New York Stock Exchange



Authors: Sanjib Dutta, K Subhadra,
Faculty Member, Faculty Associate,
ICMR (IBS Center for Management Research).

The New York Stock Exchange (NYSE) was in news recently for all wrong reasons. It was criticized for its governance practices which led to the resignation of its Chairman and CEO. The interim chairman and CEO took various steps to reform the exchange. In this article the author explains the governance issues at NYSE and the steps taken to reform the organization.

Regulating the Regulator

On September 18, 2003 Richard Grasso (Grasso), chairman & CEO of New York Stock Exchange (NYSE) resigned amidst widespread criticism against his pay package and governance practices at NYSE. Earlier in August 2003, NYSE announced that Grasso received a lump sum amount of $140 million from NYSE (covering two decades of deferred compensation, and retirement benefits). The exchange also announced that Grasso's contract was extended up to 2007 with an annual pay of $1.4 million and $1million annual bonus.

William Donaldson (Donaldson), Chief of Securities and Exchange Commission (SEC)1 commented that Grasso's compensation details raised serious doubts about governance standards at the NYSE. Donaldson sent a letter to the compensation committee head - Carl McCall (McCall) asking for more details about how Grasso's compensation was decided. The mis-governance at NYSE came to light in August 2003 when 'The Council of Institutional Investors (CII)2 published a report in which it highlighted the shortcomings in NYSE's governance practices. The Grasso episode provided more ammunition to the critics of NYSE, who were demanding greater transparency in its working.

In September 2003, former Citigroup Co-CEO, John Reed (Reed) was appointed the new interim chairman and CEO of the exchange. Soon after taking over the charge, Reed announced that his first priority would be to reform the working of the exchange. On November 5, 2003, Reed announced proposed reforms in the governance practices of NYSE. The media, general public and industry sources welcomed the reforms saying that they were the step in the right direction. However, some were of the opinion that more drastic changes should be bought in implemented to ensure transparency in the operations of NYSE.

Working of NYSE

NYSE was defined as "member-owned co-operative and self regulatory organization that serves the public as the nation's principal securities market, its principal self-regulator and its principal source of governance standards."3 It comprised of three constituencies, viz., broker-dealer members, listed companies and the investing public. The specialist firms, and floor brokers were grouped under broker-dealer members. The specialist firms employed specialists, who specialized in the trading of stocks of particular companies.

At NYSE trading took place at one central location - trading floor where both buyers and sellers competed to get best price for their clients. Usually, each stock was assigned a trading post, with specialists managing the auction process.

NYSE had the authority to regulate securities firms in the US, dealing with public accounts. The Enforcement Division oversaw the working of listed companies. It was given powers to take disciplinary actions against the firms violating the listing and disclosure rules of the exchange. Along with ensuring transparent working of the listed companies, NYSE even oversaw the working of broker-dealer members to ensure free and fair market.

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1] Founded in 1929 by the U.S. Congress to monitor the securities industry and enforce punishments to those who violate the industry's regulations.
2] Founded in 1985, The Council of Institutional Investors with around 130 pension fund members and more than $2 trillion assets seeks to address investment issues that affect the size or security of plan assets. Its objectives are to encourage member funds, as major shareholders, to take an active role in protecting plan assets and to help members increase return on their investments as part of their fiduciary obligations.