GOING AFTER GRASSO’s MONEY - I

Court, Consent, or Common Cause?

Lawsuits have come flying in Mr. Richard Grasso’s retirement money. The New York State’s Attorney General, Mr. Eliot Spitzer, already has filed a suit on May 24. Not to be outdone, Grasso the next day pledged to file a countersuit. The two, Spitzer and Grasso, are of course aiming for two different things.

Spitzer for “over $100 million (as is claimed in his suit) of the $200million-plus in salary, retirement pay, bonuses, benefits and potential severance payments the Big Board paid Grasso or promised him”. Grasso’s suit is for justifying not only $139.5 million which the Big Board when disclosing his accrued benefits in August last year decided he could withdraw, but also the remainder of $48.5 million out of the package due to him. This amount he said last August he would let go since the Big Board had not disclosed it as part of his dues. But now he wants to claim it.

At the center of these claim and counterclaim lies however the contentious issue of Grasso’s package on retirement as Chairman and Chief Executive of the New York Stock Exchange. “My vindication will come in courtroom,” says Grasso. Spitzer believes the court will uphold his contention that Grasso’s payment stands in excess of norms.

It is open to question where court comes into Grasso’s package. Yes, inasmuch as he claims what is still due, court would decide whether Grasso has claim to the undisclosed amount of $48.5 million. But Spitzer, prima facie, has no claim to Grasso’s pay.

It is Spitzer’s case however that the NYSE in awarding the huge package to Grasso has violated the state law governing not-for-profit groups. He has further alleged in his lawsuit that the package resulted from Grasso’s “manipulation and intimidation of the exchange’s unwitting and incurious board of directors”.

Spitzer’s claim to half of Grasso’s pay rests on these two of his contentions.

To support his standpoints Spitzer has made two specific moves. Together with Grasso, he has also sued the NYSE, too, in addition to the exchange’s former head of compensation committee, Mr. Kenneth Langone. Secondly, before filing suit, he got two different parties in the exchange’s human resources agreeing to admit they provided “inaccurate and incomplete information” about Grasso. This by implication to show the board was misled in deciding Grasso’s pay.

“You can’t do a whole lot better than that to prove a decision was suspect,” Spitzer said on filing the lawsuit.

Spruced up, Spitzer is smug. To boot, Spitzer has struck at Grasso at the behest of no other than NYSE’s boss, Mr. John Reed, who succeeded Grasso. Reed asked him to investigate the circumstances surrounding Grasso’s pay package. Spitzer spent four months investigating before filing the lawsuit.

But all that the AG with all his expertise has achieved is to articulate and, moreover, to allege, instead of making a clear case as would stand before court. He has asserted that the NYSE board erred in deciding Grasso’s pay by contract, rather than by the exchange’s not-for-profit status by which Grasso’s terms could be set to reasonable level. Calling this a mistake, he has alleged that Grasso manipulated and intimidated the board to fix his pay. On these premises, he has then questioned all of Grasso’s payments and laid claim to at least half of his $200 million take.

What is important is that in his lawsuit the AG has required the court to rule first that the NYSE’s status is governed by the state’s not-for-profit law, and secondly to annul the contracts the exchange made with Grasso (what about other executives, since Spitzer does not mention it).

But when did it dawn on Spitzer to discover the not-for-profit status of the NYSE? After the exchange rewarded Grasso with millions? And even then why did the activist AG wait till Grasso got his dues? Could he not have intervened earlier? How come he did not even when he had the chance to do so in the intervening period from the time when the Board announced in August Grasso’s award to the time when Grasso was made by the Board to resign in September?

Spitzer would have been perfectly in place to step in at that time in his dual capacity as the regulator of the financial markets and the Attorney General of the New York State. Spitzer did not. Nor did also the Securities and Exchange Commission. This was regardless of the SEC’s chairman, Mr. William Donaldson, a Grasso predecessor at NYSE, having worked behind the scene to get Grasso out over his paycheck.

When those placed in authority and paid to do their part decided to sit back, why must the court rise to the occasion?

