New York Stock Exchange

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

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Governance Structure at NYSE Contd...

NYSE Comes Under a Flak
Over the years, governance at NYSE attracted lot of criticism. Analysts pointed out that the governance structure at NYSE failed to deliver results. They felt that NYSE failed to safeguard the interest of the general public. NYSE attracted criticism due to the alleged misgovernance, and the role of specialists. However the controversy regarding the CEO compensation received the wrath of the media and general public the most.

Analysts opined that while NYSE demanded greater transparency in the operations of the companies it regulated, it never bothered to bring in transparency in its working processes. It was alleged that the process of electing the NYSE board was not transparent and the Chairman handpicked the board. Though the exchange claimed that its election process was fair and transparent, analysts pointed out that the candidates to be elected to the board were nominated by the nominating committee, which itself was regulated by the chairman and members themselves.

In early 2003, with increasing criticism against the working of stock markets, Donaldson asked all the regulatory bodies and exchanges to review their governance processes. NYSE requested CII to prepare a report on the governance practices at NYSE. In August 2003, CII submitted a 47page report on the governance practices at NYSE. The CII in its report said, "The exchange's public purpose is to protect investors - but it is owned and operated by a profession that has its own needs to tend to. The big banks - the so-called broker-dealers - are not the only groups with interests to be considered, yet they wield massive influence over the NYSE."

The CII reported that the directors on the board were too busy to devote required time to regulatory matters. It was pointed out that most of the directors were top executives of the companies and they had their own businesses to look after. The CII report stated, "Board members have too many connections among themselves to be effective."⁴ For instance, Grasso was inducted into the board of Home Depot Inc, while Home Depot's co-founder Ken Langone was a director at NYSE.

Analysts felt that conflict of interests in the roles played by the members of the BoD was one of the main reasons for misgovernance at NYSE. The role of the directors was to maintain free and fair market environment and ensure high standards of working to safeguard interest of public. But, analysts were doubtful about the performance of the board.

It was pointed out that the role played by the members of the BoD came in conflict with their primary business. Half of the directors who represented the board did business on the exchange and other half were the ones whose companies were listed on the exchange or shared close relationship with companies listed. Commenting on the role of non-industry directors Fortune wrote, "But these people don't wake up each morning wondering how they can protect investors - they wake up thinking about how to make money for their companies, a noble goal to be sure, but not exactly the watchdog role the securities market might like."⁵ Commenting on the role conflict, said Robert Mittelstaedt, Vice dean and director - executive education, Wharton school, "They are fundamentally different activities. You can't be both a regulator and an organization that is trying to draw companies [as members] and make it attractive for them to function on the exchange."⁶

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4] English, Simon, Wall Street report slams 'cosy' NYSE, www.telegraphic.co.uk, August 8, 2003.
5] Lashinsky, Adam, NYSE: Who's Minding the Store? Fortune, March 24, 2003.
6] How to Restore Credibility at the NYSE, www.knowledge.wharton.upenn.edu, September 24, 2003