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NYSE to Corporate America: Do as I Say, Not as I Do

Author: Benn Steil, Senior Fellow and Director of International Economics
August 19, 2002
Securities Industry News

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The burgeoning epidemic of corporate financial scandals has served to highlight the critical importance of well-functioning company boards of directors. All too often, boards have appeared to act as agents for the personal interests of senior company executives, constrained only by the threat of lawsuits and government investigations when the bilking becomes serious enough to threaten insolvency. Given this context, the recent NYSE proposals for extending the role of independent directors on the boards of listed companies are clearly a step in the right direction.

The NYSE specifies that for a director to be “independent,” the board must affirmatively determine that the director has no material relationship with the company, either directly or as a partner, stockholder or officer of an organization that has a relationship with the company. A majority of a board’s directors, according to the Exchange, should be independent according to this definition.

Good stuff. Clear, sensible, long overdue.

Sad, then, that this initiative appears to be such a brazen case of “do as I say, not as I do.”

NYSE Chairman and CEO Dick Grasso and his two fellow NYSE executive directors, Robert Britz and Catherine Kinney, themselves sit as outside directors on the boards of NYSE listed companies. Yet given that listing a company places the Exchange in the dual role of being that company’s regulator as well as its lead capital market intermediary, a function which nets the Exchange over 1/3 of its annual revenue, Grasso and associates are hardly in a position to claim to be “independent.” If being a top executive of a company’s listing authority does not constitute a “material relationship” with the company, it’s difficult to imagine what could. Nasdaq agrees. Its executives do not serve on boards of Nasdaq listed companies.

But what if the placement of exchange execs on listed company boards actually results in materially better governance? Sadly, there’s not much evidence of that. The US Attorney’s Office and the SEC are currently investigating Computer Associates for accounting practices dating back to 1998, midway through Grasso’s tenure as an “independent” director on their board.

But what about the Exchange’s own board? Of its 29 members, 3 are NYSE executives; 21 are representatives of NYSE member firms, listed firms or both; and only 5, or 17%, are nominally independent of the Exchange’s management, its member firms and its listed firms. Not all of these “independent” directors are, however, necessarily independent in strict accordance with the NYSE’s own definition of independence. One such director, for example, Larry Sonsini, is managing partner of a law firm which, according to law.com, “did more IPOs as issuer’s counsel than any other firm nationally for the past three years running.”

Furthermore, whereas the SEC places enormous faith in the Exchange’s independent directors to guard the “public interest,” in recognition of the inherent conflicts of interest suffusing the relationship between the intermediaries which control the Exchange and the investors who must trade through them, all independent directors are nominated by an NYSE nominating committee and then elected by the NYSE membership. The only way such a process can reasonably ensure the election of directors independent of members’ interests is for the Exchange to demutualize, and significantly to lessen the members’ ownership stake in and strategic control over the Exchange.

But we already know what the members think of that idea.


Dr. Benn Steil is Andre Meyer Senior Fellow in International Economics at the Council on Foreign Relations.

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