CME Group has received a lot of honors since its IPO in late 2002 and generally is seen as a pretty forward looking company, so it was a bit of a surprise to see on a list of Chicago “worst boards”.
Crain’s Chicago Business provided the honor based on CME’s bloated board of directors. Crain’s stated, “A whopping 31 non-executive directors guide the exchange operator — the largest board of any U.S.-based public company and nearly double the next largest Chicago-area board.”
Crain’s cite experts who peg the perfect board size at eight to 12, adding anything over 14 is problematical.
I am sure the expert, in general, is correct though to apply such a test to a subject so broad seems silly. For them to cite as proof recent performance of the stock, is sillier.
It was interested as I have been reading Leo Melamed’s new book “For Crying Out Loud,” and just went through his take on the moves to reduce the exchange’s bloated bureaucracy.
(I have not completed the book but so far it is the story of how Leo and some other old line insiders conspired to oust CME Chairman Scott Gordon and rein in the power of President and CEO Jim NcNulty.)
The problem for the CME — and other mutual exchanges contemplating the new business landscape — at the time they were going through demutualization is that they were burdened with too many board members and too many committees. They had to get lean and mean in order to quickly react to competitive pressures. You couldn’t have these intramural squabbles. Melamed acknowledges that need but says by 2002 it had perhaps taken it too far and the exchange lost “its systems of checks and balances.”
He claims they were moving to the other extreme, “their philosophy was to have the board as a purely oversight-of-management role, without any strategic planning input.”
Melamed and his allies felt that Gordon did not show enough independence and too quickly sided with McNulty’s agenda. It also got personal as there were efforts to reduce the role of former chairmen Melamed and Jack Sandner.
While not electing to take sides, we certainly have seen what problems can occur when a board doesn’t take an active role and managers —who based on compensation packages and other factors may not take a long-term view— are allowed a free hand.
Crain’s expert stated that adding too many board members from an acquirer is a red flag and a sign of compromise. Of course the growth of the board, which had been reduced to 19 in 2007, was the result of adding members mainly due to the merger/acquisition of the Chicago Board of Trade.
This was not your typical acquisition and no one knowledgeable of the two organizations would have expected the CBOT not to get significant representation.
The story does make a point that the compensation of non-executive board members, north of $6 million, is high and perhaps it is time to pare down the size of the board, however there are specific reasons the board is shaped the way it is.
Futures has refrained, for the most part, in doing these types of lists, mainly because the resources needed to do a truly in depth job are so great. I am not an expert on corporate organization but I bet there are many more important factors in measuring a board’s performance than size.
Tags: futures exchanges
