VideoIn recent weeks, everyone from Fidelity Investments to the California Public Employees' Retirement System to state treasurers to the Securities and Exchange Commission has weighed in. The controversy boils down to four issues: whether to divide the roles of CEO and chairman; whether to split the NYSE's operational and regulatory arms; what to do about the size and composition of the exchange's bloated, 27-member board; and whether to ditch the specialist system.
There's no doubt change is needed. The board includes many of the Wall Street firms the NYSE regulates. "It's a classic case of the fox guarding the henhouse," says Michael Caccese, a securities lawyer with Kirkpatrick & Lockhart. This board structure has helped fuel a perception that the NYSE's regulatory arm is weak—a perception only strengthened by recent reports of misdeeds by the specialist trading firms. Separating the roles of CEO and chairman is an obvious step—an independent chairman could better concentrate on board oversight while the CEO focused on operations. Similarly, making the regulatory arm of the exchange more independent could help restore credibility.
The question of board composition is trickier. Stanley Keller, a partner at Palmer & Dodge LLP and former chair of the American Bar Associa-tion's Committee on the Federal Regulation of Securities, argues that "the larger a board gets, the more it ends up looking like a gentleman's club as opposed to an effective oversight governance body."
But excluding member companies may make less sense. "You need to have the support of the key Wall Street firms and involve them in the oversight, because they're such huge players in the market," says Caccese. One solution—proposed by Goldman Sachs CEO Henry M. Paulson Jr.—would be to have the NYSE member companies sit on an advisory board.
Whatever it does, the NYSE will have to act fast to stem the loss of investor confidence. Given the Big Board's pivotal role in the financial markets, its declining credibility could cost Wall Street far more than the $140 million former CEO Dick Grasso has to spend in his retirement. —Don Durfee
Does Not Compute
Computer Associates International Inc.'s CFO and two other finance executives stepped down in October after an audit-committee report detailed revenue-recognition issues at the company for the fiscal year ended March 31, 2000.
Some software contracts were allegedly signed after the quarter in which revenue from them was recognized, according to committee chair Walter P. Schuetze. However, it found no evidence that the revenue was not genuine. CA's accounting practices are also being investigated by the SEC and the U.S. Attorney's Office for the Eastern District of New York.
The executives—Ira Zar, CA's finance chief; Lloyd Silverstein, senior vice president, finance; and David Rivard, vice president, finance—resigned at the request of Sanjay Kumar, CA chairman and CEO.
Many analysts were surprised that Kumar was not forced out as well. "The reaction by CA was less than what most people on the Street expected," says Nitsan Hargil, a senior analyst at Friedman, Billings, Ramsey & Co.
While the company searches for a new CFO, Douglas Robinson, senior vice president, finance, will serve as finance chief. Robinson joined CA in 1989. —Joseph McCafferty
Watch Your Demeanor
Note to CFOs: Next time you talk with analysts in any setting, relax, stand up straight, and smile, smile, smile.
That may be the message of the latest Reg FD enforcement action by the Securities and Exchange Commission. In September, the agency charged that Schering-Plough Corp. and its former CEO, Richard Kogan, violated the three-year-old rule—which prohibits selective disclosure—"through a combination of spoken language, tone, emphasis, and demeanor." The case is leaving other companies wondering if they should reevaluate their external-communication policies or perhaps eliminate individual analysts meetings altogether.
This ruling may sound "the death knell for one-on-ones," says Boris Feldman, a securities lawyer with Wilson Sonsini Goodrich & Rosati, in Palo Alto, Calif. Now, he explains, how a CFO or CEO discloses information may be as important as what he or she says. In other words, he says, executives shouldn't "look depressed when they talk to analysts."
Others, however, believe this case is about more than body language. "If you read the complaint, you realize that [Kogan] gave information that was a material breach" of Reg FD, says Elizabeth Saunders, chairman of Ashton Partners, a Chicago-based IR consultancy. During the 2002 meetings in question, she explains, Kogan not only appeared disheartened, he allegedly said that the company's 2003 earnings would be "terrible," among other things—a combination that led to a stock drop of 17 percent. There is a huge distinction, says Saunders, between "how important the statement was versus how dour he was when he said it."
Still, the National Investor Relations Institute's president and CEO, Louis Thompson Jr., maintains that many "lawyers are going overboard on this one" and advising clients to resort to only Webcasted communication. Moreover, Thompson, who has written to SEC commissioner Harvey J. Goldschmid seeking clarification, insists that the SEC did not set out to cause a major overhaul of communication policies. "I'd put this in the category of unintended consequences," he says.
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