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Governance challenge at NYSE

  • Category
    Ethics
  • Published
    20th Dec, 2018

On September 18, 2003, Richard Grass, Chairman and CEO of NYSE resigned amidst widespread criticism of his pay package and governance practices at NYSE. In August 2003, NYSE had announced to give lump sum amount of $140 million along with extending his contract up-to 2007 with annual pay of $1.4 million and $1 million additional bonus. Also, the misgovernance came to light following the Council of Institutional Investors (CII) report which highlighted the shortcomings.

Context

On September 18, 2003, Richard Grass, Chairman and CEO of NYSE resigned amidst widespread criticism of his pay package and governance practices at NYSE. In August 2003, NYSE had announced to give lump sum amount of $140 million along with extending his contract up-to 2007 with annual pay of $1.4 million and $1 million additional bonus. Also, the misgovernance came to light following the Council of Institutional Investors (CII) report which highlighted the shortcomings.

About

New York Stock Exchange (NYSE)

It is a member-owned co-operative and self-regulatory organization serving the public as nation's principal security market, regulator of security firms and listed companies, & source of governance standards.

It comprises of Broker-dealer members, listed companies, and the investors. It has the power to take disciplinary action against firms violating the rules of exchange and to ensure transparency in working of listed companies.

Governance structure of NYSE:

There are five main elements: Board of Directors, standing and advisory committee, nominating committee, professional executive management, and it's ‘not-for-profit’ status.

Major issue:

It has been alleged that NYSE has failed to protect the interest of public and deliver results due to misgovernance, role of specialists, lack of transparency in its working process and electing the board members, etc.

CII in its report pointed out conflict of interest on part of directors of board who are also executives of the companies listed on NYSE and the specialist were alleged to be involved in front running i.e. purchased shares at lower prices to sell them for profit afterwards.

Reforms suggested:

  1. Separation of regulatory function from core trading functions.
  2. Doing away with specialist system.
  3. Transparency in the working and decision-making process of exchange. 

Steps taken:

  1. Reduction in strength of BoD from 27 to 6-12 members.
  2. Independent directors with responsibility of supervising regulation, governance, compensation, and internal administration.
  3. Executive Board (BOE) to be appointed by BoD representing listed companies, broker-dealer members, and general public.
  4. More frequent BOE meeting for more transparency.

Analysis

The security exchange regulator is the principal source for safeguarding the interest of general public and investors in the stock exchange market and establishing corporate governance in the listed companies. Transparency and independence of the key personnel along with governance of the security exchange itself is the key to achieve its prime objective and bringing credibility to itself. Had the NYSE followed these basic principles, it would not have come under the wrath of media and public alike.

Applications for India:

Bibek Debroy committee has also initiated similar reforms in Indian railways regarding-Focus on core activities - The Committee observed that, apart from its core function of running trains, Railways also engages in peripheral activities such as running schools, hospitals and a police force.

It is expected that these various zones and divisions within the Railways will face increasing competition in the future. To enable themselves to compete effectively, they will need to reduce costs on these non-core activities that are non-remunerative in nature, and instead improve the efficiency of running trains by greater resource allocation to this function.

Non-core activities can be outsourced to private entities. An example cited by the Committee is that of subsidization of education and medical facilities in alternative schools and hospitals respectively, including the private institutions.

BSE is also a privately owned stock exchange like the NYSE, and has come under SEBI regulatory lens many times, particularly due to manipulation by brokers and traders as it was dominated by them. Many reforms have been brought in last two decades to clean up the BSE and make it more responsive to investors, rather than traders.

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