governing issues

8/8/2019 Governing Issues

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Governing IssuesGoverning Issuesat theat the

NYSENYSEPresented by:

Rati

RishuRiya

ShubhalaxmiShweta

Sayantan


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NYSE GOVERNANCE ISSUES

"The New York Stock Exchange is longoverdue for a very serious and thoroughexamination and overhaul of its

governance. The very fact that theynominate their own board without any inputfrom anyone else should not be tolerated.

- Nell Minow, Editor, Corporate-Governance Research Firm - TheCorporate Library in August 2003.

Criticism from every where like this


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Evolution of NYSE

1792- NYSE set up as NYS &BE

An agreement signed in 1792 betweentwenty-four stockbrokers that effectivelycreated the New York Stock Exchange

(Buttonwood Agreement )The agreement had two provisions: 1) the

brokers were to deal only with each other,thereby eliminating the auctioneers, and

2) the commissions were to be 0.25%.

1863 changed to NYSE


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Why this case?Governance practices ofNYSE

The role of specialist

Execution of order

NYSE failed to meet the expectations of investorsin regard to governance practices?

Controversy regarding Grasso's compensationwas one of the main reasons for the declination of

the NYSE governance system,NYSE and itsreputation.

The reforms suggested by John Reed are enoughor does more need to be done?


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Payback time at NYSE

removal of richard grasso :- Due to his package & governance practices

He did not reveal his executive compensation figures iedollar140 million with the extension of job upto 2k7 and 1

million bonus despite of slowdown of market. Donaldson,Chief of the Securities and Exchange

Commission (SEC), issued a statement saying thatGrasso's pay package raised doubts about the NYSEadministration.

members of the executive compensation committee wereappointed by Grasso himself.

Had to face criticism both from internally and externally.

Finally Under the unrelenting pressure, Grasso resigned inSeptember2003.


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The Role of Specialist

In April 2003, the SEC initiated an investigation against trading

violations committed by specialists .

Analysts pointed out that the objective of the inquiry remained

the same, though the rules violated differed .In 1999, NYSE entered into a settlement with the SEC to make

the specialist system more transparent

In 2000s, specialist firms at NYSE posted pre-tax profit margins

of35-37% against the 9.7% margin of corporate America as a

whole.

Analysts were also critical about execution of orders at NYSE.

Investors could not execute their buy/sell orders immediately

as they were required to go through specialists


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THE FINAL ASSAULT- CEO

COMPENSATION

In 2003, NYCE announced its executive

compensation figures.

The exchange revealed that Grasso would be

receiving around $1.4 million as salary per year and

a bonus of $1 million per year

Donaldson issued a statement saying that Grasso's

pay package raised doubts about the NYSE

administration and asked NYSE to submit the

minutes of the meetings in which Grasso's

compensation had been finalized.

The compensation committee comprised of

executives from companies which were regulated by

the NYSE


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one of the NYSE directors had claimed in an email that board

members who were not in the compensation committee, did

not know about the break-up of Grasso's pay package.

NYSE said that it acted on the advice of HR consultants

- advice from Hewitt Associates regarding Grasso's

compensation

-had hired an independent consultant - Vedder Price to

assess the CEO's compensation.Nothing wrong in the NYSE chief being compensated

It was reported that the cost of operating on NYSE had

increased by over30% during 2000-2003


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Reforms (Clean Up Exercise)||More Compliance Oriented, No Self Regulatory

Guidelines||

Conducted interviews with specialists, outside critics andexperts.

Separating the regulatory function

Specialist system should be replace with Electronic Trading.

Reed Decided to:Carry on with specialist system, and

Restructuring the Board and Governance Process

6-12 Directors, no one from securities industries or listedcompanies

To supervise the regulation, governance, compensationand internal administration.

Board of Executive (BoE)

Issues ofmarketplace operations, membership, listedcompanies, market structure and performance.

Chief Regulatory Officer, appointed by the board to report

directly to the Regulatory Oversight Committee.


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ReactionsReactions

Step in the right direction.

