I shop at WalMart! I demand a seat on their Board!
Full disclosure: I am an employee of the New York Stock Exchange, Inc., but the views that I am expressing here are solely my own, have not been vetted with the Exchange or any of its officials, and do not in any way, shape or form, constitute the official or unofficial position of the New York Stock Exchange, Inc., or any persons affiliated with the Exchange other than me.
It has been suggested that the NYSE Board of Directors is hopelessly mired in conflicts of interest, and should be reconstituted. Currently, the Board has 12 of its 27 seats reserved for members of the securities industry. One proposal that has been floated is that these firms should not have a seat on the new Board, and that instead, the Board should have representatives of the "public investor" and listed companies only.
To which I say, say what?
Let us suppose we were talking about WalMart, instead of the New York Stock Exchange. Under the current system, WalMart is run by executives who serve at the pleasure of the Board of Directors (leave aside the issue of employment contracts for the moment). The Board, in turn, is elected by shareholders of the corporation. The shareholders are the owners of the corporation. See how easy that is? The owners of the corporation select a group of people who are stewards for the company, and those people pick the people who run the company. Notice that WalMart's customers aren't anywhere in the mix?
But surely, you say, the entire corporation is run for the benefit of the customer, right? And it's the customer who gets hurt if WalMart engages in anticompetitive behavior, right? So to be fair and protect the consumer, shouldn't the customer have a dominant say in the running of the company? Well, actually, no. If the customers have a beef with WalMart, they are free to take their business to a competitor (to vote with their dollars). Other redress can be found in any number of consumer protection statutes, the offices of the state and local authorities and in the press.
But what about WalMart's suppliers, you ask? Doesn't WalMart exist to give an outlet for suppliers to get their goods to customers? Doesn't that mean that WalMart should give its suppliers control of the Board? Of course not, for the same reason. Suppliers can choose not to do business with WalMart, or may seek redress through enforcement of laws.
Now consider that the Exchange is a not-for-profit entity that is owned by its 1,366 members, or "seat holders". These people and entities are already in the minority (12 of the 27 seats on the Board), but at least they have a seat at the table. Sound familiar? To suggest that these entities shouldn't have a seat at the table would make as much sense as suggesting that customers (public investors) and suppliers (listed companies) should dominate the board of WalMart.
Ah, but what about the regulatory aspect, you ask? Good question. In both the examples I posited, the customer or supplier who is aggrieved can complain to an independent authority for enforcement of the laws through civil or criminal penalties. At the Exchange, the order of the day is "self-regulation", which means that the members of the Exchange are responsible for policing themselves.
Admittedly, this is a difference, but is it one that justifies removing the owners of the business from the control of the business? After all, we're not relying on the Exchange members to police themselves just out of the goodness of their hearts -- it's mandated by statute, and is an essential part of the Exchange's status as a "self regulatory organziation". And even then, we don't simply leave the Exchange to regulate itself in a vacuum -- there is a process called "oversight" in which the SEC routinely reviews the self-regulatory apparatus of the Exchange (both preventative self-regulation and disciplinary action taken by the Exchange when it uncovers problems). What's more, integrity is part of the Exchange's brand, and therefore, effective self-regulation is powerfully in the interest of the owners of the Exchange, no matter how much they may grumble about it.
And besides, customers and suppliers retain the ultimate veto power over the Exchange: the ability not to do business there. There is no obligation that a listed company list on the Exchange; they could just as easily list on the Nasdaq. And most "public" investors (that is, individuals, not institutional investors) don't know or care where their orders are executed (the little known secret is that orders can be executed in any number of places, not just on the NYSE). And the investors who do know or care where their orders are executed still come to the NYSE for 8 trades out of 10. 94% of the time, the NYSE gives them the best price for their trade. (Parenthetically, if any market does not have the best price, it is obligated to forward the trade to the market that does have the best price. This is known as the "trade through" rule, and it prohibits the NYSE from executing a customer's trade at an inferior price).
Those facts should count for something in this debate, shouldn't they?
