Opposition mounts as CME looks to slim down its board

The exchange has proposed axing six board director seats elected by traders, but its old guard objects to the move.

Futures exchange operator CME Group postponed a November shareholder vote aimed at eliminating board members, as opposition to the proposal mounted, though voter apathy might have something to do with the decision, too.

Chicago-based CME, which operates the biggest futures market in the world, had planned to tally the vote at a Nov. 5 special meeting, but postponed the poll to Nov. 29. A spokeswoman for the company didn’t have any comment regarding the delay.

Shareholders who oppose the CME proposal to eliminate six board directors have had plenty to say. Those B stockholders are mainly traders, or trading firms, who have had the right to elect directors ever since CME transitioned in 2005 from a member-owned exchange to a publicly-traded company. The company has changed considerably since then, shifting most of its trading off the floors in Chicago to a worldwide electronic system that allowed the company to nearly quadruple annual revenue to $3.65 billion last year.

In August, CME offered the B shareholders a collective $10 million to give up their rights to elect directors in an effort to shrink its oversized board by nearly a third. Some of the biggest B shareholders have supported the effort, but others have balked.

“While we agree this action may be in the interests of the future of the CME Group globally, the question of valuation should be determined by a mutually agreed upon financial third-party analyst,” a group of 19 B shareholders said in an letter to the company last month. “As of now, the current proposal stands without our input. It behooves all B Shareholders to vote NO.”

“I would never sell my director’s chair,” says Aryeh Shender, one of the B shareholders who signed the letter, and himself a former CME director. “We are slowly being marginalized since the floor has basically disappeared. This is the last ‘place’ where we still have a voice,” he said by email.

To pass, the proposal must win the support of its common Class A shareholders, as well as a majority in each of the three categories of B shareholders. Despite the proposed million-dollar outlay, big A shareholders like BlackRock and Vanguard Group are likely to back the proposal because the company contends it will enhance CME corporate governance, streamline the process for electing board members, and reduce costs. Growth of the company’s futures business, including its recent acquisition of the London-based NEX Group, has driven up the value of CME stock for all shareholders, now with a market capitalization of $67 billion.

CME anticipated it might have trouble attracting the votes it needed in all three class B groups. In its initial filing with the Securities and Exchange Commission for the vote, it laid out a scenario in which it might win over only the B-1 and B-2 shareholders, but not the B-3 shareholders. There’s a bigger challenge with the B-3 group because there’s more shares outstanding, 1,287, as opposed to the smaller proportion of 625 B-1 shares, and 813 B-2s.

B-1 shareholders have the most trading rights and other privileges at the exchange, including the ability to elect three CME directors, while the B-2s can only elect two directors, and the B-3s just one director. If CME gains approval from just the smaller two groups, B-1 and B-2 shareholders, it said in the filing that it would eliminate just five director seats and pay a lesser $7.2 million to those shareholders.

Another B shareholder and trader, Ray Cahnman, whose Chicago firms TransMarket Group and Valkyrie Trading control four B shares, backs CME’s proposal largely because it would eliminate annual payments to directors. He said the challenge for the company is likely “apathy” among voters.

Any B share that isn’t voted is the equivalent of a vote against the proposal. Earlier this year, the company delayed reporting results in the election for B1 directors because it couldn’t attract a quorum of voters.