him this amount of money. He agreed to take it. Perhaps he should have given some of it back, more than the $48 million, but the board is absolutely the problem here. As Professor Coffee pointed out the fact that they are so dominated by the very industry he regulates is an outrage and disgrace. That has to change.

RAY SUAREZ:

But were we witnessing a spectacle in the last 24 hours of a board taking down a chairman whose predicament they had created?

GRETCHEN MORGENSON:

Yes. In fact, and I will predict that the board has to completely turn over, because this was something that they all either agreed to or if they didn't know and didn't know what they were handing him, should have. There is no public, true public representative on this board to represent public investors. A lot about this governance has to change.

RAY SUAREZ:

Is the road forward for the New York Stock Exchange, John Coffee, made more complicated by the fact that the head of the Securities and Exchange Commission is the former chairman of New York Stock Exchange, William Donaldson?

JOHN COFFEE:

I suppose that complicates matters, but I think Mr. Donaldson has indicated very clearly that he wants significant governance reforms. The SEC had a very different model that they imposed on NASDAQ eight or nine years ago when NASDAQ had a much more serious scandal. I think something like that may happen here – that the core of that kind of proposal is that insulate the regulatory functions of the New York Stock Exchange by transferring them to a subsidiary that has its own board on which you have public directors rather than securities industry directors.

I think that's the most important reform, not changing the personalities but changing where they come from. Do they come from the public sector, such as federal officials from the federal banks or the deans of business schools, or are they people who work full-time in the securities industry and necessarily have some conflict between their interest and the interest of investors.

RAY SUAREZ:

What does the exchange in your view, professor, have to do now, in the short term? New York state controller Alan Hevesi talked about returning investor confidence. Are the events of this week enough?

JOHN COFFEE:

I think the first question will be whether they can find someone of unquestioned integrity. I would suggest if they split the two jobs it wouldn't be that difficult to find a non- executive chairman who would be a person of Walter Cronkite-like integrity that the whole country respects. The harder job will be to find an executive who is willing to work underneath that structure. But I think people who coming from the banking industry, former Federal Reserve officials all of those people would make excellent candidates. Several have been mentioned recently to be the chief executive of the New York Stock Exchange.

RAY SUAREZ:

Gretchen, earlier today there was a hastily called meeting of the members of the exchange. Any word on what came out of that?

GRETCHEN MORGENSON:

I haven't heard anything. They are not my best friends. They know their livelihoods are at issue here and the integrity and confidence of the investing public is at stake and it has to be addressed immediately and soundly.

RAY SUAREZ:

But the markets didn't show any jitters today from having a quick change at the top yesterday afternoon, did they?

GRETCHEN MORGENSON:

No, they did not.

RAY SUAREZ:

Gretchen Morgenson, John Coffee, thank you both.