Stock Market Chief Resigns in Pay Furor

By Thomas S. Mulligan

Sept. 18, 2003 12 AM PT

Times Staff Writer

NEW YORK —

New York Stock Exchange Chairman Richard Grasso resigned Wednesday, unable to withstand the uproar over a $140-million pay package that critics said made him look more like a symbol of Wall Street greed than one of the world’s most important financial regulators.

In an emergency board meeting convened 15 minutes after the stock market closed for the day, NYSE directors requested, received and accepted Grasso’s resignation, climaxing an increasingly bitter, three-week flap that market professionals said was tarnishing the Big Board’s reputation and becoming a major distraction from its business.

No successor was named. NYSE director H. Carl McCall issued a statement late Wednesday night saying the board had “reaffirmed its confidence” in Grasso’s top lieutenants, Robert G. Britz and Catherine R. Kinney, and that they would “continue to manage the exchange on a day-to-day basis, reporting to the board.” The two are executive vice chairmen and co-chief operating officers of the NYSE.

Some critics said the 27-member board, which includes the heads of Wall Street’s largest securities firms and several top corporate chieftains, was at least as much to blame for the controversy as Grasso. The directors, after all, approved Grasso’s employment contracts and should have known what was in them, the critics said.

“This is just one step. We have a ways to go,” said Francis P. Maglio, a recently retired 30-year veteran of the NYSE trading floor who still owns two membership seats. He said at least some directors should step down.

Maglio said it was hypocritical of the directors to handle Grasso’s pay “without the transparency and accountability that they demand” of companies whose shares trade on the NYSE, the world’s largest stock exchange.

His comments echoed the criticism that has hounded Grasso since his outsized pay package was detailed in late August. One of the NYSE’s roles is to draw up rules of corporate behavior for its member companies -- and Grasso’s compensation and the secrecy with which it was determined appeared to fly in the face of those rules.

Detractors have also attacked the process as rife with potential conflicts of interest. For example, until procedures were changed this year, Grasso made nominations to the board’s pay-setting compensation committee.

When the NYSE disclosed details of Grasso’s pay on Aug. 27, the numbers shocked even some of Grasso’s supporters. The exchange said it would pay Grasso a $139.5-million lump sum this year, representing deferred salary and retirement benefits from previous years. The exchange also said his 2003 salary and bonus would total at least $2.4 million.

The revelations surprised Securities and Exchange Commission Chairman William Donaldson, who demanded further details. The NYSE replied a week later with new disclosures that Grasso’s pay over the last three years had amounted to $59.3 million and that he was owed an additional $48 million under a revised employment contract set to run through 2007. Grasso, in an attempt to stem the mounting outrage, said he would forgo the $48 million.

Grasso, 57, with a working-class Queens, N.Y., upbringing and no college degree, became the first Big Board chief who rose through the ranks rather than get plucked from an executive slot in government or a big brokerage firm. He joined the NYSE as a clerk in 1968 and never worked anywhere else.

“Throughout my career and on behalf of all exchange constituents, I have worked with great partners to build and enhance the value and brand of the NYSE,” Grasso said in a statement after the meeting. “I look forward to supporting the board and the exchange in bringing about a smooth transition to a successor. I believe this course is in the best interests of both the exchange and myself.”

The tipping point in Grasso’s downfall apparently came Tuesday, when a growing Wall Street chorus calling for his resignation was joined by California State Treasurer Phil Angelides, the heads of California’s two largest public pension funds and New York State Comptroller Alan G. Hevesi, trustee of New York’s public pension fund.

Together, the four influence the investment of $345 billion in state employees’ retirement funds and thus are among the NYSE’s largest customers.

Angelides on Wednesday called on Grasso to give back some of his past wages so that his total compensation package would look “rational.”

“Our free enterprise system is built on the notion of entrepreneurs taking risk and earning wealth,” Angelides said. “But in recent years, we’ve seen an elite class that felt it had an entitlement to riches, without taking risk.”

As the pressure mounted, Grasso at midday Wednesday called on his board to hold a special meeting on Sept. 24 to discuss new corporate-governance recommendations that it was preparing to submit to the SEC.

But the board decided it couldn’t wait a week and scheduled the emergency session for 4:15 p.m. New York time.

The directors pushing to replace Grasso, according to people familiar with the discussions, included William B. Harrison Jr., chairman of J.P. Morgan Chase & Co.; Henry M. Paulson Jr., chairman of Goldman Sachs Group Inc.; and John J. Mack, chairman of Credit Suisse First Boston.

