The size of Dick Grasso’s pay package will have ongoing implications for listed companies across the globe – and not just for those listed on the NYSE or other US exchanges. Calls for the NYSE to be stripped of its regulatory powers have already begun. Although they’re being resisted at this stage by the NYSE’s interim chairman, John Reed, it is hard to see how the exchange can hope to hang on to its regulatory role over the longer term.
The charge is that there are too many potential conflicts of interest if the NYSE continues both to operate the market and be a regulator of it. Investors were incensed when Reed seemed to rule out the idea of splitting the NYSE’s roles without even giving it due consideration. ‘This is the most important issue and to decide so quickly on it, and in the wrong way, is very disappointing and telling,’ sniped Sarah Teslick, executive director of the Council of Institutional Investors.
The fact that the NYSE and countless other exchanges have been market operators and regulators since time immemorial is not the point. The agenda has moved on, the issues are being debated here and now – and the NYSE is struggling against the tide of opinion.
In the same week that Reed came out desperately fighting to save his corner, the SEC was already on the warpath. It ordered the Chicago Stock Exchange to improve oversight of its trading practices, and accused the American Stock Exchange of using false documents to cover up regulatory failures. So much for Reed’s claim that market operators and regulators could happily sit around the same table. That’s where the real damage has been done in allowing Grasso’s pay to become such a large issue.
The vast majority of exchanges continue to hold market operation and market regulation powers. Indeed, it tends to be only those exchanges that have demutualized and made the switch to commercial operations that have completely or partially separated off their regulatory roles – Nasdaq and the London and Australian stock exchanges spring to mind. Hong Kong and Singapore are also going through similar processes, one more voluntarily than the other.
The trouble is that when new bodies are established to take charge of listing regulation they invariably want to have a good old tinker with the rules. The UK’s Financial Services Authority is still only partly finished that process since taking over the Listing Authority’s role from the London Stock Exchange in May 2000. And all indications are that the Hong Kong Listing Authority will take a similar line should it be given the go-ahead at some point in 2004. Now there’s nothing wrong with tinkering with the listing rules – but tinkering for tinkering’s sake can lead to confusion and unnecessary costs for listed companies, particularly when handled badly.
Many exchanges are already in the process of consulting and renewing their listing rules in the wake of the Sarbanes-Oxley Act in the US. Following the US lead is almost par for the course on the regulatory front these days, particularly in emerging markets in Latin America and Asia. Those changes will begin to impact on companies late this year and early next as regulatory authorities desperately try to prove that their rules are at least on a par with the leaders in their own region, if not with the US itself.
The NYSE’s woes suggest another round of regulatory upheaval in the not-too-distant future. If, as expected, the NYSE finds that it has to be relieved of its regulatory powers then you can bet your bottom dollar that other securities commissions will follow suit and pile the pressure on their exchanges.
Splitting the operational and regulatory roles at the NYSE may be the best solution for such a high-profile market that has seemingly gone off the governance rails in recent times. But to extend that thinking to all markets across the globe simply because the US takes such a lead would result in another round of unnecessary regulatory upheaval and costs for many listed companies. It would certainly be a hefty price to pay for one man’s excessive pay package.
