Governance Issues at the New York Stock Exchange

Details

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

Buy Now

Case Code : BECG035
Case Length : 20 Pages
Price: Rs. 500;

Tools

<< Previous

The Final Assault- CEO Compensation Contd...

Even NYSE insiders criticized Grasso's compensation deal. The members of the exchange were furious that while the operating income and volume of trade on the exchange were declining, Grasso had rewarded himself so handsomely. It was reported that the cost of operating on NYSE had increased by over 30% during 2000-2003. Public resentment against Grasso increased further as two large pension funds in the US demanded his resignation. Under the unrelenting pressure, Grasso resigned in September 2003.

The Clean-Up Exercise

Reed who took over as the interim chairman and CEO of NYSE in October 2003 initiated reforms at the exchange. He conducted interviews with the specialists, outside critics and experts on the kind of reforms to be initiated in the exchange procedures. Many suggested that NYSE should go the NASDAQ way by separating the regulatory function.³³ Further, it was also suggested that the specialist system should be done away with, and the NYSE should opt for electronic trading.

However, to the disappointment of many, Reed announced that he intended to keep the specialist system and would be focusing only on restructuring the NYSE board and bringing more transparency into the decision-making process of the exchange. Defending the specialist system at NYSE, Reed said, "Computer systems find liquidity but they don't add any liquidity. The specialist system brings capital into the system. All the studies suggest this is helpful."³⁴

Though he agreed that the specialist system delayed the speed of transactions, Reed was of the opinion that reviewing the whole trading system would not be very easy. On November 5 2003, Reed announced his proposed reforms in the methods of governance at the NYSE. It was proposed that the board would have independent directors with the responsibility of supervising regulation, governance, compensation and internal administration. Reed also announced that the BoD would be appointing an executive board (BOE) comprising of representatives from broker/dealer members, listed companies and the general public.

Further, it was stated that BOE would meet regularly to discuss issues related to marketplace operations, membership, listed companies, market structure and performance. The exchange would also have a Chief Regulatory Officer who would be appointed by the board of directors and he would report to the Regulatory Oversight Committee (Refer Table I for details on the BOD and BOE).

TABLE I
WORKING OF BOD & BOE (Post-reform)

PARTICULARS	BOD	BOE
Responsibilities	Board would act as a trustee. BOD would be answerable to the members and SEC.	Basically it would be an advisory body giving guidance on the working of the exchange.
Composition	It would comprise of 6-12 directors excluding current CEOs of member organizations and listed companies, the NYSE chairman and CEO.	It would consist of members from Institutional Investors/ CEOs/CIOs of public funds, CEOs of listed companies, lessor members³⁵, CEOs of specialist firms, floor brokers, the NYSE Chair and CEO.
Meetings	The BOD would meet at least quarterly and it would also have joint meetings with BOE.	It would meet at least 6 times a year. The lessor and floor members would be meet the BOD separately.
Standing Committees	Under the new governance system, the BOD would constitute the following standing committees: • Audit Committee: This committee would be set the internal audit budget. • Regulatory Oversight Committee: This would set the budget for all regulatory functions. • Regulation, Enforcement & Listing Standards Committee: This would oversee the regulatory group, hearing board, arbitration and Listings and Compliance Unit, and act as "Court of Appeals" in case of disciplinary and delisting hearings. • Quality of Markets/Public Policy Committee: This would act as an advisory on the issues related to member organizations and listing rules.	Under the new system, the BOE would constitute the following standing committees: • Market Performance: This committee would serve as forum to discuss issues related to trading and market operations and develop trading rules and products. • Allocation: This would oversee the allocation of stocks to specialists.
Advisory Committee	This committee would report to the BOD.

Source: www.nyse.com

Next >>

33] After various scandals rocked NASDAQ in the mid-1990s, NASDAQ separated its regulatory function to totally independent body - NASD.
34] Liston, Broward, NYSE's Reed to Keep Specialist Trading, www.washingtonpost.com, November 4, 2003.
35] Lessors are the ones who own right to trade on the NYSE, but lease them to the trade brokers.