Posted on Fri, Sep. 19, 2003

NYSE chief seems too cozy

Outside relationships give Richard Grasso potential for conflicts and plenty of money

By Andrew Countryman

Chicago Tribune

Former New York Stock Exchange Chairman Richard Grasso built a series of outside relationships with members of the exchange's compensation committee, whose sizable pay awards on his behalf led to his downfall, a Chicago Tribune review of NYSE records reveals.

Corporate governance experts say such relationships amounted to potential conflicts of interest -- and probably made members more willing to go along with Grasso's hefty pay package.

The embattled chairman stepped down late Wednesday as outrage swelled over his $188 million accumulated compensation package and the exchange's governance.

The Tribune review showed that Grasso held positions in charities and other organizations with more than one-third of the 27 people who served on the compensation committee during his tenure.

Meanwhile, the NYSE and its foundation gave generously to committee members' pet charities, especially those affiliated with the panel chairman at the time. Those donations increased sharply as Grasso was granted enormous raises, records show.

Academics and other governance experts have repeatedly cited a lack of director independence as a key cause of escalating CEO pay, with some research suggesting that such social factors and rewards for directors are at least as important as financial results in determining compensation.

Critics said it's particularly unsettling that the exchange has become embroiled in the controversy, because it sets governance standards for the public companies it regulates.

Even a recent shakeup of the compensation panel to enhance its independence did little to eliminate Grasso's relationships, which shareholder activist and governance expert Nell Minow believes are a likely cause of his sizable pay.

``The single most important quality you need in a director is the ability to say no to the CEO,'' she said. ``I'm not saying these people can be bought, but it makes it much harder to say no.''

Despite the shakeup of the compensation panel, Grasso still had outside connections with at least four of the committee's six members, and groups affiliated with at least three had received donations.

Documents show he also has outside connections with nearly half the non-NYSE directors who decided his fate; many of them had been among his most outspoken defenders.

Overall during Grasso's tenure, the NYSE and its foundation donated more than $2.7 million to organizations affiliated with compensation committee members, including more than $900,000 to those connected to the chairman at the time.

The NYSE has stressed the giving is a small fraction of total donations. It said it began to contribute to several groups before Grasso became chairman.

But the total value of donations to all committee members' charities increased sharply as Grasso's pay escalated in the past few years.

Donations jumped sixfold from 1996 -- Grasso's first full year as chairman, when he made $3 million -- until 2001, when his pay hit $25.5 million.

The donations then quadrupled again from 2001 to 2002, reaching $1.3 million -- more than half of it to groups affiliated with longtime friend and then-committee chairman Kenneth Langone.