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Friday, April 28, 2006

Ignorance and Reason in the Grasso-NYSE Case

Since Larry Ribstein is otherwise occupied, I thought I'd point you to the latest development in N.Y. Attorney General Eliot Spitzer's case concerning Richard Grasso's $187.5 million compensation package from the New York Stock Exchange.  BusinessWeek is reporting on a 2003 memo dictated by Carl McCall, former N.Y. Comptroller and member of the NYSE board.  According to the memo, the NYSE was "shocked" to learn about the enormity of Grasso's pay after it came out.  In addition, McCall expressed concern that the compensation committee had failed to inform the board properly about Grasso's payout.  McCall had reason to be concerned, as he was on the compensation committee and was actually chair of the committee when the pay package was announced.  (Kenneth Langone, co-founder of Home Depot, was the prior chair of the committee, and he is also a defendant in the suit by AG Spitzer.)

Does this prove Spitzer's case?  No. But it does provide support for his theory that Langone hid the size of the pay package from the NYSE board in the process of getting it approved.  It may also implicate McCall as a less-than-informed board member whose failure to exercise proper oversight led to the shocking result.  In any event, it makes it harder for Langone and Grasso to claim that the board was completely on board with the form and the amount of the pay package.

Even if the Board was fully aware and informed, AG Spitzer still has the claim that the pay package was unreasonably lucrative.  As a non-profit at the time, the NYSE was obliged to provide its executives with reasonable levels of compensation.  Even in the world of Ovitz, $187 million looks fairly unreasonable.  Others disagree. Larry Ribstein, for one, argues:

there's other evidence in the case . . . that Grasso's compensation was well within the realm of reasonableness, and certainly within the business judgment rule. State law business judgment decisions don't necessarily apply to Spitzer's suit. That's too bad, because the policies that underlie the rule – the lack of judicial expertise, and the problems inherent in second-guessing managerial and board decisionmaking – apply no less to the NYSE than to, say, Disney.

I'd like to see a court wrestle with the limits of "reasonable" compensation.  As it becomes clearer that executives cannot properly police their own pay, perhaps it's time for courts to start setting some form of substantive limits.  Non-profits -- with their taxpayer benefits, state AG oversight, and public purpose -- would be a good place to start.

Posted by Matt Bodie on April 28, 2006 at 12:15 AM in Corporate | Permalink


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