Full disclosure: I am an employee of the New York Stock Exchange, Inc., but the views that I am expressing here are solely my own, have not been vetted with the Exchange or any of its officials, and do not in any way, shape or form, constitute the official or unofficial position of the New York Stock Exchange, Inc., or any persons affiliated with the Exchange other than me.
It has been suggested that the NYSE Board of Directors is hopelessly mired in conflicts of interest, and should be reconstituted. Currently, the Board has 12 of its 27 seats reserved for members of the securities industry. One proposal that has been floated is that these firms should not have a seat on the new Board, and that instead, the Board should have representatives of the "public investor" and listed companies only.
To which I say, say what?
Let us suppose we were talking about WalMart, instead of the New York Stock Exchange. Under the current system, WalMart is run by executives who serve at the pleasure of the Board of Directors (leave aside the issue of employment contracts for the moment). The Board, in turn, is elected by shareholders of the corporation. The shareholders are the owners of the corporation. See how easy that is? The owners of the corporation select a group of people who are stewards for the company, and those people pick the people who run the company. Notice that WalMart's customers aren't anywhere in the mix?
But surely, you say, the entire corporation is run for the benefit of the customer, right? And it's the customer who gets hurt if WalMart engages in anticompetitive behavior, right? So to be fair and protect the consumer, shouldn't the customer have a dominant say in the running of the company? Well, actually, no. If the customers have a beef with WalMart, they are free to take their business to a competitor (to vote with their dollars). Other redress can be found in any number of consumer protection statutes, the offices of the state and local authorities and in the press.
But what about WalMart's suppliers, you ask? Doesn't WalMart exist to give an outlet for suppliers to get their goods to customers? Doesn't that mean that WalMart should give its suppliers control of the Board? Of course not, for the same reason. Suppliers can choose not to do business with WalMart, or may seek redress through enforcement of laws.
Now consider that the Exchange is a not-for-profit entity that is owned by its 1,366 members, or "seat holders". These people and entities are already in the minority (12 of the 27 seats on the Board), but at least they have a seat at the table. Sound familiar? To suggest that these entities shouldn't have a seat at the table would make as much sense as suggesting that customers (public investors) and suppliers (listed companies) should dominate the board of WalMart.
Ah, but what about the regulatory aspect, you ask? Good question. In both the examples I posited, the customer or supplier who is aggrieved can complain to an independent authority for enforcement of the laws through civil or criminal penalties. At the Exchange, the order of the day is "self-regulation", which means that the members of the Exchange are responsible for policing themselves.
Admittedly, this is a difference, but is it one that justifies removing the owners of the business from the control of the business? After all, we're not relying on the Exchange members to police themselves just out of the goodness of their hearts -- it's mandated by statute, and is an essential part of the Exchange's status as a "self regulatory organziation". And even then, we don't simply leave the Exchange to regulate itself in a vacuum -- there is a process called "oversight" in which the SEC routinely reviews the self-regulatory apparatus of the Exchange (both preventative self-regulation and disciplinary action taken by the Exchange when it uncovers problems). What's more, integrity is part of the Exchange's brand, and therefore, effective self-regulation is powerfully in the interest of the owners of the Exchange, no matter how much they may grumble about it.
And besides, customers and suppliers retain the ultimate veto power over the Exchange: the ability not to do business there. There is no obligation that a listed company list on the Exchange; they could just as easily list on the Nasdaq. And most "public" investors (that is, individuals, not institutional investors) don't know or care where their orders are executed (the little known secret is that orders can be executed in any number of places, not just on the NYSE). And the investors who do know or care where their orders are executed still come to the NYSE for 8 trades out of 10. 94% of the time, the NYSE gives them the best price for their trade. (Parenthetically, if any market does not have the best price, it is obligated to forward the trade to the market that does have the best price. This is known as the "trade through" rule, and it prohibits the NYSE from executing a customer's trade at an inferior price).
Those facts should count for something in this debate, shouldn't they?
posted by Daniel at 5:41 PM
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