Fund Skippers Applaud Big Board Reforms
December 8, 2003
Mutual fund managers are tipping their caps to interim chief John Reed as the New York Stock Exchange preps itself for a makeover. But industry lobbyists suggest that the proposed governance structure fails to provide adequate representation.
An overwhelming majority of fund managers believe Reed is demonstrating effective leadership of the 211-year-old exchange, according to a recent survey by Broadgate Consultants of New York. The poll revealed that nearly three-quarters of the 115 fund managers who participated believe his efforts will help right the ship in the aftermath of Dick Grasso's forced resignation.
The study was comprised of institutional portfolio managers and analysts from a wide variety of U.S. mutual funds, banks and insurance companies that collectively hold roughly $1 trillion in assets under management.
Further underpinning the call for a complete overhaul at the NYSE, 85% of the respondents favored splitting the roles of the NYSE chairman and chief executive officer. Critics argue that entrusting those responsibilities to one individual creates an inherent conflict of interest that prevents the board of directors from policing the trading floor. And 55% of the managers suggested abandoning the specialist system altogether.
Last month, NYSE members voted to approve changes to the Big Board's constitution, but they still have to be examined by the SEC. The proposal includes an amendment to establish a board made up of independent directors, with the exception of the exchange's CEO, who may also serve as chairman. The newly appointed board has eight directors, including the head of TIAA-CREF, former executives, and former public servants including Madeline Albright, who served as secretary of state in the Clinton administration.
While many executives in the fund industry have cheered the way the NYSE has addressed its failings, the sentiment toward the SEC is not as peachy. When asked if the SEC was doing a good job promoting more effective securities industry practices and reforms, 70% of the respondents concluded that the industry watchdog is not providing adequate leadership.
Seventy percent of managers expressed concerns that the wave of high-profile investigations being conducted by New York Attorney General Eliot Spitzer are politically motivated. The respondents also questioned the merit of these investigations in terms of helping restore investor confidence in the capital markets.
Stock pickers were divided on the issue of whether new regulations will have a significant impact on corporate behavior. Slightly more than half have concluded that Sarbanes-Oxley has prompted companies to focus more readily on shareholder relations and corporate governance.
"The jury is still out on whether major initiatives, such as Sarbanes-Oxley, will restore confidence in the market, and federal state regulators appear to have their own credibility issues," said Thomas Franco, chairman and CEO of Broadgate. "One reform on which there is broad agreement is the need for a level playing field. Technology advances continue to make this an achievable goal."
In a letter to SEC Secretary Jonathan Katz last week, the Investment Company Institute urged the NYSE to take steps to ensure investor representation on the NYSE board of directors and create a NYSE board of executives more balanced between the buy side and sell side.
The ICI argues that in order to create a constituency that better aligns the board with the investors' interests, there must be several seats reserved for representatives of investors. "We believe that if investors are not provided with an increased voice in the NYSE's governance structure, the NYSE's proposal would represent a classic missed opportunity to truly improve the workings of the Exchange," said Amy Lancellotta, senior counsel at ICI.
Reed has publicly denounced calls for investors to be represented on the NYSE board, saying the exchange needs fully independent directors. He believes that a board made up of industry groups was a big part of the problem in Grasso's pay deal controversy.
In November, the California Public Employees Retirement System, the largest U.S. pension fund, recommended federal regulators reject the two-board structure proposal, calling it insufficiently independent and not representative of investors' interests. Calpers President Sean Harrigan maintains that the plan is flawed mainly because the board members who will ultimately be accountable for imposing regulatory actions against members are indebted to those members for their jobs.
Reed said the newly appointed board would be in a position to oversee the exchange's regulatory division effectively because they do not have ties to the securities industry. Reed's proposal also calls for a second board, made up of 20 members representing the securities industry and listed companies as well as institutional investors, that would have no say in regulatory and compensation issues.
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