Against Spitzer’s suit, there is to be Grasso’s countersuit. The legal row will take long to resolve. It will also cost some millions. Spitzer on his part will be spending money out of public coffers. These and such other related issues will need to be considered in getting after Grasso’s money.

If logic suggests recourse to court is not the right course to do this, can other recourses be considered?

Like, say, for instance, consent or common cause to serve.

SEC’s POSITIVE TEST

Making provision for shareholders’ nominees on boards of companies to further corporate governance which to do it is presently absorbed with is to go down as yet another typical example of frivolous ways of the Securities and Exchange Commission to address itself to engaging issues. Instead of turning to palliatives and rather than be petulant in dealing with companies which also is a way in which it has gone about its business, the SEC to be positive can devote time and attention to pertinent issues.

A striking instance is of voting rights. The prevalent practice in the US board election process permits existing director in contest of votes at the annual general meeting of the company to win his seat by one single vote cast in his favor. This may appear paradoxical. But the practice has prevailed by the proxy system.

For the proxy system is much too complicated and bears no relevance to either voting rights of shareholders or to the pattern of votes exercised at a company’s annual general meeting. This is one area of corporate governance begging for urgent reform.

To cap this is the queer listing stipulation of the major New York Stock Exchange for companies to comply. The rule lets brokers vote for clients’ shares where clients have not laid voting instructions. It so happens that instances of such unspecified votes are not scarce but substantial to make a sizable difference in voting.

Brokers, of course, are free to vote as they wish. But they would vote, as they like. And as brokers what they may like is what their vote gets in return. More so, where the vote is unrepresented by clients and come as bonus to the brokers.

Moreover, seeking and serving such vote is to be a matter of striking a bargain between the seeker and the server. Reduced simply to a matter of quid pro quo, without care for concern about right or wrong.

Call it, if you like, as capitalism’s conclusive facet. But it is of no credit to corporate governance.

Surely, the SEC knows this well. Just in case it did not, outside bodies in US corporate world have drawn attention of the SEC to deficiencies of the prevalent practices insofar as corporate governance is concerned.
But the SEC is unmoved.

However, herein is one positive test for the SEC in intent and purpose of corporate governance. But it is very much a question whether the SEC would so to say rise to the occasion and meet the test.

To do so will certainly be a daunting task, knowing how corporate interests are entrenched in the prevailing voting rights practices. Any amendments, alterations and changes in these will surely invite instant protests of corporate interests. Besides, making a difference in what is existing will require authorization in law. Which means a new legislation to make and getting lawmakers to agree to it. Much spadework to do before all this, moreover, to make the case and prepare the ground for the change to make.

Important at the same time is to examine how well arrayed the SEC can be to field objections to changes from concerned interests that may arise before the regulatory authority can be moving in the matter. For the objection can be devious enough to defeat the move. Will the SEC be able to field them effectively? This is to depend not only on its efficiency, but also its conviction.

But one thing is certain: to change the archaic voting rights the SEC is the one to qualify as the highest regulatory authority. So far as the work to go into it goes, the SEC is working full time into its proposals of shareholders to elect their nominees on boards of companies while it is also to give the proposals the form of formal regulations.

Bending so much for the surrogates of directors to act as mercenaries, the SEC might as well bend for the shareholders.

CAN SHAREHOLDERS’ DIRECTORS ON BOARD HELP CORPORATE GOVERNANCE?

Seized by the urge to enhance corporate governance the Securities and Exchange Commission has proposed shareholders nominate their own directors for election on the boards of companies. The SEC has drawn up plans towards this while one of its five commissioners, Mr. Harvey Goldschmid, has said the proposals are designed to make “the corporate governance system work”.

How good are the prospects of the SEC’s expectations proving true and what is likely to anticipate of the SEC’s move?

Expectations are to relate not only in regard to making the system of corporate governance work. They are to arise also in respect to shareholders’ nominees getting elected on corporate boards. Assuming such ‘outside’ directors find a seat on the board of a company, what is to anticipate of them? That is, whether they would go to thwart the management of the company in wrong doing, or what they believe is a wrong doing, or whether they would yield and even toe the management’s line.

