New NYSE Chief Meets More Than Adulation
Since taking over a week ago as interim chairman of the New York Stock Exchange, John S. Reed has exuded the confidence and serenity of a man who knows that the worst that can befall him is to get fired from his $1 job and sent back to retirement on scenic Ile de Re, off the west coast of France.
And if that weren’t enough to keep his stress level down, consider the reception that the former Citigroup Inc. executive received upon being named to the job.
Regulators, pundits and politicians hailed Reed, 64, as just the tonic the Big Board needed after the embarrassing and painful ouster of longtime Chairman Richard Grasso. In his first meeting on Wednesday with the NYSE’s trading floor professionals and seat owners -- many of whom had grown suspicious and resentful of exchange management by the end of Grasso’s tenure -- the overflow crowd greeted Reed with a standing ovation.
“If we were in England, what he’s doing would be called knightly,” one floor veteran gushed after the meeting. He noted approvingly the signal Reed sent by asking for a total salary of $1.
The warm glow hasn’t enveloped everybody, however.
To Sarah Teslik, executive director of the Council of Institutional Investors, the worst problem at the NYSE -- more harmful to investors than cronyism or bloated executive pay -- is that the exchange operates both as a market and as a market regulator. Teslik considers it an unresolvable conflict for the NYSE to have “governmental authority to decide the rights and wrongs between its customers and its owners.”
When Reed insisted at his first news conference that the Big Board was a good regulator and should keep that function in-house rather than farm it out to government or an independent third party, “he conceded the only thing that mattered,” said Teslik, whose organization represents 130 pension funds with assets of $3 trillion.
“Of course there’s going to be a love-fest,” she said, “except for the people who don’t have a voice and don’t have a vote -- the investors.”
Teslik’s sentiments are shared by some of the same state treasurers and pension fund managers whose outrage at Grasso’s $187.5-million pay package -- $139.5 million in retirement and deferred salary, plus $48 million in future retirement benefits and other compensation -- helped prompt his forced resignation Sept. 17.
“Having a regulatory body that is owned and controlled by the very entities it regulates creates a conflict with investor interests,” said Jack Ehnes, chief executive of the $100-billion California State Teachers’ Retirement System.
As the pension fund community’s reaction implies, Reed’s rescue mission may encounter rougher sailing than he imagined when he agreed to take the tiller -- although some observers said critics should hold their fire until Reed produces his plan.
“It’s unseemly to be trying to judge the guy after one week,” said Rep. Barney Frank (D-Mass.), ranking Democrat on the House Banking Committee.
Even absent controversy, Reed has set himself an ambitious timetable: He hopes to win approval from the board for a still-developing reform plan, put the plan to a required vote of the exchange’s 1,366 seat holder-owners, find and install permanent NYSE leadership and be back in private life -- all by year-end.
Damon Silvers, associate general counsel for the AFL-CIO, which has become increasingly outspoken on pension and executive pay issues, said the toughest task Reed faced might be scraping away the exchange’s “clubby” culture.
The 27-member board, laden with Wall Street financiers and corporate CEOs, was so out of touch with the way most people live that it didn’t balk at a nine-figure payday for a man whose job, at least in part, was to regulate the market, Silvers said.
Critics Target Directors
Some NYSE critics, the AFL-CIO included, have pushed for the removal of some or all of the exchange’s directors.
The biggest target is Kenneth Langone, a friend of Grasso’s and co-founder of Home Depot Inc., who headed the NYSE board’s compensation committee when Grasso was awarded his most generous pay packages, including a peak annual salary and bonus of more than $30 million in 2001.
Langone has said he has no intention of stepping down.
But Reed rejected the calls to dump his board, saying he needed the directors’ insight into what went on under Grasso so that he could reach his own analysis of how to fix the place.
In a Thursday news conference, Reed said that having spoken with all the directors, he expected to get their unanimous approval of the governance changes he would propose. His method, he said, will be to present his plan, poll the board and then “circle back” to confer with any reluctant directors about reform items that may be deal breakers for them.
Regarding self-regulation, Reed said stripping that function from the exchange would be like removing quality control from Toyota’s manufacturing operations.
“Toyota isn’t Toyota without quality control,” he said, “and I don’t think our market would view the New York Stock Exchange as the stock exchange” without its regulatory arm.
Securities and Exchange Commission Chairman William H. Donaldson, a former NYSE chairman, sided with Reed in testimony last week before the Senate Banking Committee.
Self-regulation has “worked pretty well” at the exchange, Donaldson said. What the NYSE needs to do is devise “a governance structure that guarantees the independence of the regulatory aspect.”
Defining Roles
Former SEC Chairman David S. Ruder, now a law professor at Northwestern University, suggested that conflicts between investors and exchange members be handled by an external regulator. He would like to see a single nationwide body given such responsibility for all U.S. securities markets.
For more technical issues, such as monitoring trading to determine whether a dealer is taking unfair advantage of customer order information, the exchange should retain that role, Ruder said.
“It’s important to have somebody on the floor of the exchange -- people who truly understand the business and can observe what’s going on,” he said.
Reed has acknowledged the potential conflicts but said he believed they could be addressed through governance structures. He did not go into detail, but some have suggested a separate, independent board to oversee the regulatory side.
Regardless of what structural changes Reed pushes through, the AFL-CIO’s Silvers said, the reforms will fail unless there is a corresponding attitude makeover, a movement from a sense of private privilege to a sense of public duty.
“If the exchange wants to continue to have this semi-public role, it needs to function more as a public institution,” he said. “If a serious effort isn’t made to change the way it relates to the public, [the regulatory function] will be taken away.”
