Why you should care CME plans to cut B shareholder reps on board by half

In the latest CME Group(NASDAQ:CME) proxy statement, CME management is asking B-shareholders to decrease their representation on the CME Board of Directors by 50%.  We intend to vote no on this question, and desire to keep the B share representation at the current six board members. 

It’s not because we own a B share and are holding out for a buyout.  It pays to understand how and why the B share directors were placed on the board in the first place.  It was intentional, and the reasons haven’t changed.

The B share can be one of CME’s most valuable assets if they utilize them correctly.  However, CME’s management has always looked at the B share with disdain.  In the discussion of risks to the enterprise on the documents CME filed for its IPO, a portion dealt with the perceived risk B shares could have to the value of publicly traded A shares.

Currently, a B share owner/leasee receives preferential treatment on fees, board representation, and clearing members are required to buy and hold them as collateral with the CME clearinghouse. 

You can find the issue on the CME proxy under “To approve an amendment to our Certificate of Incorporation to modify the director election rights of certain of our Class B shareholders to reduce the size of the board."  It is Item 6.


When the Chicago Mercantile Exchange (CME) started down the road to demutualization, the exchange asked the Internal Revenue Service (IRS) for an opinion on what to do with the memberships.  In an ideal world, CME would have been able to simply issue stock for memberships in a tax-free transaction.

However, the IRS wouldn’t allow that. 

This is one of the reasons there is exactly one publicly traded A share stapled to the value of the B share.  Not due to governance, or structure, but because of a bad IRS ruling.   However, B share representatives were an integral part of the thought process behind having good corporate governance at a publicly traded exchange.

When the CME Board was drafting its demutualization referendum, we debated the structure of the future CME Group Board.  At the time, CME had 40 board members.  This was not good governance, and unwieldy for a publicly traded company.  In the demutualization referendum, we proposed cutting the board down to 19 members. 

The CME Board knew that regulatory organizations like the commodity Futures Trading Commission (CFTC), Futures Industry Association (FIA) and National Futures Association (NFA) would want to see independent directors on the board.  The new public board couldn’t be made up of former members exclusively because of existing regulations.   That structure wasn’t a hallmark of good governance.  However, to get the referendum to pass, CME needed to give comfort to its membership that they would have a voice in the new public company.  That was the conundrum we were confronted with prior to sending the referendum out for ratification.

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