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Corporate Governance Standards Harmed the NYSE

June 19, 2005

Kimberly A. Strassel dismantles NY attorney general/gubernatorial candidate Eliot Spitzer's case against ex-New York Stock Exchange chairman Dick Grasso(WSJ $). It turns out that interviews with the NYSE board members refute Spitzer's contentions that Grasso manipulated the board to pay him too much money.

Unintentionally, the interviews reveal how dysfunctional boards can become when they adopt politically correct standards of corporate governance. The drive for "independent" boards is placing people with little or no practical business experience in positions of responsibility where they can do real damage to corporations.The NYSE was pressured to include on its board several people who know little or nothing about the capital markets business.

The most extreme example is Carl McCall, the African-American former New York state Comptroller and Democratic candidate for governor in 2002. McCall is "viewed by his colleagues as incompetent," writes Strassel. His mishandling of the paperwork on Grasso's pay package and a $48 million supplement causes considerable confusion on the board:

The interview notes are rife with comments that Mr. McCall had little inclination or ability to understand the contract he took over negotiating. An outside consultant, William Mischell, said that when he and Mr. Ashen explained the contract to Mr. McCall, "the meeting . . . lasted somewhere between 15 to 30 minutes, with McCall making or taking phone calls throughout and not really focusing on the details."

Mr. McCall himself told investigators that "the subject of executive compensation was entirely foreign to him" -- yet he refused offers of help to explain the contract to others. When asked why Mr. McCall was chosen to chair the committee rather than someone more knowledgeable, Mr. Karmazin told the Webb team that it was an "image thing" (the NYSE had just instituted new governance standards).

Mr. McCall's excuse for not giving directors "additional details" about the $48 million or other aspects of the contract -- which were clearly stated in the text -- is that "he was not aware of any." That's because, as he admitted, he didn't read the full document, even before he signed it. Moreover, at least one director, Van der Moolen's Mr. Fagenson "asked McCall twice to make certain that all pension plans and other plans were going to terminate on this date, but stated he never received any updates from McCall on these issues."

As Mr. McCall went to brief the full board on Aug. 7, 2003, he was given talking points that referenced the extra $48 million but didn't read these or tell the board.

J.P. Morgan Chase CEO William Harrison noted that Mr. McCall "did not appear to understand the proposed payout very well. . ."

Avon CEO Andrea Jung noted that "McCall struggled" and that "others were more able to answer questions." 

Mr. Karmazin described Mr. McCall as "flustered," and said he did a "horrible job" of explaining the numbers.

Leon Panetta, former Clinton White House chief of staff, speaking of a later McCall performance, was blunt: "Carl knew nothing."

So here we see that the massive drive post-Sarbanes-Oxley to have "independent" boards is just a cover for placing politicians and other financial naifs on boards. Another pol added to the NYSE board was former Secretary of State Madeleine Albright (infamous for her statement that killing a half million Iraqi children was "worth it").

According to Strassel:

Many directors felt that in recent years the board had been stocked with celebrities who didn't understand the Exchange. Former Morgan Stanley chief Mr. Fisher noted "that many directors 'couldn't tell a stock from a bond' and were only on the Board because they represented particular constituencies."

As a result, the board was rife with personal antagonistic agendas. Mr. Cayne referred to Ms. Albright as "unbelievably irritating."

Albright at first did not object to the size of Grasso's pay package, instead wringing her hands in classic political style about the "optics" (how it would appear).

When asked why she did not object, she explained that "she, as the newcomer, did not feel as though she was in a position to question this." But if you judge yourself qualified to participate on a board of directors that ratifies executive compensation agreements, you do not behave irresponsibly just because you are new. You speak up and voice your opinion that this or that action is improper. Why serve on the board at all if you think you are too new to offer any valuable contributions? Why refrain from speaking out against what you suspect is an illegal compensation package?

The obvious reason: you know that you are only there for show. Ms.

Albright, a ringleader in Mr. Grasso's ouster, missed being present in person at the meeting at which his package was voted on, choosing instead an Aspen Institute event because "former foreign ministers were also to be present at this meeting."

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