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."
A prospectus describing the changes was mailed to the members Tuesday, and a ratification vote was scheduled for Nov. 18. If approved, the plan then would be submitted for final approval by the SEC.
Immediately after the news conference, Reed flew to Washington, his first stop on an eight-city "road show" to stump for support from exchange members. The tour will conclude with meetings in Los Angeles and San Francisco on Nov. 14 and 15.
Reed said he also would be lobbying another key constituency: the five SEC commissioners, who must approve his plan.
The SEC, in a statement released at the same time as Reed's press conference, was careful not to appear to endorse the proposal, which must go through a public comment period before it is voted on by the commissioners.
Reed was equally careful not to predict how the SEC would act, although people familiar with the situation said he had been in regular contact with SEC Chairman William H. Donaldson and was expected to win the agency's approval.
Between now and the SEC vote, the agency is sure to get an earful from critics of Reed's plan.
Corporate-governance advocate Nell Minow, for example, said that regardless of the quality of Reed's nominees, "the important question is where future directors come from." Since board members would continue to be approved by the NYSE's member-owners, the potential for conflict of interest still exists, she said.
Minow and others suggested having the SEC nominate NYSE directors, as it does with the new accounting industry watchdog, the Public Company Accounting Oversight Board.
"I don't believe there's been enough thought about how this initial reform could be eroded over time," Angelides agreed. He worried that the board could degenerate into "a buddy system 10 years down the road."
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NYSE director nominees
New York Stock Exchange interim Chairman John S. Reed on Wednesday proposed replacing the exchange's 27-member board of directors with one having six to 12 members. Here are profiles of Reed's eight board nominees, who must be approved by the NYSE membership:
Madeleine K. Albright
Principal of Albright Group,
Secretary of State, 1997-2001
As secretary of State, Albright, 66, was the highest-ranking woman in the history of the U.S. government. Albright is a current NYSE board member who chairs the exchange's public policy committee and serves on a special committee on NYSE governance. She is also chairwoman of the National Democratic Institute for International Affairs, a trustee of the Aspen Institute and a board member of the American Red Cross. She serves as a trustee for the National Gallery of Art and is chairwoman of the International Advisory Board of the Pew Global Attitudes Survey.
Herbert M. Allison Jr.
CEO of TIAA-CREF
Allison, 60, took over the New York-based teachers' pension fund, which manages about $286 billion, last November. He spent 28 years at Merrill Lynch & Co., leaving in 1999 as president after he was told he would not get the top job. Allison, a current NYSE board member, has been on the exchange's human resources and compensation committees and has been a member of the public policy committee. He also serves on the boards of the National Assn. of Securities Dealers, United College Negro Fund, Yale Investment Committee and the Yale School of Management. Allison was the national finance chairman for Arizona Sen. John McCain's 2000 presidential bid.
Ex-CEO of Schlumberger Ltd.
Baird, 66, joined Schlumberger, the world's largest oil field services company, in 1960 as a field engineer and was named chief executive in 1986. He retired this year. Baird was named chairman of Rolls Royce Group, the world's second-largest aircraft engine maker, in February. He has been a trustee of the Carnegie Institution of Washington since 1996 and a member of Britain's Council of Science and Technology since 2000.
Marshall N. Carter
Ex-chairman and CEO of State Street Corp.
Carter, 63, was chairman and CEO of State Street Corp., the world's largest custodian of assets, from 1992 to 2000. He served two years as a Marine during the Vietnam War after graduating from the U.S. Military Academy at West Point in 1962. Carter was awarded the Navy Cross and the Purple Heart, according to the Massachusetts Institute of Technology Sloan School of Management's Web site. Carter is an adjunct lecturer in public policy and a senior fellow at Harvard University's Kennedy School.
Shirley Ann Jackson
President of Rensselaer Polytechnic Institute
Jackson, 57, became the 18th president of Rensselaer in Troy, N.Y., in July 1999. She is a member of the board of directors of FedEx Corp., AT&T; Corp., Marathon Oil Corp. and Medtronic Inc. A former professor of physics at Rutgers University who has worked at AT&T; Bell Laboratories, she was chairman of the U.S. Nuclear Regulatory Commission from 1995 to 1999. She also was chairman of the International Nuclear Regulators Assn. and is a member of the National Academy of Engineering and a fellow of the American Academy of Arts and Sciences.
James S. McDonald
CEO of Rockefeller & Co.
McDonald, 50, has been running Rockefeller & Co., which manages the investments of the Rockefellers and other wealthy families, since 2000. Before joining the firm, he was president and CEO of Pell, Rudman & Co., a money manager that was bought by Amvescap in 2001 for $172 million. A graduate of Harvard College and the University of Virginia, McDonald was a partner with Boston law firm Choate, Hall & Stewart from 1977 until he joined Pell Rudman in 1986.
Robert B. Shapiro
Ex-chairman, Pharmacia Corp.
Shapiro retired from Pharmacia in 2001. Reed served as a Pharmacia director while Shapiro was at the company and the two left its board at the same time. Shapiro was chief executive of Monsanto Co. from 1995 until 2000, when the company merged with Pharmacia & Upjohn Inc. and he became chairman. Shapiro joined Searle, which became a unit of Monsanto, in 1979 and rose to head the company's NutraSweet group.
Ex-chairman of J.P. Morgan & Co.
Weatherstone, a 72-year-old former foreign exchange trader, helped transform J.P. Morgan in the 1990s from an old-line commercial bank to a securities underwriter and investment banker, businesses once reserved for Wall Street firms such as Merrill Lynch & Co. Weatherstone, who joined the bank when he was 16, became chairman of J.P. Morgan & Co. in January 1990 and retired four years later. A native of London, he has been knighted as a Commander of the Order of the British Empire. J.P. Morgan was bought by Chase Manhattan Corp. in 2000 and is now called J.P. Morgan Chase & Co.
Source: Bloomberg News