Grasso's Fungibility

Calling economics the "dismal science" is harmful.

Such denigration makes it seemingly forgivable to ignore the key life lessons conferred by Econ 101, one of those classes I'm quite happy I took at the University of North Carolina. (My alma mater's economics building is in fact called Gardner Hall -- completely unrelated to my family -- but it does look like destiny, in retrospect!)

Allow me, therefore, to make your day just a bit more dismal by brandishing a term from our econ toolbox. Call it today's word of the day: "fungibility."

Know it? If so, you may not need to read the rest of this column, since I'm here to define and illustrate the term, applying it to former CEO of the New York Stock Exchange, Dick Grasso. I do in fact suspect many American professionals do not know this term. One minor and sorry confirmation of my suspicion is that the spell-check in Microsoft Word underlines "fungibility" in red as I type it, suggesting that even the world's most popular word processor never -- back of the room, legs propped up on the desk in front -- sat through an econ course. Tsk-tsk.

Fungibility is the degree to which any one thing can be replaced by another. The Latin fungi meant "to perform," and so when we talk fungibility, we ask ourselves how much one thing can perform in place of another.

A synonymous modern-day phrase for fungibility is replacement cost or replacement value, where we simply ask ourselves how much it would cost to put one thing in place of another.

Which broaches the question of the fungibility of Dick Grasso -- or, truly, of any CEO in America today. Let's for a second not accept the media's conventional focus, which regards how much these guys are making. From our Foolish standpoint, any pay package more than a few mill a year sounds like any other, and these stories seem pitched in most cases to arouse our envy.

No, let's take action instead, and rationally ask ourselves how much would it cost to replace this or that person, whatever the context. Because it is this question, this understanding of fungibility that boards of directors across the nation need to understand -- because they seemingly, and irresponsibly, do not seem to understand.

How fungible is Dick Grasso?

For five years now, I have sat on a committee of the New York Stock Exchange, the individual investor advisory committee -- whose aim is to represent people like you and me -- and I have had the pleasure of spending a few hours a year with Dick. He is an excellent guy. Completely stand-up fellow, well-liked and deservedly so, articulate, visionary. He's overcelebrated for opening up the Exchange after Sept. 11 (this is called a "heroic" act by CNBC, which still has me scratching my head). At the same time, he's undercelebrated for pushing through investor-friendly policies like the decimalization of share prices and a host of other initiatives not so easily swallowed by the ancient proud beast that is the New York Stock Exchange. So I conclude this paragraph with a point most important to me: Dick Grasso, whatever you read about him, is a good man.

That said, how fungible is Dick Grasso? Exceedingly so. The institution of the New York Stock Exchange can be run effectively by dozens, if not hundreds, of people, given the chance, and for a fraction of the cost. Pulling another lesson from undergraduate economics, anytime you have a supply that large, the pricing for a given supplied component (one CEO, in this case) should be much -- make that much much much -- lower than, say, the $48 million bonus that Mr. Grasso says he was entitled to as a result of his 1999 contract (48 additional millions that he decided to forgo!).

You can read the considered opinion that others will get run out of the Exchange in coming weeks and months, particularly those large-bank fat cats responsible for OKing Grasso's compensation package. So be it, and glory be.

For 10 years, we at The Motley Fool have invited you -- our fellow Americans -- to work together with us to reform Wall Street. So many conflicts of interest remain, and in many cases the silver bullet that puts an end to these is simply education.

So if you've learned with me the term fungibility today and understand how it can and should be applied to CEO compensation in America, consider yourself better educated than the limp-wristed fellows joining hands in America's corporate boardrooms, who must certainly have skipped their college "dismal science" courses -- or at least slept through that one econ class where their dismal prof taught fungibility.

David Gardner co-founded The Motley Fool and writes each month for Motley Fool Stock Advisor.


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