CME Group: A Bloated Board with Absurd Consequences

CME Group: A Bloated Board with Absurd Consequences

CME Group: A Bloated Board with Absurd Consequences

CME Group Inc (NASDAQ:CME) operates a derivatives clearinghouse as well as futures exchanges and other trading platforms covering all major asset classes. The company is the result of a 2007 merger between the Chicago Mercantile Exchange and the Chicago Board of Trade. One byproduct of this merger is that CME now operates the world’s largest futures exchange. Another consequence is that the company has an extremely bloated board of directors with more than 30 members! From the New York Times:

CME’s big board is in part the legacy of the 2007 merger of the Chicago Board of Trade and the Chicago Mercantile Exchange, and the acquisition of the New York Mercantile Exchange the following year. Its board structure is also more complex than most, with six directors chosen by three separate groups of the company’s class B shareholders, and the rest elected by class A and class B shareholders together. Until this year’s annual meeting, the company has been required to seat 10 directors picked to represent Chicago Board of Trade interests.

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Normally boards comprise between seven and twelve members, with most companies at nine. This ensures reasonable coverage of needed skills and allows for consistent director engagement. The smaller the board, the less coverage you get, and the larger the board, the less engaged it becomes (e.g. it is unlikely that CME’s board meetings are three times as long as the average board, giving every director a chance to participate to the same extent!). There are other problems too:

Beyond a dozen directors or so, it becomes harder for the chief executive to speak to each of the directors, and individual board members are also less inclined to speak up in the group.

“Traditionally, when you view the board as more advisory, you have bigger groups,” Mr. Elson said. “You can’t have an effective monitor with more than 12 people.”

The practicality of having so many directors even leads to some absurdities:

Most companies explicitly lay out each director’s qualifications for serving on the board to meet a recent Securities and Exchange Commission requirement. The CME Group instead provides a full-page table listing generic qualifications (“Satisfies applicable standards of independence,” “Possesses an advanced degree”) followed by the names of each director to which it applies.

So despite having more representatives than perhaps any other company in America, shareholders of CME have less insight into who their representatives are and what skills they possess. Is that an advanced degree in accounting, or pipefitting? According to the proxy statement, never you mind.

Ok, perhaps this is too touchy-feely for MBA types, so let’s get down to brass tacks: money. As you would expect, having more than three times the regular number of directors does not mean each director is only paid a third of what a director at a regular company would earn:

It also costs the company nearly $5.1 million a year in cash, stock and other compensation.

Yikes! Fortunately, CME is slimming down, aiming to reduce its board from 32 to 30 this year. As the New York Times states with, I am sure, tongue firmly in cheek:

If the company continues to shed a director or two every year, its board can be expected to reach a more typical nine members by about 2026.

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At twenty years old, Frank opened the first of what would eventually become four successful restaurants while completing concurrent undergraduate degrees. He later sold these businesses and returned to school to complete concurrent JD and MBA degrees. During this time, he wrote and passed the three CFA exams. Frank takes a value perspective in his commercial real estate endeavours, hunting for unloved and undervalued investment opportunities to add to his investment group’s portfolio. Frank has traveled extensively and lived in Auckland, London, Toronto, and is currently living in Hong Kong with his wife, Danielle, a successful entrepreneur, MBA, author, blogger and international manager for one of the largest global financial institutions. Frank splits his time between consulting and searching for new value investments.

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