As members of Wall Street’s elite, they had prospered along with the stock exchange during the bull market of the late 1990s and supported Grasso’s chairmanship. But facing a near revolt on the trading floor, they finally bowed to the inevitable, several market professionals said.

“If you took the temperature of the floor community as this thing dragged on, each day the sentiment got more negative and the pressure for change became just overwhelming,” said trader Ted Weisberg of Seaport Securities.

The NYSE, as the nation’s oldest and largest stock market, wields significant power as a regulator of the 2,800 companies that list their shares on the exchange, including most of America’s biggest firms. The NYSE sets rules that companies must follow to maintain their stock listings.

For example, the exchange last year proposed new rules requiring that listed companies get shareholder approval for all equity-based compensation programs for their executives, such as stock option grants. The SEC approved the NYSE proposal in June.

But in the wake of the corporate financial scandals of the last two years, some critics said the NYSE, while calling for better governance on the part of the companies it regulates, was refusing to lead by example.

Grasso’s pay, for example, had long been kept confidential by the exchange. Only after intense pressure this year from the media and, finally, from the SEC did the NYSE agree to go public with Grasso’s compensation.

The anger aroused by those revelations stemmed from more than the sheer size of Grasso’s pay packages. There also was intense criticism about the timing, since Grasso received some of his biggest paydays -- $30 million in salary and bonus for 2001, for example -- when the financial community was already mired in a brutal bear market.

Moreover, there was concern about the appearance of conflicts of interest, because some members of the board that gave Grasso his big pay ran companies that were subject to his regulatory oversight.

The former chairman of the board’s pay-setting compensation committee was Kenneth G. Langone, a co-founder and director of Home Depot Inc. Grasso is a director of Home Depot and serves on its compensation committee, a role that has earned him criticism because Home Depot is an NYSE-listed stock.

Some of Grasso’s defenders in the money management community expressed outrage at seeing him forced out.

“People ought to be able to make as much money as they want to in America,” said Nicholas Gerber, manager of the Ameristock fund in Alameda, Calif.

Gerber said he believed the NYSE board had rightfully rewarded Grasso for accomplishments in recent years, including updating the exchange’s technological infrastructure, expanding its listings capacity for domestic and foreign companies, and implementing corporate reforms ordered by Congress such as new independent director standards.

Following Grasso’s ouster, the NYSE board reportedly asked exchange director Larry W. Sonsini, a prominent Silicon Valley business lawyer, to serve as interim chairman and chief executive. However, the exchange said late Wednesday that it would not name an interim chairman. A Sonsini aide told Bloomberg News that Sonsini recommended that the board “use its existing structure with Carl McCall as lead director.”

Grasso’s resignation came two years to the day after his greatest triumph: the dramatic reopening of the stock exchange after the World Trade Center terror attacks. But even that career pinnacle was stained in recent days by criticism that greeted the surprise disclosure that Grasso had received a $5-million bonus for his performance in the aftermath of 9/11.

“The whole situation is unfortunate,” Weisberg said, “but it reminds us that the institution is bigger than any one person.”

Times staff writers Walter Hamilton in New York and Josh Friedman, Kathy M. Kristof and Tom Petruno in Los Angeles contributed to this report.

(Begin Text of Infobox)

Rapid downfall

The end of Richard A. Grasso’s eight-year reign as chairman of the New York Stock Exchange played out in three weeks:

Aug. 27: The NYSE reveals that it will pay Grasso $139.5 million in accrued retirement benefits this year, along with a 2003 salary

and potential bonuses of at least $2.4 million.

Sept. 2: Securities and Exchange Commission Chairman William Donaldson demands that the NYSE show how it formulated Grasso’s compensation.

Sept. 8: Veteran NYSE seat holder James Rutledge asks the SEC to investigate Grasso’s pay package.

Sept. 9: The NYSE reveals Grasso is guaranteed additional compensation of $48 million between now and 2007, but Grasso says he’ll forgo that money.

Sept. 10: Grasso tells reporters he won’t resign.

Monday: Former NYSE Chairman James Needham says Grasso and the exchange’s board should resign.

Tuesday: California’s state treasurer and New York’s state comptroller call for Grasso’s resignation, as do California’s two largest public employee pension funds.

Wednesday: The NYSE calls an emergency board meeting. Grasso agrees to resign.

Source: Times research

Los Angeles Times

Richard Grasso

Age: 57

Hometown: Queens, N.Y.

Education: Attended Pace University in New York.

Career highlights:

* 1968: Joins the New York Stock Exchange as a clerk after leaving the U.S. Army.

* 1973 - 1988: Holds various management positions at NYSE.

* 1988 - 1991: NYSE president and COO.

* 1991 - 1995: Executive vice chairman of the NYSE.