Chicago's Merc Hits the Reform Road


The Chicago Mercantile Exchange, under the same pressures for structural reform that the New York Stock Exchange (NYSE) and other markets face, says it will increase the number of independent directors on its board. The Merc is also planning to install these outside directors in the chairman slots in its important audit, compensation, and governance committees.

Yet the changes, announced on Nov. 11, still don't go far enough in the view of critics such as Nell Minow of independent researcher The Corporate Library and Merc outside board member Daniel Glickman. Over time, they say, more independent directors will have to join the mix (see BW, 10/20/03, "Red Flags Rising at the Merc").

The Merc board remains controlled by traders and floor brokers who are regulated by the exchange. What's more, only 4 of the 20 board directors have no ties to the Merc or its trading floor. The Commodity Futures Trading Commission, the Merc's Washington overseer, is now delving into market-governance questions at the exchange.

INDUSTRY PLAYERS. The largest futures exchange in the U.S. and second only to Europe's Eurex, the Merc spelled out its plans for reform without saying who will be joining or leaving its board. The plans will take effect at or soon after the Merc's 2004 annual shareholder meeting, expected in March.

On their face, the proposals aren't as dramatic as the overhaul planned at the NYSE. The Merc board will remain at 20 members, but seven will be drawn from outside the futures industry -- up from four now.

While three industry insiders will retire from the board, 13 seats will still be held by industry figures. By keeping the majority of the board in the hands of futures-industry players, the Merc is setting itself apart from the NYSE, which plans to fill its board entirely with outsiders, aside from the chairman and chief executive officer.

"BEST PRACTICES." Merc executives have argued in their defense that theirs is a membership organization that has evolved into a publicly traded company, and their role in the complex futures industry requires more insiders than other exchanges if it is to function well.

Perhaps more significant, the Merc plans to fill the chairmanships of its important committees with independent, nonindustry figures. This is along the lines of what the Securities & Exchange Commission has urged corporations to do with their audit, compensation, and governance committee leadership posts.

Merc Governance Committee Chairman Jack Sandner, a former chairman of the exchange who still serves as a paid special adviser to its board, says the shift in the leadership of these committees is "modeled after the best practices of some of the largest publicly traded companies."

"POSITIVE START." The Merc plans, too, to set up a market-regulation oversight committee that will be made up of outside directors only. The group will annually review the independence of the Merc's regulatory apparatus from its business operations, the independence of management from directors drawn from the industry, funding for self-regulatory tasks, and the pay of self-regulatory staff.

Yet these steps win only half-hearted praise from critics. Good-governance advocate Minow says she needs to see who ends up filling the outside seats on the board before she can assess whether they are truly independent. She calls the changes "significant" and adds that they "may be the best they can do right now." Ultimately, she says, there need to be more independent directors than the seven planned.

Glickman, a former U.S. Agriculture Secretary now at the John F. Kennedy School of Government at Harvard, calls the moves "a very healthy, positive start." An outside director on the Merc board, Glickman also believes that "Longer term, we're going to have to add more."

Not to worry, answers the Merc leadership. They hint that more announcements of changes will be forthcoming. And exchange Chairman Terrence Duffy promised that the Merc will "continue to evaluate CME's governance going forward." Even critics agree it's a step in the right direction. By Joseph Weber in Chicago


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