As expected, crusading New York attorney-general Eliot Spitzer has filed suit against former New York Stock Exchange chairman Richard Grasso, alleging that his compensation was egregiously large and that he misled the NYSE board in order to achieve it. Mr. Spitzer wants the former exchange chief to repay $100-million (U.S.) of the $187.5-million package he received before being fired. Mr. Grasso is fighting back, however — and as outrageous as his compensation package may be, he makes a couple of good points about the way Mr. Spitzer is waging this battle.
First on the list is the attorney-general's focus on Mr. Grasso himself, rather than on the board of directors — a flaw that is also present in a $200-million lawsuit launched against Conrad Black and two of his senior executives at Hollinger. In Hollinger's case, the reason is fairly obvious: the company's board of directors launched the lawsuit. Naturally, they would rather point the finger at Lord Black rather than themselves, even though many of them signed off on the compensation agreements that they are now criticizing. But what is Mr. Spitzer's excuse? True, Richard Grasso accepted the $187-million or so, and the attorney-general is also going to try and make the case that the NYSE chairman misled the board with some of the financial information he provided to back up his compensation package. An assistant to Mr. Grasso has admitted misleading the board, and Mercer Consulting has refunded the fee it accepted for reviewing the pay package. The lawsuit also names Kenneth Langone, the founder of Home Depot and a friend of Mr. Grasso's who sat on the compensation committee. That said, however, it's still not clear why the rest of the board of directors get to avoid any responsibility. It's one thing for the chairman or CEO of a company to demand a massive compensation package — in fact, that's probably fairly common. But why didn't the board balk at the size of Mr. Grasso's package? It's a little hard to believe that board members such as former U.S. Secretary of State Madeleine Albright had the wool pulled over their eyes by the diminutive NYSE chairman. The omission of other board members from Mr. Spitzer's lawsuit is so jarring that a number of observers have remarked on it, including — ironically — Mr. Grasso himself, in an opinion piece he wrote for the Wall Street Journal defending his compensation. According to the former NYSE chairman, Mr. Spitzer doesn't want to antagonize board members such as former New York comptroller Carl McCall or senior executives of Goldman Sachs and Merrill Lynch because he is planning to run for governor of New York state and doesn't want to burn any bridges. That may be an overly cynical view of Mr. Spitzer's motivation, but it is hard to ignore the fact that he has avoided naming any of the other members of the NYSE's board. Mr. Langone may be worthy of specific criticism in the AG's view, since he headed the compensation committee, but surely the chairman's pay was just part of a larger problem — a governance structure that was impaired in several ways. For example, several members of the board came from brokerage firms whose floor-trading arms were regulated by the NYSE. So why not go after the board as a whole rather than just Mr. Grasso? It's hard to quarrel with the overall intent of Mr. Spitzer's crusade. While corporate compensation should be a matter between a company's board and its shareholders, in cases such as Mr. Grasso's the larger issue of fiduciary duty has to be addressed, and Mr. Spitzer's office clearly has jurisdiction. Although most people assume that the NYSE is a corporation owned by its member firms, it is in fact a not-for-profit company and thus is governed by special legislation — which prevents such agencies from paying their executives excessive amounts of compensation. More than one wag has observed that the NYSE was a non-profit organization in large part because it paid out so much money to Mr. Grasso. In fact, between 2000 and 2002, the amount the NYSE expensed in relation to the chairman's compensation and benefits amounted to 99 per cent of the exchange's net income. The compensation Mr. Grasso received between 1999 and 2002 — a total of $80.7-million — was more than four times what he received in the previous four years, and yet for much of that time the NYSE was faltering. Still, Mr. Grasso's pay did not occur in a vacuum, and it's hard to imagine that he somehow hoodwinked the board of directors into approving his oversized pay package. The compensation he received was a symptom of the corporate culture on Wall Street at the time, and a symptom of the flaws in the NYSE's governance — and there are a lot more people to blame for that than just Richard Grasso.© The Globe and Mail
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