Analysis: Reforms of 1938 recalled in latest NYSE efforts

Jan. 27, 1938, was the date of a committee report that urged an overhaul of NYSE operations, back before the term "corporate governance" was in vogue.

William Donaldson referred to it in recent Congressional testimony, saying in prepared text, "The link between governance and the NYSE's role was recognized as far back as 1938 in the NYSE's Conway Committee report, which said its recommended governance changes 'really represent merely another step in the long evolutionary development of the exchange as the nation's primary securities market."'

The 1938 committee was headed by Carle C. Conway, an investment banker whose family had founded the Continental Can Co. It took only a bit more than a month to deliver on its charge to evaluate the exchange's operations, including whether to make the presidency of the NYSE a salaried office.

The committee emphasized the emerging notion that "the public interest is the paramount issue" in running the Big Board and noted when suggesting term limits for a trimmed down board of governors that "it is important that the administration of the stock exchange not only be right but seem right" to the public.

The Conway Committee did suggest that the president should be "adequately paid," and devote full time to the task, divesting himself "of all other business interests of every kind."

The 1938 committee also made a plea for self-regulation, which is the crux of the current-day debate about how to reform governance at the NYSE after pay scandals and charges of less-than-ideal regulatory enforcement.

Donaldson and interim NYSE Chairman John Reed want to keep self-regulation, albeit in a more rational framework reporting to independent directors on the NYSE board.

"Particularly in matters of policing business conduct, the stock exchange can act more swiftly and more surely than any government body, leaving residual functions to the governmental bodies," the Conway Committee wrote in 1938.

Last week to Congress, Donaldson echoed those sentiments. He said even a break-down in self-regulation is "not reason to throw it out, in my view," according to a transcript. "What you do about that is you change the rules and then you make sure the rules are followed. And you change the reporting structure of the regulation to enhance the enforcement."

Donaldson added later on at the Senate Banking Committee hearing that the basic decision in the 1930s in favor of market self-regulation was the right one. "I think if we had gone the other way, and had a Securities and Exchange Commission or some other agency that tried to run these markets from Washington, we would have had a bureaucracy and we would have had a federal expenditure that would have impeded the growth of the markets," he said, according to a transcript.

Sen. Jim Bunning, R-Ky., after expressing skepticism about self-regulation, said maybe it was the right thing for the 1930s, "but it's not in 2003."

The 1938 committee also recommended the post of chairman be separate from that of president. The chairman, unpaid, would be an "outstanding member of the exchange" elected annually by the membership.

Reed's reform proposal has left open the question of whether the NYSE chairman and chief executive should be one or two people. Certainly, in 2003, a chairman would have to be independent of exchange functions, not the "outstanding member" recommended in 1938.