November 8, 2005
NYSE Spin on Shareholder Primacy
The NYSE has answered critics of its proposal to go public. Users of the exchange, traders, worry that a for-profit NYSE will be obliged to do what other for- profit companies do, maximize shareholder profits. This means that the NYSE can (perhaps owes a duty to shareholders to) rise trading fees and streamline the trading system to save costs. The Exchange has a powerful market position with pricing control and will be obliged price accordingly. When the CBOE and the Merc went public, exchanges with much less market power, they raised trading fees. The Exchange also will have to evaluate whether its physical floor trading system is optimal.
What will the Exchange do?? The NYSE's chief economist, Paul Bennett, has answered with promises -- the Exchange will keep specialists and redundant computer systems as checks once it goes public. How can he possibly make such claims? At issue is whether the Exchange can make more profits without specialists than with them. If so, the board of a for-profit company has a fiduciary duty to shareholders to eliminate the specialist system in favor of a computerized trading system.
The claims are arguably irresponsible and could stimulate litigation once the company is formed (either the claims are breached and sued on (reliance by interested parties) or followed and sued on (breach of duty to make profits)). A for-profit company is obliged to cut costs to maximize revenue and use its pricing power; Bennett cannot make promises that cannot be delivered on by a board of directors of a for profit company. The most he should say is "We will do whatever is in the best interests of the new for-profit company (ie to make money)."
Bennett's promises remind me of the old Ford v Dodge Motor Company case in Michigan. Henry Ford refused to pay a dividend to shareholders because two of his larger shareholders were using the dividends to capitalize a new car company, Doge Motor. Ford testified in court that he wanted to give away the company's profits to the workers instead. His testimony so outraged the judge that it is became the one time a court ordered a public company to pay a dividend.
TrackBack URL for this entry:
Listed below are links to weblogs that reference NYSE Spin on Shareholder Primacy: