Richard Grasso Case
Question #1 By the beginning of 2001 it was evident the collapse of the NASDAQ was continuing from the previous year. Abuse of analyst coverage came under scrutiny and corporate governance and enforcement begins to take center stage. On September 11, 2001 tragedy strikes and the NYSE closes. But 6 days later, under the leadership of Grasso, the NYSE reopens to much fanfare. Opening the New York Stock Exchange just days after 9/11 was one of the first steps toward rebuilding the financial community. Dick Grasso was celebrated for getting the New York Stock Exchange up and running almost immediately after the attacks of September 11.
This year Grasso makes $30 million dollars and is a possible successor to outgoing Treasury Secretary Paul O’Neill. This could well be the beginning of a healthy, strong ego, which enabled Grasso to be a high achiever, turning into a negative, overly narcissistic leader. At the end of 2002, the NYSE wielded perhaps the strongest brand equity to date. In October 2002, as a condition of new contract negotiations, Grasso proposes taking $51 million of deferred earnings from his previous contract and depositing it into his retirement savings account.
New compensation committee members vote to retain outside consultant to evaluate the proposal and deferred decision on the plan. Then, in January 2003 Grasso announces he is changing his contract proposal and wants a cash payment of his accrued retirement in the amount of $130 million. In February 2003, when Dick Grasso is appointed to the board of Home Depot Inc. , along with his board membership of Computer Associates Inc. , the move is criticized as a potential conflict of interest as both companies are listed on the NYSE. (NYSE’s Grasso remains under the gun, 2003).
Grasso defended his role as director, noting it helped him “gain perspective on our listed companies. ” (Keenan, 2003) This is a good example of narcissistic behavior in Grasso sense of immunity to consequence, manipulation of the environment for personal gain, and an inability to consider the needs of others. “Narcissism gives people a sense that they can do no wrong – it leads to a very narrow view of the world that starts to justify things for the individual, at the expense of other people. ” (Effective Leadership: What’s Wrong with Narcissism? 2011) On March 23, 2003, the NYSE announced its intention of naming Citigroup Chairman and Chief Executive Sanford Weill to the Board as a public director. The Exchange was publicly criticized for naming a CEO whose brokerage firm (Salomon Smith Barney) was part of a Wall Street research analyst scandal. Two days later, the nomination was withdrawn. It’s clear the view of ethical corporate governance is becoming a clear issue in the eyes of the public and those companies that empathize with sentiment are reacting in a positive way.
If Grasso would have been emotionally intelligent, which evidently is not a narcissistic trait, he would have seen the signs of the changing times. On March 26, 2003, SEC Chairman William Donaldson sent a letter to all Self-regulating Organizations regarding corporate governance issues. (Statement by SEC Chairman: Letter to NYSE Regarding NYSE Executive Compensation, 2003) In the letter, the Chairman requests a review of the corporate governance of the NYSE, in a reply due May 15, 2003. On April 17, 2003, the Wall Street Journal broke a story stating the NYSE was investigating front-running on its trading floor, which is a federal offense.
In response, the NYSE released a statement indicating that the investigation was regarding treading “ahead” of investors, not front-running. Although the front-running part of the story was inaccurate, the Wall Street Journal’s attention to the issue forced the NYSE to reveal information regarding its investigation of possible specialist violations. This announcement triggered criticism of the NYSE trading model. (Burkowitz, 2003) On May 7, 2003, the Wall Street Journal broke a story announcing Grasso’s $10 milliion 2002 pay package.
This article put the NYSE on the defensive and angered its floor traders, who were not aware of the large executive pay. The news also began a very public debate about the NYSE and its role as a regulator. The Exchange itself establishes stiff regulations and rules regarding corporate governance, yet the Exchange was paying its chairman a salary on par with some of the highest paid CEOs in the country. To meet the SEC requirement mandated in the March 26th letter, the NYSE Board of Directors formed a special Governance Committee.
Chairman Grasso forwarded a copy of the draft report in his May 15, 2003 response. On September 2, 2003, Donaldson sent a letter to H. Carl McCall, NYSE compensation committee chairman. In the letter, Donaldson expressed great concern about Grasso’s pay package, stating, “In my view, the approval of Mr. Grasso’s pay package raises serious questions regarding the effectiveness of the NYSE’s current governance structure. ” Also included in the letter was a list of nine requests regarding the terms of the pay package and related information due to the SEC by September 9, 2003.
A complex communication challenge became significantly more difficult when on September 9, the NYSE responded to SEC Chairman Donaldson’s letter of a week earlier. In this communication, the NYSE revealed that Grasso was owed an additional $48. 0mm previously undisclosed payout. While the NYSE’s position was that this information was not significant (because it was future compensation) the public outcry was enormous. Appearing on CNBC and in newspaper interviews, the CEO publicly announced that he would forgo the additional monies to end the time when the exchange was, “preoccupied talking about the compensation of its leader. By September 16, 2003, Grasso was clearly under fire and the fervor was only increasing. Several strong stakeholders including major fund managers were calling for his resignation and floor traders were visibly upset with the giant pay package. Late in the day on September 17, Grasso called an emergency board meeting to discuss the situation. In the meeting, he offered to resign as chairman and CEO only if the board requested it. The board voted for his resignation, 13 to 7. High profile directors, including the Goldman Sachs CEO, former Secretary of State Madeline Albright and the CEO of J.
