Restoring trust at the NYSE - Commentary

Chief Executive, The, Nov, 2003 by Bill George

The recent turmoil at the New York Stock Exchange should never have happened. An able leader lost his job and the NYSE lost credibility with the investing public. Richard Grasso's pay package was just the beginning. The revelation of it exposed deep flaws in the Big Board's system of governance.

The irony is that the NYSE was at the pinnacle of its power prior to the disclosure of Grasso's $200 million pay package. In eight years as its CEO, Grasso greatly enhanced the prestige and the reach of the exchange. Not only did the exchange stand tall in the days after September 11, it took the lead in setting exacting standards in corporate governance--at least for its listed companies.

However, the NYSE board, composed of many of the country's most powerful CEOs, failed to govern itself in the same manner it ruled its listed companies. In so doing, it breeched the trust of the investing public and lost credibility as a self-regulating body. Now it seems inevitable that its trading and regulatory functions will be divided into separate entities.

As the WorldCom and Tyro scandals were emerging in the spring of 2002, the exchange issued a new set of governance standards that all companies had to meet to be listed on the Big Board. They included requiring a majority of independent directors, the creation of mandatory governance and nominating committees, and executive sessions without the presence of the CEO.

Just months later, the NYSE's listing requirements were incorporated into the Sarbanes-Oxley bill in slightly modified form. "Best governance practices" had become the law of the land, with Congress adding on tough criminal sentences for noncompliance.

Why, then, didn't the NYSE board take its own medicine? Why did it not routinely disclose its CEO's compensation? Defenders of the exchange have argued that it is a private company that can surround itself in a shroud of secrecy. But for a body that governs the vast majority of the world's greatest companies and is responsible to the American public to maintain a fair, equitable and open exchange, that argument holds no water.

When the scandal broke, the NYSE hoard had 24 members, only 10 of whom were arguably independent. All my board experiences suggest that the larger the board, the less committed individual members are to the future of the enterprise and the more they worry about their selfish interests. This appears to have been the case with the NYSE board.

Only when challenged by the Securities and Exchange Commission did the board disclose the compensation of its top officer. Several members of the compensation committee that approved Grasso's pay led the firms that the NYSE is supposed to regulate. Thus, the regulated were regulating the regulator.

As furor over Grasso's pay escalated, the NYSE board moved rapidly to force the resignation of its CEO. It seemed to recognize that the institution itself was at risk, and that it had to put the institution's interests above the individual's. The board swiftly appointed John Reed, former co-CEO of Citigroup, as Grasso's interim successor. An outsider's insider never tainted by Wall Street scandals, Reed was an inspired choice.

Reed and the board would be well advised to adopt quickly a new set of governance procedures at least as exacting as those imposed on listed firms. Full disclosure of pay is but the first step toward making the exchange's inner workings more transparent. The board should be reduced to a more manageable 12 to 15 members and accept the resignations of several non-independent directors. Moreover, the board should split the NYSE's regulatory and exchange roles and separate the positions of chairman and CEO.

It is high time the NYSE's board members acknowledge that they, and not the CEO, are ultimately responsible for proper governance of the Big Board. Our system of capitalism is counting on their wisdom and leadership to rebuild the public; trust in the world's premier financial exchange.

Bill George, former CEO of Medtronic, the $7.7 billion medical devices maker, is the author of Authentic Leadership.