Governance Issues at the New York Stock Exchange

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Themes: Coporate Governance
Period : 2003-2004
Organization : NYSE
Pub Date : 2004
Countries : USA
Industry : -

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Case Code : BECG035
Case Length : 20 Pages
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Governance Structure at NYSE (Pre-reform) Contd...

Nominating Committee
The nominating committee consisted of eight members - four from the industry category and four from the non-industry category. The members of the nominating committee were elected for two years, and no member could be re-elected for the second consecutive term. The nominating committee nominated members to be elected to the BoD.

Professional Management
Though till the 1970s, the members of the exchange oversaw the day-to-day functioning of the exchange; from the early 1970s, a professional management team was appointed by the Chairman and CEO with the approval from the board to oversee administrative matters. But the executive vice-president of the exchange was directly elected by the board.

Not-for-Profit Status
Initially NYSE was formed as a membership organization, and in 1971, it was incorporated under the 'Not-for-profit' Corporation Act. The main aim of the exchange was stated to be maximizing the reliability and integrity of market functioning, rather than to maximizing profits.

NYSE Comes Under Flak

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. However, finally, it was the controversy over its CEO's compensation that resulted in the eruption of the wrath of the media and the general public.

Composition of the Board

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. 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 the board members themselves.

In early 2003, as criticism of the system at the stock markets in the US mounted, SEC Chairman Donaldson asked all the exchanges and their regulatory bodies in the US to review their governance processes. At this point, NYSE requested the CII to prepare a report on the governance practices at NYSE. In August 2003, the CII submitted a very critical 47-page report on the governance practices at NYSE.

In its report, the CII 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."²²

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22] English, Simon, Wall Street report slams 'cosy' NYSE, www.telegraphic.co.uk, August 8, 2003.