Grasso fallout: Is Big Board a small clique?

The New York Stock Exchange, one of America's enduring symbols of American capitalism, is reeling.

Its chairman, Richard Grasso, has left in the wake of disclosures that he received eyebrow-raising compensation. Now, there is massive finger-pointing over how one of the nation's top regulatory institutions could fail to be as transparent as the companies it regulates. Everyone from Congress to the Securities and Exchange Commission is watching to see how the Big Board rights itself.

Such repair to the exchange's reputation is important to the financial markets. It is a place where the nation's largest companies fund themselves, where ownership often changes hands. It is also a symbol of equality: Individual investors are supposed to receive the same treatment as giant pension funds.

And up until now, it has been a model of efficiency and integrity. "There has been a critical notion of investor trust that the NYSE has stood for," says Jeff Sonnenfeld, a professor at the Yale School of Management. "They say investor confidence is their biggest product."

To be fair, no one is claiming the exchange has failed to fulfill its principal duty: acting as a fair marketplace for the trading of stocks and bonds. Indeed, Thursday morning, the Dow Jones Industrial Average hit a 15-month high as traders ignored the Big Board's problems.

And no one is accusing anyone at the exchange of committing crimes. "They are honorable people," says Mr. Sonnenfeld, "but it's a bad process."

The exchange's difficulties, however, are coming at a time when Americans are still reading about corporate abuses. Only this week, Merrill Lynch & Co. accepted responsibility for the role of some of its employees in the Enron scandal. Bank of America Corp. is under attack for allowing outside firms to perform late-trading deals after the markets have closed.

The exchange itself is investigating some of the specialists' firms that know in advance the direction of the order flow.

Through most of these scandals, the NYSE has been a leader in requiring that listed companies make reforms. Now, many outsiders are saying it's time for the exchange to police itself.

"There is a need to reform," says William George, author of a new book, "Authentic Leadership," and the former chairman of Medtronic. "There is the question of who sits on the board: Do you want a representative board?"

Before Grasso's departure, the NYSE board was composed of 27 members. Of those, 14 are from companies that are also regulated by the exchange itself.

"Can those who are being regulated regulate the board?" asks Mr. George.

In fact, some believe the exchange should be a leader in corporate governance issues. "If member governance does not work, it's hard to be confident it protects the public interest," says Steve Thel, a professor of securities law at Fordham University and a former SEC attorney.

Davia Temin, a crisis-management specialist, believes the exchange will have to be more transparent in the future. "The only way will be to have a public dialogue about almost everything until the public tires of it," she says. "You can't simply say, 'I'm honest.' You have to show it by actions."

This would be a change in what's happened at the exchange to date. Over the past year, the Big Board has made a series of questionable judgements. In March, it nominated Citigroup chairman Sanford Weill to be a "public" representative on its board. Regulators quickly squashed that nomination. Next in May, there were leaks about the size of Mr. Grasso's compensation. He received $30 million in 2001, including a $5 million bonus for getting the exchange up and running after Sept. 11. Then it turned out that he had accrued almost $140 million in retirement money over his 36 years at the exchange. Later, he agreed to give up an extra $48 million.

"This is totally out of proportion for the exchange," says George. "That is a lot of money to be paid in cash."

But Bernard Marcus, a former NYSE board member, thinks Grasso is being made into a scapegoat. "This is a man out of work for having done his job better than anybody I have ever seen do it," says Mr. Marcus, the cofounder of Home Depot.

This is not the first time the NYSE has had its nose bloodied. In 1930, Richard Whitney became its president and served for five terms. He was known as a spokesman for the old guard, and his ways came under attack when Franklin Roosevelt's newly created Securities Exchange Commission began investigating his practices. Probes revealed that he had been borrowing against funds in his trust since at least 1926. When the investigations were made public, it was estimated that Whitney had borrowed more than $30 million.

When he declared bankruptcy, he owed about $6.5 million. He was indicted on one count of misuse of funds from his father-in-law's estate and pleaded guilty. He served three years and four months of a five- to 10-year sentence.

Franklin Roosevelt was shocked when he heard of Whitney's dealings. The scandal provided an impetus to reform.

• David Cook in Washington and Stacey Vanek Smith in New York contributed to this report.