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Hoffer Kaback
President
Gloucester Capital Corp.

Caught in the Webb

The Webb Report, that is. Just the facts, ma’am -- to be read with care.

By Hoffer Kaback

In the 1950s TV series “Dragnet,” most episodes contained an early scene in which a crime witness (or victim) tried to explain to the main character, LAPD Det. Sgt. Joe Friday, what had happened. Almost invariably, that citizen rambled in the telling.

And so Friday, played by Jack Webb, would issue a laconic instruction, which quickly became a catchphrase in popular culture. Webb would drily tell the witness (almost always a woman) to report “Just the facts, ma’am.”

Fifty years later, we consider a different Webb report -- this one by Dan Webb to the New York Stock Exchange.

This Webb report pertains to Richard A. Grasso, ex-chairman of the NYSE. In late September 2003, the exchange, a not-for-profit entity, retained Webb’s law firm, Winston & Strawn, to investigate how it came to pass that Grasso had received a payout of some $140 million in deferred compensation and benefits and was to receive an additional $48 million in deferred comp and benefits through 2007.

Palpable Amount of Disquietude
The disclosure about Grasso’s comp occasioned a palpable amount of disquietude. In mid-2004, New York Attorney General Eliot Spitzer filed suit against Grasso and NYSE director Ken Langone. (For further background and commentary, see my column “Lord Black and Duke Dick,” Directors & Boards, Third Quarter 2004.)

With trial approaching, lawyers for Grasso and Langone requested a copy of the Webb report (upon which Spitzer relied for his complaint against their clients). The exchange resisted, since the report had been created by Webb’s law firm for its client the exchange (and not for the benefit of Grasso and Langone) and was, accordingly, entitled to legal privilege. A lower court state judge disagreed and ruled in favor of Grasso and Langone. The exchange decided in early February 2005 not only not to appeal but to make the report public. (Ed. Note: Click here for a PDF copy of the Webb report.)

Directors & Boards readers – and, in particular, current board and comp committee members – should read the Webb report with care.

The Power of the Report
The power of the Webb report lies not in its literary style (far from Hemingway or Red Smith) nor in its conclusions (which, interspersed irregularly throughout, don’t really get going until the last 20% of the document), but, rather, in what Jack Webb always said he wanted: Just the facts. Like:

• “Grasso’s executive assistant was paid approximately $240,000 per year for the last three years.”

• “Grasso used two drivers on the NYSE payroll who each earned approximately $130,000 per year.”

• Grasso “had the unfettered authority to select which Board members served on the Compensation Committee and, likewise, to select the Committee Chair.”

• A prospective director told Grasso that “he had no interest in going to a lot of meetings or doing a lot of work. He was assured by Grasso that he did not have to attend all the meetings and that it would not be that much work. He was placed on the Compensation Committee.”

• Comp Committee Chairman Carl McCall, former comptroller of the State of New York,“admittedly signed [Grasso’s employment contract] without reading it in its entirety.”

• “[O]f the directors interviewed, some recalled McCall being delegated authority to negotiate the contract, others did not, and yet other directors said they were unclear that McCall was delegated the authority to both negotiate and sign the contract without it being presented first to the Board.” And...

• Regarding Grasso’s 2001 comp, one director said “that the numbers ‘blew him away’ and that, in hindsight, he maybe should not have agreed to a compensation award that high. He said that at the time he went with the flow and did not object, as he didn’t want to be the first to speak out, but if others had spoken up he might have also.”

Grasso and Langone can be expected to challenge not only the conclusions of the Webb report (e.g., Grasso’s comp was “the product of multiple flaws in the compensation and benefits process employed by the NYSE”) but also many of its factual assertions – in other words, the competence and accuracy of Webb’s own investigative process.

Attention Should Be Paid
The defense presumably will also argue some variation of (a) directors were indeed fully informed when they approved Grasso’s comp, (b) they intended properly to reward him for extraordinary service on behalf of the exchange, and/or (c) if some directors now claim surprise at what they approved, that is their problem, not Grasso’s.

The remark by a Grasso spokesman that some directors “did not bother to read two page handouts” about his comp is illustrative.

Webb report perusers would do well to measure its contents against their own board conduct. Particular attention should be paid to the last bullet point above. Those of us who, alone, have spoken up in the boardroom to oppose a proposed action know how uncomfortable that can be.

Even more uncomfortable, though, is not doing the right thing.

Hoffer Kaback is President of Gloucester Capital Corp., New York, and has served on several corporate boards. He is the lead columnist for Directors & Boards, authoring the “Quiddities” column in each edition. The author can be contacted at hkaback@directorsandboards.com.