From the Providence Journal
http://www.projo.com/opinion/contributors/content/projo_20050215_ctlee.200fa8d.html
Lee Drutman: Corporate boards take care of pals 10:15 AM EST on Tuesday, February 15, 2005
BY NOW, we are all familiar with the fractured fairy tale of former New York Stock Exchange Chairman and CEO Richard Grasso. Hard-working kid from Queens begins his career as an NYSE clerk in 1968, charms his way up the ladder, makes lots of friends, puts some of them on the board of directors at the not-for-profit NYSE, and somehow winds up with a $188 million pay package.
The public finds out, Grasso is forced to leave, and his name becomes a symbol of the current era of executive excess, in which top executives are, on average, paid 300 to 400 times what average workers earn.
So -- how did he do it? And how can we prevent this kind of avarice from happening again?
The latest insight into this question comes from a recently disclosed 130-page report by NYSE lawyer and former federal prosecutor Dan K. Webb. The Webb report details how Grasso's hand-picked board of directors was largely kept in the dark about Grasso's metastasizing remuneration -- which added up to $192.9 million in compensation and paid pension benefits over eight years of service -- while Grasso quietly (though ultimately not quietly enough) started pulling out his retirement benefits.
According to the report, Grasso's compensation was $113.6 million to $124.5 million too high, on the basis of salaries for comparable positions. Although Grasso comes across as a smooth, scheming operator in the report, the question remains: Could he have won such a pay package for himself without having a board willing to either pay him his millions or at least conveniently look the other way?
The board that granted Grasso his millions was a Who's Who of Wall Street CEOs, including James Cayne, of Bear Sterns, Henry Paulson, of Goldman Sachs, and David Komansky, of Merrill Lynch. Another big-league board member was H. Carl McCall, the former New York State comptroller and state Democratic Party bigwig who, as a member of the exchange's compensation committee, first asserted that he didn't know how Grasso had gotten paid so much, but then defended the salary.
These directors didn't get to their present positions of power by being stupid or easily duped. Which makes it hard to believe that they were tricked outright by Grasso. What is easier to believe is that they willfully turned the other way, following the advice of legendary U.S. House Speaker Sam Rayburn: "If you want to get along, go along."
Then there is the special case of Kenneth G. Langone, chairman of the compensation committee at the time of Grasso's top pay. According to the Webb report, Langone argued in 2002 for a new Grasso contract (which ultimately led to the outsized payout), in response to rumors that Grasso might leave the NYSE to become Treasury secretary. According to New York Atty. Gen. Eliot Spitzer, Langone was a full-on conspirator in the plot to take the NYSE's money and put it in Grasso's pockets.
Spitzer is suing Grasso and Langone for having violated the New York State Not-for-Profit Corporation Law, which mandates that executive compensation must be "reasonable" and "commensurate with services provided."
Unfortunately, the Grasso pay debacle is only a more extreme version of what is happening at corporate boardrooms across America -- where CEOs place their friends on the board of directors and then help them come up with confusing, misleading, and ever more outrageous pay packages.
As a result, executive pay continues to surge. For example, according to a recent Reuters study of the Standard & Poor's 500 companies, CEO median cash pay -- base salary and bonuses -- rose from $1.75 million in 2002 to $2 million in 2003 (the latest year for which such numbers are available). Bonuses were up 20 percent, from $884,000 to $1.06 million.
A dose of board independence -- today's bromide solution for all that ails corporate America -- is obviously needed. Certainly, those responsible for deciding executive compensation should not be in a position in which they are also trying to curry favor with management to keep their $160,000-a-year gig as director.
Meanwhile, the CEO of a company should not also serve as the chairman of the board that sets his or her salary -- as 75 percent of CEOs currently do (and as Grasso did at the New York Stock Exchange).
Another promising development comes from the Securities and Exchange Commission, where Chairman William Donaldson has proposed bringing more transparency to the disclosure of executive compensation, which is often presented to shareholders (and even sometimes directors) in hopelessly confusing and misleading terms.
But perhaps the easiest and most straightforward way to put a clear check on excessive executive compensation is for shareholders to have the right to vote on the compensation -- after all, it is their money.
The lesson of Dick Grasso and his $188 million should have sent corporate boards scurrying to remove potential conflicts of interest and to clarify pay packages in order to ensure fairness. It hasn't. But the resistance of executives and insiders to the growing chorus of both shareholder and citizen complaints can last so only long.
Give us a few more Dick Grassos, a few more Webb reports, and a few more William Donaldsons, and somewhere, somehow, something has got to give.
Lee Drutman, an occasional contributor, is the communications director for Citizen Works, a public-policy research and lobbying group, and the author of The People's Business: Controlling Corporations and Restoring Democracy.
