Sunday, September 21, 2003

Investor protection

Stock exchange: Chief resigns

New York Stock Exchange Chairman Richard Grasso's resignation Wednesday over a $140 million compensation package offers another opportunity to reform the market.

If NYSE is to remain the leading stock market in the world, it needs to act fast to clean up its act, or the Security and Exchange Commission and Congress should impose reforms.

The furor over Grasso's pay package exposed the conflict of interest between the exchange's roles as corporate regulator and a business itself. Although public outrage this time was not over trading scandals and Grasso's $140 million was mostly deferred pay from past years and an extraordinarily generous pension, it is still astounding that neither Grasso nor his board of Wall Street power brokers understood how suspect it was to pay him $30 million a year, when part of his official duties was to regulate their securities firms.

Twelve of 27 seats on NYSE's board are held by securities firms; most of the rest are supposed to go to "public directors." Don't assume that means independent outsiders. Most are from companies, including those traded on the Big Board.

The exchange is charged with policing insider trading and other violations, yet despite the Enron, MCI and other scandals, NYSE has been slow to reform rules of corporate governance. This week's uproar should speed reform, and it needs to be broader than just finding a successor to Grasso, who joined boards of corporations traded on the exchange. Ideally, the next chief should be an independent outsider with a history of public service. The board should include more representation by investors. It also needs to consider handing off its regulatory duties to a separate executive or giving up that power to the SEC or another oversight body. If the exchange adopts real reform, this flap over Grasso should cause no lasting damage. Do nothing, and it could further undermine investor confidence.

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