P. Morgan all voted for Grasso to leave. Grasso’s is completely disillusioned at this point believing the board would not vote in favor of his resignation. Grasso misjudges his power and that of his opposition. He underestimates challenges facing him and pretends to be “Mr. Know-All” Leaders, whose goal is gaining power over others, maximizing wealth or becoming famous tend to look to other people for satisfaction and acknowledgement of their status. In public and in private, they display a high degree of narcissism.
As leaders of institutions, they ultimately believe that the institution cannot survive without them because in their mind they are the institution. A tragic example of this is Richard Grasso in his closing days as CEO of the New York Stock Exchange. Grasso got so caught up in his power and celebrity that he lost touch with the negative reaction to a public servant receiving a $130 million compensation package and was forced to resign by his board. (George, 2007) Question #2 In his eight years as chairman and chief executive, Mr. Grasso steered the xchange through the rise of competition from Nasdaq and electronic-communications networks. He did that by grafting new technology onto the old system, while maintaining one of the last human-dominated exchanges in the world. Mr. Grasso also has brought in new stock listings, kept NYSE market share high and marketed the exchange effectively. Dick Grasso, one of the better leaders the New York Stock Exchange has had should not be forced to resign for the crime of being overpaid. But he became a casualty of the public’s distaste over corporate excess. He was paid like a big-time Wall Street chief executive, rather than a regulator.
Mr. Grasso’s pay package — he received more than $30 million in 2001 alone — also became a flash point because it came amid a weak market that squeezed many NYSE members. This brought much negative public attention to him, his pay and the NYSE. This could not be overlooked as stated in the case, the NYSE was looked to for regulation and hence confidence. If the public doesn’t have confidence in the regulatory body overseeing the biggest exchange the entire system is in jeopardy. It’s not the amount of money paid to Mr. Grasso that concerns me, after all the $130 million was already his.
What does concern me is the how we went about getting it. He controlled the compensation committee by staffing it with Corporate Executives that were scared to cross him. People were afraid to get on his bad side. Additionally, it was especially concerning that the final pay package was awarded before the exchange completed its governance review. With his extraordinary sense of entitlement and self-confidence, Grasso knew how to work the system to get what he wanted. In my opinion, he is a high level narcissist, a quick learner and he understands how to ingratiate himself to those who inhabit the innermost circles of power and influence. if even for only a while). For these reasons and not for the amount of his compensation I would have voted for him to resign. Question #3 That his demise would come in part as the result of his own actions only makes this event more tragic. Narcissistic people don’t recognize they are creating a living tragedy for themselves. Grasso lacked the insight and vision to understand the consequences of his actions given the circumstances of his current environment. In the summer of 2003, America was still reeling from corporate scandals involving executives run amok: Enron, WorldCom, and Tyco International, to name just a few.
But the litany of stories detailing incompetence and greed was capped by an extraordinary disclosure; that Grasso wanted to cash in a retirement package worth $130 million. As stated in “Narcissistic Leaders – The Incredible Pros, The Inevitable cons”, “Poor Listeners. One serious consequence of this oversensitivity to criticism is that narcissistic leaders often do not listen when they feel threatened or attacked. ” Richard Grasso came to the conclusion in 2002 that it was time for him to figure out a way to get his money out of the retirement accounts and into his pockets.
This in unprecedented and contradicts “normal” American thought process; retirement money is meant for retirement and he wasn’t about to retire. I’m fully aware of why he wanted his money right then and there; hadn’t he negotiated an 8% accrued annual interest on this money? If he would have just left his money alone he would not have been in this situation. Question #4 The years under Grasso’s leadership were strong for the NYSE. The Exchange remained competitive and relevant despite the growth of the NASDAQ, a slew of corporate scandals and a major terrorism attack. In fact, the events of Sept. 1, 2001 could have been devastating to the NYSE and the American economy. Instead, under his leadership, the NYSE was up and running within one week of the falling of the Twin Towers. I would use these criteria to evaluate Grasso’s performance as a leader and not his failure to overestimate his worth to the NYSE. I use these as a basis for my rating of his performance as I am a proponent of Pay For Performance (PFP Plans). According to the salary survey conducted by the consultation firm Fontes in 2005, compensation policies of 91% of the firms in the survey include some kind of pay-for-performance.
In addition, salaries depending on performance influence people to work harder and a pay-for-performance system improves enterprises’ performance. (Tepp) This evidence, while not to be taken without connection to other leadership traits supporting performance, suggests most organizations measure performance through quantitative results. While me may not all agree on the softer traits needed to lead a company, we can all agree on the positive or negative outcomes of delivering a objectives.
