Merging Big Board takes its moniker literally

February 15, 2011

By Richard Beales
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

In its merger, the Big Board is taking its moniker literally. The Deutsche Boerse-NYSE boardroom crew will be 17-strong, a lot bigger than the norm. Board size can reflect the need for different skills — or, as with NYSE Euronext’s existing board, compromises that make M&A more palatable. The latter effect should be temporary.

The average S&P 500 company board has been shrinking — from 15 members 25 years ago to 10.7 last year, according to Spencer Stuart. Potential drivers of the trend include pressure to make decision-making more efficient and the reduction in the number of full-time executives sitting on boards in favor of a majority of outside directors.

Big financial firms can be different, and even NYSE’s board currently has 16 members. That doesn’t necessarily mean its unwieldy size outweighs its value. Some governance researchers have concluded that large boards coincide with corporate underperformance. But a New York Federal Reserve study suggests that isn’t necessarily the case with big financial institutions, perhaps because their complexity demands it.

That’s potentially the case with the new German-American exchange group. Though Deutsche Boerse’s governance has hitherto been on a different model, it too has a populous supervisory board of 18, which in turn oversees an executive board of six. But both players in the merger deal have complicated webs of operations in different businesses and financial centers, so bigger-than-average boards may be justified.

The danger, though, is that companies — especially those trying to create the politically safe impression of a merger of relative equals — allow boards to become bloated for the wrong reasons. And big boards can become dysfunctional. As it happens, that’s how John Reed described the 27-strong board of the then-privately held New York Stock Exchange back in 2003 when he came in to steady the ship after a pay scandal led to the ouster of Dick Grasso. Reed wanted a board of six to 12, according to news reports at the time.

There’s no single prescription, though shareholders are probably best served by a majority of independent directors who work together but contribute a diversity of useful views. Since its 2002 IPO the Chicago giant, CME, has outperformed NYSE and Deutsche Boerse. It had 20 board members when it went public and currently has 32, easily the most in Spencer Stuart’s survey. Sometimes, the wisdom of crowds is valuable.

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