Restoring trust at the NYSE.The recent turmoil at the New York Stock Exchange New York Stock Exchange (NYSE) World's largest marketplace for securities. The exchange began as an informal meeting of 24 men in 1792 on what is now Wall Street in New York City. should never have happened. An able leader lost his job and the NYSE NYSE See: New York Stock Exchange 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 (1) (Chief Executive Officer) The highest individual in command of an organization. Typically the president of the company, the CEO reports to the Chairman of the Board. , 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 listed company n → compañía cotizable listed company n → société cotée en Bourse listed company list n → . 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 Listing requirements Requirements, including minimum shares outstanding, market value, and income, that are laid down by an exchange for any stock to be listed for trading. 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 noncompliance failure of the owner to follow instructions, particularly in administering medication as prescribed; a cause of a less than expected response to treatment. 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 ar·gu·a·ble adj. 1. Open to argument: an arguable question, still unresolved. 2. That can be argued plausibly; defensible in argument: three arguable points of law. 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 furor /fu·ror/ (fu´ror) fury; rage. furor epilep´ticus an attack of intense anger occurring in epilepsy. 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 taint v. taint·ed, taint·ing, taints v.tr. 1. To affect with or as if with a disease. 2. To affect with decay or putrefaction; spoil. See Synonyms at contaminate. 3. 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 Listed firm A company whose stock trades on a stock exchange, and conforms to listing requirements. . 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
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