There are other considerations when designing a good board. It was important to the designers of demutualization that there were members from the industry on the board. The futures industry isn’t a typical industry. It changes quickly, and there are a lot of intricate parts that require deep understanding before a rule is passed or decision is made. Having industry participants on the board is essential to operate a well-run exchange.
When we arrived at 19 members, the board agreed six of them with industry experience would provide enough input for good board governance. Our investment banking advisors also thought having 31% member representation on the board was a good idea. Having that representation also created credibility with the investing community. We had skin in the game.
The proposed board structure also aligned with the “3-2-1” profit sharing CME had established for Post Market Trade (PMT) back in 1987. The six members would always be in the minority. This gave safety to A shareholders that the B shareholders couldn’t dominate policy making so there was economic disadvantage brought to publicly traded shares in favor of privately traded B shares.
The board also needed six members to oversee continuing operations that existed on the trading floor as well. In 2001, CME still had a large open outcry presence, even though everyone knew things would change in the future. We knew the six board members with experience on the floor would eventually become six board members with experience in electronic markets. CME needs six board members with market experience to help guide it through the choppy waters of today.
It’s important to note, CME is still in the midst of a massive transition, which has happened on the floor, but has not happened in the ownership of the B share memberships. It most certainly will eventually.
The demutualization referendum put forward passed almost unanimously. CME Board members were to engage in run off elections over the next couple of years that would thin the board from 40 to 19. That only happened for some of the former members, not all. Many members of the board from 2000 are still on the board, and have never had to face a run off. They have been on the A slate.
Corporate executives currently leading CME (except for the Executive Chairman) were not a part of the debate that took place prior to demutualization. They are out of touch when it comes to the historical parts of the structural debate.
Evolution of CME Board size
In 2002, then CME CEO James McNulty wanted a seat on the board. It is proper to have a CEO on a public board. Instead of replacing a board member, CME management asked to add one member in the proxy statement. It passed, and CME became a 20-member board. CME avoided the hard decision of replacing an existing board member that could have run for a B slot with Mr. McNulty. An “even” number of board members is not ideal for good board governance.
When CME acquired the Chicago Board of Trade (CBOT) and New York Mercantile Exchange (NYMEX), instead of trimming board members it simply added them until it got to a high of 34 board members. This was also poor governance. What other company engaged in M+A “staples” on board members in this manner?