Some New York Stock Exchange (NYSE) board members are trying to limit the damage to their own images for their roles in approving NYSE Chairman Dick Grasso's $140 million retirement package. Curiously, they're doing so by stating that they didn't know how much they had agreed to pay him -- that they never added up all of the bonuses and perks, that this was a shock to them as much as to anyone.
If this is, in fact, the case -- if these directors really, truly didn't know -- then they should resign. If they did know, they should still resign. One of the most important jobs of a director is approving compensation for top management. A plea of ignorance is just not good enough; after all, this was one of their main jobs. And frankly, I don't believe them.
CEOs know what they are paid
The directors of the NYSE know exactly how the executive compensation game is played, because the majority of them are top executives at publicly traded companies. So when a compensation consultant says that Grasso's pay package is "competitive" with executives at comparably sized companies, these folks need only look at their own tax returns to know precisely how much Grasso gets paid. I'll leave for another day the notion that it's high time that investors reject "salary competitiveness" as a justification for overpaying executives. Among publicly traded companies, it's a specious argument. At a quasi-regulatory body like the NYSE, it's absurd.
Yes, the NYSE is a private entity and only chose to disclose executive compensation under pressure from the SEC. But the government has given broad oversight duties to the NYSE, and Grasso's compensation package -- and the justifications thereof -- have rightfully put that role in sharp light. Grasso's rewards are not based as much upon the NYSE's ability to perform as regulator as they are on the NYSE's performance as a business.
Where the two pursuits conflict, we investors ought to have no doubt where management's interests lie. After all, they're getting paid for how well they compete with rival exchanges, most notably the Nasdaq. In such an environment, each listing lost is a triple threat: the loss of a bean in the "who's got more" competition, the loss of ongoing listing revenues, and the loss of a product -- the ticker symbols by which NYSE member brokers generate trades.
In each case, the business element comes into conflict with the regulatory one. If the NYSE's top brass is mostly rewarded for their business skills, and that means increasing listings, then who is to say that the regulatory requirements and oversight won't suffer? The NYSE under Grasso received a big black eye in 2002 when the SEC shut down trading on ACLN, a Belgian/Cypriot car carrier that turned out to be primarily in the business of scamming stock investors. How many people got just a little bit more comfortable with this bizarre company due to its presence on the Big Board? Did the fact that investors "didn't know" ACLN was a scam help them?
No such thing as a free pass
Of course, Grasso wasn't responsible for what happened at ACLN, Enron, Tyco (NYSE:TYC), Cendant (NYSE:CD), Sunbeam, or other NYSE companies beset by scandal under his reign. And certainly there are directors in each case, and many others, who were truly hoodwinked. Next up, naturally, are the directors of the mutual fund companies and the funds themselves who, predictably, will have had no idea that the companies were fleecing their customers.
But that's no excuse. You don't get a free pass from a cop for not knowing the speed limit, and directors should in no way get off with a "had I only known" here. It makes no difference when you go 60 mph in a 35 mph zone whether you were aware of the speed limit -- there's no such thing as a "60, but he didn't know" citation.
When the NYSE compensation committee agreed that the management of the exchange should be paid on par with the top folks at Merrill Lynch (NYSE:MER) based on such things as increased revenues, higher listings, and trading volume, they created a deep conflict between the interests of NYSE management and that of its end customers -- investors.
Which is why articles like Jonathan Weil's fantastic piece in the September 8 Wall Street Journal are so galling to investors. Weil detailed how the NYSE has been extremely lax in removing or in any way sanctioning companies that haven't filed SEC reports. Notable scofflaws include Qwest (NYSE:Q), which does not have audited financial statements from as far back as 2000; Footstar (NYSE:FTS), which completed a 10-month accounting investigation on Monday; and Symbol Technologies (NYSE:SBL), which had officers plead guilty of fraud.
And yet all of these companies trade unencumbered on the NYSE, despite the fact that there is no good information on their financial performance. That these companies are let off easy by the NYSE for their long-lived non-compliance shouldn't be in question. But there should be no question at all that the NYSE's business interest is to keep these companies listed and unencumbered from a trading perspective as long as possible. And Dick Grasso himself believes that his job is "two-thirds businessman and one-third regulator." In such an environment, with so many dollars going Grasso's way based on NYSE's performance as a business, why should investors (or directors) expect that regulatory considerations would reign supreme?
Clean it up, NYSE
Coming on the heels of so many Wall Street scandals, and coming simultaneously with the mutual fund scandal, this disclosure of Grasso's absurd pay has rocked investor confidence in yet another American financial institution. No one has accused Grasso of wrongdoing, but we're not seeing much in the way of rightdoing, either.
Grasso claims that he never sat in on his own compensation meetings, but he and the directors had to know that such high rates of pay for a regulator in the position of a state-sanctioned monopoly (or duopoly) would be controversial.
Paying Grasso like a Wall Street mogul was irresponsible on its face, because it creates the appearance of a conflict between the NYSE's responsibility to investors and its agents' incentives. That's wrong, that's stupid, and it's the directors' faults.
A cleanup of the NYSE should start there. The NYSE directors and Grasso need to be held up as yet more parasites who have managed to weaken the structure of our public markets for their own selfish gains.
Fool on!
Bill Mann, TMFOtter on the Fool Discussion Boards
Just like the old man in that book by Nabokov. Bill Mann owns none of the companies mentioned in this article. The Motley Fool is investors writing for investors.
