Exchanges: We Can Meet Our Own Standards

NYSE, Nasdaq say they come up to their own governance standards -- sort of. Plus: FASB sees derivatives as liability, and companies balking at expensing options.

Officials at the major U.S. stock exchanges reported to the SEC last week that corporate governance practices at the bourses themselves were either on a par — or would soon be on a par — with the governance standards required of companies listed on the exchanges.

Richard Grasso, New York Stock Exchange chairman, is allowing some room for revision, however. Reportedly, he noted in a letter to SEC Chairman William Donaldson that the exchange’s governance committee would hold several days of hearings in June for which NYSE’s various constituents could make written submissions.

The NYSE is a private self-regulatory organization owned by its members. Hence, Grasso noted, “its governance structure is quite different from that of its profit-maximizing listed companies.” The head of the NYSE also noted that, unlike publicly traded companies, the exchange has three constituencies (broker member-owners, listed companies and the investing public.) Therefore, its board “embodies a ‘legislative’ model of checks and balances among constituent representatives,” acting by “compromise and consensus,” the NYSE head said.

Grasso, however, continues to draw criticism for nominations to the NYSE board. Consider the aborted nomination of Citigroup Inc. Chairman and CEO Sanford Patrick Weill. Grasso supported the nomination of Weill for a non-industry slot on the NYSE board of directors even though Citigroup was one of the companies at the center of a government investigation into alleged bias in stock research.

Weill withdrew his nomination after New York Attorney General Eliot L. Spitzer, who spearheaded the probe into analyst conflict-of-interests, called it an “outrage.”

Grasso conceded on Friday that the Weill nomination was “bad mistake,” according to The Washington Post. Other critics point to the fact that the membership of the exchange’s board is too heavily tilted toward NYSE member firms and NYSE-listed companies.

Responding to such criticisms, a NYSE spokesman told Dow Jones Newswire that, as far as specific changes to governance procedures are concerned, “everything’s on the table.” He also highlighted the Big Board’s moves to strengthen corporate governance among its listed companies as evidence of the NYSE’s commitment to good governance.

For its part, the Nasdaq stock market reportedly declared that its governance structure met that required of any company traded on the exchange. Its practices were apparently overhauled in the wake of the market’s trading scandal in the mid-1990s. The incident, according to Dow Jones, led to organizational changes at Nasdaq and at its parent, the National Association of Securities Dealers.

Nasdaq General Counsel Edward Knight, however, is not saying that the exchange has reached “some stage of perfection.” Indeed, officials at the exchange appear to believe the board nomination process could stand more examination. “The staff’s interpretation of ‘fair representation’ appears to require that a specific number of board seats be filled solely by the members of the stock market,” Nasdaq said in its report to the SEC.

But Nasdaq has a large public shareholder base that would be partially disenfranchised in order to give exchange members more control over Nasdaq, officials at the exchange added. “Moreover, the concept of member representation seems particularly outmoded in application to an all-electronic exchange that has no seats or ‘members’ in the traditional sense.”


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