Related to these questions is another one, which is from where and what kind of people are to be picked to nominate as shareholders’ directors? That is, are they to be from among professionals in areas of corporate activity and practices, or are they to be found in common folk to align with common shareholders?

These questions (there could be some more still, but these are very pertinent to the subject) are relevant for shareholders to have some real and meaningful representation on boards of companies.

Taking up in first place how good are the chances of shareholders’ appointees getting a seat on corporate board, it is quite evident and very obvious that this is to depend substantially, if not wholly, on their winning of institutional investors’ blessings. Institutions may have their own nominees to be elected to the board of a company. What assurance is there therefore of institutional investors upholding common shareholders’ nominees?

Moreover, there can be conflicts of interest between institutions and ordinary shareholders. Institutions may have their own ax to grind, which may not quite relate to shareholders’ interest.

Finally, and which is important, masters more than friends, in reality institutional investors can be setting the tune which common shareholders can only echo while, in cases, they can be striking a chord that soothes management of companies.

Overall, thus, institutional investors notwithstanding their broad shoulders are not to lean on for common shareholders while to contest corporate management more likely than not they are to wage a lone battle themselves. But to what success is anybody’s guess.

Assuming shareholders’ nominees somehow manage to get a seat on the board of a company, what is to anticipate of them? Surely, in a straight answer, to ensure shareholders’ interests are served. But is there reason to assume that management of companies per se are working in conflict with shareholders? Commonly there is no such case. Exceptionally, should there be any, very likely in quick time that management will stand disrobed.

This, no doubt, is true in regard to conduct of business of companies. It is true more or less in corporate governance, too. Some recent scandals have gone to highlight governance. But before inadequacies in this accumulated to build up in scams the authorities were there in office to suspect, question and contest with management of the companies to have come in question. Scandals may have been rooted in questionable ways of management of companies, but they festered also under the feet of the authorities being there in place to prevent them. The authorities seem to give little thought in painting by some sheep in wolves’ clothes the entire corporate herd dark and evil while armed with authority as they now prowl like tigers they look only like cops with blind eyes.

Even as the SEC, the most powerful of all authorities, champions the case of shareholders’ directors to serve on boards of companies, unmindfully it is giving the impression that it is not in a position to monitor appropriate governance of companies. This is despite the Sarbanes-Oxley legislation having introduced some new requirements for corporate management to meet in governance of companies.

It is then a question what is there to anticipate of shareholders’ directors saves that to be armchair occupants of office?

It can be said this is unlikely to be the case where directors are picked from professionals in the field. But are right professionals to be there and are they to be forthcoming to be on boards of companies as representatives of shareholders? The qualified are not to prefer to act as mercenaries. They will rather crave for management’s picking while the more prominent of them will have deemed it as honor to be called upon by a company to serve in capacity of directors.

Unless, therefore, the SEC is to draw up a panel, the right persons to be directors of shareholders are to be difficult to find. And who can say that the chosen ones on the panel will be true to their salt? Once nominated, they may well be seeing reason to be one with the management of a company. That is what some high placed people in the field did in cases of recent corporate scandals.

Conclusively therefore the idea of shareholders’ directors to fill the bill of corporate governance is not only fanciful, but also farcical. The only objective it can meet is to create more of mere figureheads. It is sad to see that even after all the focus on diligence in corporate governance; the SEC is digging for a damp squib.

What meanwhile is business reaction to the SEC’s proposal?

The Business Round Table, the powerful chief executive grouping, believes the proposal has “ immense potential for disruption even at well-run companies in business”. Significantly, at the same time, former SEC chairman, Mr. Harvey Pitt, who is presently CEO of Kalorama Partners, a strategic consulting firm in Washington, and who now is become part of business, has observed that the SEC’s proposal is “silly and dangerous in the extreme”.

Silly and dangerous and disruptive do not spell diligence in governance.