'Insider' Reed May Not Please Investors

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Byline: Jamie Dettmer, INSIGHT

'Insider' Reed May Not Please Investors

The New York Stock Exchange (NYSE) received widespread praise in late September for its speedy appointment of a temporary chairman to replace Dick Grasso, who resigned amid uproar over his $186.5 million compensation package. But the quick selection of former Citigroup chairman John Reed risks yet more investor wrath.

One of the biggest complaints about the NYSE is that it is a cozy club run for the benefit of bankers and the stock exchange's members. As a result it has been an ineffective watchdog in an era of corporate malfeasance. While praising the appointment of Reed, William Donaldson, chairman of the Securities and Exchange Commission (SEC), had told the NYSE board ahead of the selection that in the interest of credibility its interim chairman should not be an insider.

Reed is an insider par excellence. He has close ties to the bankers who control the NYSE board and who endorsed Grasso's enormous pay package without any qualms, only to claim later that they had no idea how big it was. A Wall Street veteran, Reed helped to orchestrate the 1998 merger of Citicorp and Travelers and then served with Sandy Weill as co-chief executive officer of the merged group. But the power sharing between the two did not work and Reed retired in 2000.

According to Laurence Fink, who led the NYSE recruitment effort, Reed's "excellent managerial experience, outstanding background in corporate governance and familiarity with the NYSE's varied constituents make him the ideal choice to chair the board." The NYSE says Reed was the only one offered the job, but other candidates at which they looked declined to be considered. Larry Sonsini, a leading Wall Street lawyer, is said to have turned down the job hours after Grasso resigned.

One good spin-off of the temporary appointment of Reed is that the focus now will turn on landmark governance reforms proposed by the NYSE board. Reed has hinted that the board should be restructured, arguing that smaller boards tend to be more effective. NYSE critics will be hoping to see the departure of several heads of investment banks who sit on the board.

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