The WSJ has a major report today on Dick Grasso's tenure as NYSE CEO. It reminds us that one of the key problems with Grasso was his ability to stack the NYSE board with nominally independent directors who were in fact Grasso cronies and/or ceremonial figureheads who knew nothing but had a lustrous resume. Eliminating crony and ceremonial directors would be a major step towards undoing the imperial CEO of the management-captured corporation and restoring the primacy of the board of directors. But how?
Requiring that the corporation have a majority of independent directors, as the NYSE listing standards now do, is not enough. The Grasso story confirms that a CEO can still stack the board while complying with a director independence requirement.
Instead, the key is control of the nominating process. As boards become stronger and more independent of top management, the process builds momentum. For example, Westphal and Zajac have demonstrated that in CEO-dominated boards, newly appointed board members tend to demographically resemble the CEO. In contrast, as board power increases relative to the CEO - measured by such factors as the percentage of insiders and whether the CEO also served as chairman - newly appointed directors demographically resemble the board rather than the CEO. The NYSE and NASDAQ listing standards now require that the corporation have a separate nominating committee comprised solely of independent directors, which is a major step in the right direction. Additional transparency, so that the markets can verify that the nominating committee itself is not stacked with cronies or figureheads would help too (although I still share Mike O'Sullivan's skepticism of the SEC's new rules, even though some of the concerns he raised were resolved in the final rule). Only when boards truly wrest control of the levers of nominating power from the CEO will director primacy triumph over managerialism.
