Online Extra: Just What Does "Independent" Mean?

Chairman Grasso's explanation to the Senate of how NYSE board members get nominated isn't exactly the same as the one he gave BusinessWeek

Richard A. "Dick" Grasso's effort to defuse the Sandy Weill affair raises a troubling question: Did the New York Stock Exchange chairman mislead the U.S. Senate? In an appearance before the Senate Banking Committee on May 7, Grasso answered a question on the nomination of Citigroup Chairman Sanford I. Weill to the NYSE's board of directors from Senator Paul S. Sarbanes (D-Md.) by emphasizing that the NYSE board-member selection process is performed by an "independent nominating committee" separate from the board.

But in an interview with BusinessWeek, Grasso disclosed details of the board-selection process that appear to contradict his assertions of "independence." Although the nominating committee is certainly independent on paper -- as spelled out in the NYSE constitution -- in practice it's little more than a rubber stamp of Grasso's picks.

That would seem to contradict his Senate testimony. In theory, failing to disclose his crucial "audience" with the nominating committee could have serious consequences. "If the Senate wanted to go after him, it could charge him with contempt," says one veteran Washington insider. But, he says, Grasso's popularity in Washington is such that this is "not going to happen."

NYSE spokesman Ray Pellechia denies that Grasso was misleading in his testimony and says time constraints prevented a fuller explanation. Below are verbatim excerpts of Grasso's Senate testimony and his interview with BusinessWeek:

Before the Senate Banking Committee:

Senator Paul Sarbanes: ...I am dealing with where we are now -- how the exchange could have selected as one of the nonsecurities representatives Sandy Weill.... Now, how did that happen?

Richard Grasso: Senator, I can only say -- and I will have to look back, O.K? -- for the purposes of answering your question, that the independent nominating process at the exchange, which is not to be confused with an independent nominating committee of the board of directors. The mechanism itself is wholly separate and apart from the board of the stock exchange. Although similar in constituency, one may not sit on the board of the exchange and be a member of the nominating committee....

I think if the nominating committee chair or the entirety of that committee were here today, they would say to you, as I am about to say, it was a mistake to have offered it. I think Mr. Weill would say, if he were here, it was a mistake to have accepted it. I think if you were to spend some time looking at the Martin report, not to be confused with the Martin law in the state of New York, but William McChesney Martin, our first president at the Exchange, later to become chairman of the Federal Reserve and then later to come back to the New York Stock Exchange as a special adviser in the early 1970s when he authored that report and created the new composition of the board, there is separation of the chief executive from that nominating process.

The BusinessWeek interview:

BW: Whose idea was it to name Sandy Weill? Was it your idea?

Grasso: Well, I wouldn't say that I didn't have a part in it. The nominating committee advanced the name, I discussed it with my board, and apparently everyone should have expected there was going to be some controversy. But it was a realistic assessment of the pros and cons....

BW: You don't claim authorship of that particular idea.

Grasso: I was certainly a party to it.... The nominating committee is totally independent of the board -- not to be confused with an independent nominating committee. A nominating committee totally independent of the board. You cannot sit on the nominating committee and on the board simultaneously.... We have a dialogue every spring. I lay out usually five to seven candidates. And they're not compelled to listen to those five to seven. They can do whatever they want.

BW: Was Sandy Weill one of those?

Grasso: Absolutely.... They can choose from that list or any other list that they themselves produce. They have no responsibility to take the direction of either the board of the exchange or the chairman of the exchange.... I have an audience with them. I throw -- there are three, four CEOs who are willing to step down, I might put in 15 names.

BW: Have they ever picked somebody who wasn't on the list?

Grasso: Up until 1985, there was never any audience between the CEO and the nominating committee. Every name they picked was without the benefit of any input.... In the recent experience, have they picked a name that wasn't among my top 20 or whatever the number is? I don't think so.

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