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Vanderbilt Law Review

Article Title

The Case of CEO Richard Grasso and the NYSE: Proposals for Controlling Executive Compensation at Public Nonprofit Corporations

Authors

Rachel Penski

Abstract

In August 2003, for the first time in its 200-year history, the New York Stock Exchange (NYSE) announced the compensation package for its Chairman and Chief Executive Officer. The NYSE's Board of Directors revealed in a press release that it had distributed $139.5 million in deferred compensation to its CEO Richard Grasso. This payment was in addition to a base salary of $1.4 million with an annual bonus of $1 million. Due to the Exchange's status as a nonprofit corporation, Grasso's payout "led to an outcry, as [his compensation was] more in line with what chief executives of public corporations are paid and [was] far above the pay of top officials at the Securities and Exchange Commission, NASD [National Association of Securities Dealers] and even NASDAQ, a primary competitor." While Grasso's total compensation for his first three years as CEO, including bonuses, was $17.82 million, his total compensation from 1999 to 2002 jumped to a staggering $80.7 million. Notably, during this latter period, Grasso's close friend Ken Langone served as Chairman of the Compensation Committee.

Three weeks after the Board's press release, Grasso resigned. Following his resignation, the Board began to examine its own structure and propose various changes and reforms. The Board's new interim CEO also requested that the SEC and New York Attorney General Eliot Spitzer investigate the matter, handing over to both parties a report written by an attorney hired by the Exchange. In May 2004, Spitzer sued Grasso, Langone, and the NYSE to recover the excessive compensation paid to Grasso under New York's nonprofit corporation law.

This Note will use the lawsuit brought by Spitzer as a case study for proposing changes to New York's nonprofit corporation law. Because New York models its nonprofit corporation law after its for- profit corporation statute, Part II will argue that use of this model is questionable by focusing on the structure of the NYSE. Part III of this Note will focus on the Grasso lawsuit and make predictions about the outcome of the case under the current law. To make predictions, this Note relies on the leading nonprofit executive compensation case in New York. Part III also will show how the for-profit corporation model may not effectively control executive compensation in the Grasso case. Finally, Part IV will propose modifications to the nonprofit corporation law to ensure that suits challenging executive compensation can be brought successfully without increasing costs to the corporation.