-SEC

not enough to regain investors confidence

and suggested SEC to reject the proposal.-California Public Employees Retirement Fund

CALPER filed a suite in the direct court,

alleging Fraud and Negligence

Causing high cost for investors


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Current ScenarioCurrent ScenarioEnforcement cases stem from a variety

of sources that include internal

referrals, investor complaints,

examinations of member

organizations, and referrals from the

U.S. Securities and Exchange

Commission. Case types may

include:failure to cooperate

financial/operations

insider trading

market manipulation

misconduct on the trading floorregistration/qualification

short sale violations

supervisory violations

books and records deficiencies, and

other abusive trading practices.


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Question 1

Analyze the working and corporate

governance set up at NYSE. Do you

agree that NYSE failed to meet the

expectations of investors in regard to

governance practices?


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THE WORKING OF NYSETHE WORKING OF NYSENYSE comprises of3 constituencies, viz: broker-dealer members,

listed companies and investing public. The specialists firms andfloor brokers are grouped under broker-dealer members. The

specialists firms employ specialists involved in the trading of

stocks of particular companies.

At NYSE, trading takes place at one central location the trading

floor 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.

GOVERNANCE STRUCTURE AT NYSE

It comprises of five important elements: the BOD,STANDING AND

ADVISORY committees, a nominating committee, its professional

executive management, and its not-for-profit status.


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BOD and Standing and Advisory

committees:

The 1,366 broker-dealer members of the exchange elected the BOD

which consisted of27 members (12 industry directors, 12 non-industry

directors, 3 members of office of chairman)

No director was allowed to be on board for more than 3 consecutive 3

year terms.

The day-to-day working of the exchange was overseen by the boardBoard plays active role in formulating policies and programs

The exchange had 5 standing committees, 10 advisory committees and

4 international advisory committees.

NOMINAT

ING COMMITT

EE:Consist 8 members: 4 from industry category and 4 from non-industry

category.

Members elected for 2 years and no member could be re-elected for

the second executive term


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Professional Management:Though till the 1970s, the members of the exchange oversawthe day-to-day functioning of the exchange: from the early

1970s a professional management team was appointed by thechairman and CEO with 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 organisation. And

in 1971, it was incorporated under the not-for-profit Corporation

Act. The main aim of exchange was stated to be maximising

the reliability and integrity of market functioning, rather than to

maximising profit.


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1)Investors could not execute their buy/sell orders

immediately as they were required to go through

specialists or floor brokers paying highcommissions.

2)NYSE demanded greater transparency in the

operations of the companies it regulated,it did not

itself maintain any tranparency in its own working

process because the board was handpicked by

the chairman.

3)Though the exchange claimed that its election

process was fair and transparent but the

candidates to be elected to the board were

nominated by the nominating committee


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Some analysts were of the opinion thatcontroversy regarding Grassos compensation was

one of the main reasons for the overhauling of the

NYSE governance system. Analyze the impact of

the controversy over Grassos compensation, on

NYSE and its reputation.

QuestionQuestion -- 22


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AnswerUnder pressure, NYSE announced its compensation figures in August,

2003.

Grasso had been paid a lumpsum amount.

Employment contract was extended

Salary- $1.4 million per year. Bonus of $1 million

Entitled to receive $48 million as benefits

Donaldson doubted the NYSE administrationAsked to submit details of meetings; wherein compensation was finalised

Washington Post reported that Grasso had appointed the members of the

executive compensation committee.

Board members not in the CC, were not aware of the break-up of Grassos

pay package.

Blame Game

Insiders criticized

Increased resentment demanded the resignation of Grasso

Reed took over as the interim chairman and CEO ofNYSE


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QUESTION3

Though most brokers and investorshad a positive reaction to the reformsbought in by the exchanges interimCEO John Reed, a majority also feltthat more had to be done to bring ingreater transparency.

Do you think the reforms suggestedby John Reed are enough or doesmore need to be done? Justify your

answer.


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ANSWER

Good but not enough

Specialists- why he did not remove?

Electronic stock trading

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