CME move to shrink board opposed

CME Group, the world’s largest futures exchange, is facing opposition over its efforts to slim down the size of its board after unveiling plans to reduce the representation of some of its traders and users.

Five former board members are publicly opposing CME’s plans to reduce the board from 24 to 21 members by cutting in half the six seats nominated by class B shareholders, who are members of the exchange.

Even after the cut, CME will still have the largest board of any company in the S&P 500, according to Institutional Shareholder Services. CME’s board – which at one point had 39 members – has long been seen as unwieldy. But CME’s move may provoke further tensions among its users in the wake of substantial fee increases last November which left many customers unhappy.

When the exchange changed from a private-members’ club to a shareholder-owned company in 2000, the articles of incorporation mandated the presence of six directors representing traders and users among a larger slate of regular shareholder board members.

Jeff Carter, an independent trader and former board member, wrote an op-ed in Futures Magazine this week saying the company should not change that agreement. The cuts should come from the non-member directors instead, he said. The piece was signed by four other former board members.

“They’re under pressure to cut their board size and they should,” he said. “[But] instead of doing what executives do and making hard decisions, they’re trying to change the game.”

The move, along with November’s fee rises, build on a pattern of “disdain for the industry”, he added.

Laurie Bischel, a spokeswoman for the exchange, said the proposal, made earlier this month, “corresponds to efforts to reduce our board size” and reflects how the exchange has changed since demutualisation.

“Members are an important part of our company and marketplace,” she said. “We will continue to have class B directors and other members on our board.”

CME whittled its board from 39 members to 20 when it went public in 2002. But by 2008, the board had grown to 33 members as it took on directors following the acquisitions of the Chicago Board of Trade and New York Mercantile Exchange.

This year the board has recommended a slate of 18 directors, alongside the mandatory six B share directors. If its proposal to halve the number of B share directors passes at the May annual meeting, the board will have 21 members beginning in 2015.

That will still be nearly double the 11-director average for S&P 500 companies over the past six years, according to ISS.

Gaston Ceron, analyst at Morningstar, said that while the company is large and complex, the size of CME’s board “could make managing the company’s affairs a more unwieldy process than it need be”.

“CBOE, Nasdaq and IntercontinentalExchange make do with smaller boards,” he said.

The head of one proprietary trading firm who did not wish to be named agreed. “Everybody knows that board needs to be smaller,” he said.