Governance Issues at the New York Stock Exchange

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NYSE is defined as a "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."It comprises of three constituencies, viz., broker-dealer members, listed companies and the investing public. The specialist firms and floor brokers are grouped under broker-dealer members. The specialist firms employ specialists involved in the trading of stocks of particular companies. At NYSE, trading takes place at one central location - the trading floor (Refer Figure I) where both buyers and sellers compete to get best price for their clients. Usually, each stock is assigned a trading post, with specialists managing the auction process. NYSE has the authority to regulate securities firms dealing with public accounts in the US. The Enforcement Division oversees the working of listed companies..........

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The 1,366 broker-dealer members of the exchange elected the BoD which consisted of 27 members (12 industry directors, 12 non-industry directors and 3 members of the office of the chairman) . (Refer Table I) No director was allowed to be on the board for more than three consecutive two-year terms. The NYSE constitution defined an industry director as "(1) an individual member, (2) an individual who is a principal executive, general partner or control person of a member organization, or (3) a principal executive of an organization whose "principal"subsidiary is a member organization."Non-industry directors did not belong to the securities industry........

Over the years, the style of governance at NYSE has attracted a lot of criticism chiefly on account of 'misgovernance' and the role of specialists. Analysts pointed out that the governance structure at NYSE had failed to deliver results, and that the NYSE had failed to safeguard the interests of the general public.Analysts said that while NYSE demanded greater transparency in the operations of the companies it regulated, it did not itself maintain any transparency in its own working processes. The process of electing the NYSE board was not transparent and, in fact, the board was handpicked by the Chairman.......

The specialist system at the NYSE also attracted considerable criticism. In April 2003, the SEC initiated an investigation against trading violations committed by specialists. The specialists were alleged to be involved in front running.However, the NYSE refuted the charges and announced that SEC was inquiring into violation of the negative-obligation rule. .....

Finally, NYSE also faced increased criticism because it did not reveal its executive compensation figures. Under increasing pressure from the media and SEC, the NYSE announced its executive compensation figures in August 2003. These figures indicated that Grasso had been paid a lumpsum amount of $140 million for his services and that his employment contract had been extended upto the year 2007. The exchange revealed that Grasso would be receiving around $1.4 million as salary per year and a bonus of $1 million per year in the period 2003 to 2007........

Finally, NYSE also faced increased criticism because it did not reveal its executive compensation figures. Under increasing pressure from the media and SEC, the NYSE announced its executive compensation figures in August 2003. These figures indicated that Grasso had been paid a lumpsum amount of $140 million for his services and that his employment contract had been extended upto the year 2007. The exchange revealed that Grasso would be receiving around $1.4 million as salary per year and a bonus of $1 million per year in the period 2003 to 2007........

Exhibit I: A Note on Specialists
Exhibit II: NYSE Committees
Exhibit III: Proposed Corporate Governance Architecture of NYSE