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Stock Exchange Chief Unveils Reform Plan

The proposal to restore confidence in the NYSE focuses on a smaller, independent board of directors. Critics say it doesn't go far enough.

November 06, 2003|Thomas S. Mulligan | Times Staff Writer

NEW YORK — John S. Reed, brought in to shake up the New York Stock Exchange, unveiled his long-awaited reform plan Wednesday, drawing immediate fire from critics who said it would not go far enough to make the world's largest stock market answerable to investors.

The highlight of Reed's proposal is a drastically slimmed-down board of directors that for the first time would be free of business or regulatory ties to the exchange.

The NYSE board historically has been dominated by Wall Street insiders, creating an atmosphere of secrecy and clubbiness that critics say led to approval of the $188-million pay package of ousted NYSE Chairman Richard Grasso and to trading abuses on the NYSE floor. The flap over Grasso's pay and his forced departure sparked one of the worst crises in the exchange's 211-year history.

Reed, the retired former co-chairman of Citigroup Inc., was hired as Grasso's interim replacement Sept. 21 at a salary of $1 to help restore confidence in the NYSE by revamping its governance structure and finding a credible permanent chairman and chief executive.

Since taking the post, Reed had been getting mainly favorable reviews mixed with muted criticism. The honeymoon ended Wednesday.

"I do not believe today's reforms are powerful enough medicine to restore the health of the NYSE," California Treasurer Phil Angelides said in an interview.

Other state treasurers and pension chiefs, including those from New York and North Carolina, echoed Angelides' comments. As major customers of the NYSE, state pension funds helped force Grasso's Sept. 17 resignation.

Reed's plan lacks "strong enough fire walls" between the NYSE's dual roles as manager of the exchange and regulator of the traders who work there, Angelides said. He prefers the model of the Nasdaq stock market, which is regulated by a legally separate corporation with a discrete board of directors.

Independent oversight of trading has become a key point in the debate over the NYSE's future, especially in light of revelations that some trading specialists on the exchange floor allegedly have used their privileged positions to profit at the expense of investors. The Securities and Exchange Commission has been investigating the situation since last spring.

Reed defended his proposed overhaul as "robust." In a news conference at the NYSE, he said the reforms would make him "quite comfortable that the likelihood of another breakdown in governance is extremely small."

Under Reed's proposal, the board would consist of six to 12 members who would hire the NYSE chairman and chief executive, oversee the exchange's regulatory functions and set the salaries of top management.

Reed nominated eight people for the new board, only two of whom would be holdovers from the existing 27-member panel. He said he had requested the resignations of the other current board members, to be effective when the new board is formed.

Reed, who said he would step down as soon as his reforms were put in place, said the board itself should decide whether to split the jobs of chairman and chief executive, as some have suggested, or to give both titles to a single person.

The board also would appoint about 20 members of a new panel, the board of executives, which would advise the board of directors on the nuts and bolts of NYSE trading operations. The advisory group would include representatives of institutional and public investors, such as pension funds; NYSE seat owners; floor brokers; and executives of brokerage firms and companies whose stock is listed on the exchange.

Reed's nominees for director are long on business experience. They are current NYSE director Madeleine K. Albright, former secretary of State under President Clinton; current director Herbert M. Allison Jr., president of TIAA-CREF, a public pension fund; Euan Baird, chairman of Rolls-Royce and former chairman of Schlumberger; Marshall N. Carter, former chairman of State Street Corp.; Shirley Ann Jackson, a nuclear physicist and president of Rensselaer Polytechnic Institute; James S. McDonald, president and chief executive of Rockefeller & Co., which manages money for the Rockefeller family; Robert B. Shapiro, former chairman of Pharmacia Corp.; and Dennis Weatherstone, former chairman of J.P. Morgan & Co.

From now on, Reed said, the Big Board's activities would be "surrounded" by a level of disclosure that would be "totally new for the New York Stock Exchange." The salaries of directors and top executives, the makeup and duties of board committees and all important decisions would be laid out publicly in an annual proxy statement.

"Had we had disclosure historically, I think some of the problems with compensation would have been nipped in the bud," Reed said.

The reforms would involve changes to the NYSE constitution, which must be approved by the exchange's membership -- the owners of the Big Board's 1,366 trading "seats."

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