NYSE hopes corporate reform restores market

By Lisa Singhania
Associated Press

NEW YORK — As chief executive and chairman of the New York Stock Exchange, Richard Grasso has long been among the most vocal proponents of U.S. financial markets.

At the request of the Securities and Exchange Commission, the NYSE developed a list of reforms designed to improve oversight of corporate boards of publicly traded companies and, hopefully, restore investor confidence in U.S. companies.

The proposals are still preliminary, but the response from industry and government has been generally positive. Grasso says making investors feel more secure about the integrity of the markets is crucial after the past two years, when scandals, poor earnings and the Sept. 11 terror attacks took a toll on many companies, including those listed on the NYSE.

Grasso spoke about these and other issues in a recent interview.

Q: In the last several months, investors have watched accounting scandals consume companies ranging from Enron to Global Crossing to ImClone. At the same time, brokerage houses are being investigated for conflicts of interest among their analysts. What effect are these scandals having on the market? Are you concerned?

A: When you see a failure of a company such as Enron or WorldCom, it really does test the public's confidence. When these breaches occur, they are enormously serious and they are an insult to all of the good people who do it right every day. And we in the private sector must ask what we can do to restore public confidence by rooting out the bad practices.

No body — by that I mean a private or governmental body — can legislate integrity. What we must do is prosecute fraud and send a message to investors that fraud is not acceptable.

Any single failure is one too many when you talk about the public's money. But we must not make the mistake of condemning the entirety of corporate American for the misdeeds of what is a very small minority.

Q. What is the NYSE doing to restore public confidence and prevent future crises?

A: The leverage we can use is our listing agreement. All companies that want to be listed on the NYSE have to comply with it, so we can set standards.

We think the public should have representation in the boardroom through the lens of independent directors. Currently, there is no requirement for a board to be composed of a majority of independent directors. The rules we're looking at would require the majority of a board to be composed of independent directors. So if you had a board of 13 directors, seven of them would have to be independent. We also want an independent compensation committee and an independent audit committee and an independent nominating committee.

We also are looking at partnering with a number of academic institutions to create a directors institute to educate directors.

Q: Will these rules really make a difference? If someone wants to cheat, can the NYSE really stop them?

A: I think what we're doing matters enormously. If rules were in place at Enron last year, for example, would we have avoided the problems? Probably not. But if they'd been in place five years ago, hopefully they would have provided enough oversight or safeguards that maybe this wouldn't have happened.

No body, no entity, is going to be able to legislate honesty. A dishonest person is going to be dishonest. But this way you have an independent board. You don't allow management to go unchecked.

And you prosecute people who do abuse the public trust.

Q: Do you think the punishments are going to be severe enough for the people responsible for these frauds?

A: The leadership at the SEC is strong and very much committed to the idea that this kind of behavior will not be tolerated, and that the people responsible will be punished.

Q. The NYSE has proposed requiring shareholder approval for all stock-option compensation packages. Some business groups had disagreed, saying approval should be required for management only, not rank-and-file employees. But opposition appears to be fading. The Business Roundtable, which represents the nation's chief executives, reversed course this week and decided to back the proposal. Do you believe it will be approved?

A. I believe it will be. That was the preliminary recommendation of our committee and now with it having been embraced by the Business Roundtable, which is the leading organization representing chief executives in this country, I'd say it's almost a certainty.

This is an important issue because when you grant stock options, you're effectively asking for the equity of a company to be diluted. This way, you're asking the current shareholders of a company to approve and decide whether it's in their interest to dilute the company's equity by the issuance of options. That hasn't been the case before.

Q: A lot of the individual investors who contributed so much to the bull market of the late 1990s have pulled away from the market in recent months. They're frustrated with their declining portfolios and disheartened by all the scandals. Are you worried they won't return?

A: Our economy is not performing badly, and as we begin to see earnings improve, we'll see investors come back. They'll get their 401(k) statements and see things are looking better.

I think the participation of the individual investor will be different going forward. There will be much more rational and reasoned expectations.

We as an industry also have to do a better job of making sure investments are suitable.

I'm very optimistic we're not going to lose a generation of investors.