Governance Issues at the New York Stock Exchange

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The Clean-Up Exercise Contd...

Under the proposed reforms, the 27-member board of NYSE would be reduced to 6-12 directors. It was also reported that none of the directors would be from the securities industry or from the listed companies on NYSE. However, it was stated that executives from the securities industry would serve in advisory committees of the exchange (Refer Exhibit III for the proposed governance architecture of NYSE).

The proposed changes met with mixed reactions. While SEC reacted positively saying that the proposed reforms were a step in the right direction, the US's largest pension fund California Public Employees' Retirement System Board (Calpers) said that the proposed reforms were not enough to regain investor confidence, and asked SEC to reject the proposals. Sean Harrigan (Harrigan), President - Calpers, said, "Our proposal at this point in time is just that the proposed governance model that Mr. Reed has put forth be rejected by the Securities and Exchange Commission. Self regulation, in my opinion is highly risky and simply will not work."36 Harrigan was of the opinion that the new proposals would not bring in any changes in the governance system of the NYSE but was just "shuffling the chairs". Some were of the opinion that, though Reed was expected to bring in drastic changes in the NYSE working by abolishing the specialist system, he did not favor this as it would be difficult to get the approval of the exchange members when it came up for voting.

They felt that since he was an interim Chairman and CEO of the exchange, Reed had concentrated only on the board structure and governance practices, rather than on the tricky issues such as the working of the specialist system. It was felt that by adopting a moderate approach, Reed had gained the support of the floor members. The proposed reforms of the NYSE were put to vote on November 18, 2003 and gained the acceptance of the members of the exchange.

In December 2003, however, Calpers filed a suit against NYSE and specialist trading firms in the US District Court, Southern District of New York, alleging fraud and negligence in regulatory functioning resulting in high costs for investors. It was alleged that "specialists, in conjunction with the NYSE routinely engaged in 'wide-ranging manipulative, self-dealing, deceptive and misleading conduct' that hurt public investors seeking to trade stocks."³⁷

The most important question that still remains is how far the reforms initiated by Reed will ensure transparency in the working of the board. And more importantly whether the new board will be able to bring greater credibility to the exchange.

Exhibits

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

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36] Calpers: NYSE Proposal Not Good Enough, www.money.cnn.com, November 6, 2003.
37] Calpers sues NYSE, alleges fraud, The Economic Times, December 18, 2003