The Grasso Fiasco: And Lessons for New Zealand: The Payment of $240 Million to the Chairman of the New York Stock Exchange, Richard Grasso, Created Such Controversy Worldwide That It Eventually Forced His Resignation. How Could the NYSE Board Have Got Itself into Such a Mess? What Lessons Can Be Learned from the Experience?

By Ison, Janet | New Zealand Management, December 2003 | Go to article overview

The Grasso Fiasco: And Lessons for New Zealand: The Payment of $240 Million to the Chairman of the New York Stock Exchange, Richard Grasso, Created Such Controversy Worldwide That It Eventually Forced His Resignation. How Could the NYSE Board Have Got Itself into Such a Mess? What Lessons Can Be Learned from the Experience?


Ison, Janet, New Zealand Management


The implications of the New York Stock Exchange board's handling of the Richard Grasso affair, reach much further than just settling chairman and chief executive Grasso's enormous compensation package. As the chairman of the Securities and Exchange Commission William Donaldson reportedly said: "The pay package raises serious questions regarding the effectiveness of the NYSE's current governance structure."

In the current climate of questioning all aspects of corporate governance, the saga throws into high relief the issue of how boards deal with executive compensation and the role of the compensation committee in the overall corporate governance structure.

To recap the story, Grasso had worked for the NYSE for the whole of his career. When he was appointed chairman and CEO in 1995, his remuneration was just over $4 million a year. It rose to nearly $62 million in 2001. The Compensation Committee of the board wanted to extend his employment contract from 2005 to 2007. As part of the negotiation, Grasso asked that his deferred compensation (a combination of performance bonuses and retirement benefits to which he was entitled, but which he had not yet taken), be released.

Given the huge liability, acceptance of this request was probably the only decision the NYSE board could take. But the ensuing negative publicity has been enormously damaging to the institution, even though (unlike Enron) there is no question of wrongdoing.

The disclosure of senior executive remuneration packages has only recently become the norm. Remuneration was previously seen as a private, even sacrosanct, matter between the individual executives and their employer. Not surprisingly, investors and the general public now view the way organisations structure their pay as symptomatic of other practices. In five general areas of governance practice the Grasso affair offers some timely lessons:

* Establishing clear processes and accountabilities.

* Stipulating how consultants are used.

* Determining how the company establishes the relationship between risk and reward.

* Ensuring that reward systems do not have a compounding effect.

* Analysing fully the consequences of disclosure.

Formalised processes and accountabilities

It is essential that the roles of chairman and CEO are separated to ensure a proper segregation of the governance and operational responsibilities. Unlike America, the fusion of these roles is uncommon in New Zealand. But even where the roles are separated, chairmen can be overshadowed by a high-powered CEO. Grasso, for instance, was criticised as "having an undue influence on the board's nominating and compensation committees", by a New York Times commentator. And according to the Washington Post's Jerry Knight: "Grasso's pay was set by board members and compensation committee members whom he personally picked for their jobs. No one is suggesting any quid pro quo--no kickbacks, no mutual back scratching--but the conflict of interest is no less obvious."

In future, boards are likely to be required to prove that the members of the compensation committee are suitably independent. A New York Times article suggested that "at the very least, the compensation committee ought to consist solely of outside directors".

And boards should have written policies and procedures for the compensation committee on who will decide on executive pay, what will be their credentials, and the reporting and disclosure procedures to be put in place.

Independent consultants

Consultants must also be able to demonstrate their personal independence in the process. Grasso had evidently been advised by a lawyer who also acted as chief counsel to the board's Corporate Governance Committee.

Our own professional experience shows that many boards do not consider the wider issues of independence and impartiality. We frequently receive instructions to review senior executive pay from the CEO or the general manager, human resources, rather than the chairman. …

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The Grasso Fiasco: And Lessons for New Zealand: The Payment of $240 Million to the Chairman of the New York Stock Exchange, Richard Grasso, Created Such Controversy Worldwide That It Eventually Forced His Resignation. How Could the NYSE Board Have Got Itself into Such a Mess? What Lessons Can Be Learned from the Experience?
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