Outlook: Grassogate opens the flood gates to reform at the NYSE

Postal victory; GlaxoSmithKline
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The Independent Online

Visit the New York Stock Exchange and it's like taking a trip in a time machine. If you can get through the gun-slinging cops that surround the place, you enter a surreal world of personalised trading pitches, New Jersey accents, strong language, ancient telephone systems and archaic customs.

Upstairs, there's a huge members' bar for those who find that spending 10 hours a day with their colleagues is still not enough, and a boardroom whose grandeur and pomp would do justice to the court of King Louis XIV. It's as if some ancient Babylonian market place, complete with its customs, crafts and inhabitants, has been preserved in aspic and put on show for the benefit of posterity. Yet the bizarre reality is that this is the very pulse of the greatest capitalist economy on earth.

The place should have been reformed years ago, yet it has taken Dick Grasso's greed to provide the catalyst for change. As it happens, Mr Grasso was once a reformer. Three years ago, when the European exchanges were being forced to demutualise and shed their regulatory functions, Mr Grasso said he would do the same, but he was overruled by his membership and in the last few years he has taken to saying that demutualisation will happen only over this dead body.

We now know why. The NYSE is a gravy train not just for its privileged membership, but for its chairman too. Mr Grasso plainly looked at the collapse in corporate governance that has afflicted so many of the companies he's responsible for overseeing and thought, "I'll have some of the spoils too".

That Mr Grasso managed to attain his his position from such lowly origins was indeed a blessing (Mr Grasso's own description of his pay), as well as a tribute to the great melting pot of New York's meritocracy. But instead of setting an example of ethical leadership for the companies traded on his exchange, Mr Grasso and his colleagues on the NYSE board simply copied their abuses.

It could scarcely be part of his design, but Mr Grasso's avarice looks likely at long last to bring about the change he once aspired to. The Securities and Exchange Commission has been examining the role of the specialists in the way the NYSE operates for some months now. Corporate governance and the protections the market has built for itself are now firmly within the SEC's radar screen too.

The main anachronism at the NYSE is mutual ownership, which has made change difficult to achieve. The exchange's customers and users are also its owners, so they have a vested interest in keeping things as they are. Furthermore, they have insulated the market from newer forms of electronic competition by surrounding themselves with rules and regulations that make it hard for companies to have their shares traded anywhere else without losing the cache of being quoted on the biggest and most prestigious exchange in the world.

This in turn has encouraged a bloated cost structure, reflected not least in Mr Grasso's pay, that couldn't possibly be justified or sustained anywhere else. The specialist traders who own the market monopolise the information flow and thereby make fat profits.

Turkeys don't vote for Christmas, and nor would this lot. Perversely, the tragedy of September 11th and the leadership that Mr Grasso displayed in its aftermath, has helped perpetuate a wholly unsatisfactory status quo. Grassogate has cruelly reversed the public goodwill won at that time. The NYSE's reputation and standing has been dealt a devastating blow. Yet not before time it has also highlighted some deeper weaknesses and abuses that Mr Grasso's showmanship, drive and marketing nous have for long been covering up. As a NYSE man born and bred, it will break Mr Grasso's heart to know that it is he who is bringing 300 years of history to an end, yet that is likely to be his epitaph.

Postal victory

Common sense has prevailed at the Royal Mail. Just when everyone thought we were returning to the bad old days of union militancy, complete with a Labour government prepared to kow tow to its demands, the leadership of the Communication Workers' Union have shouted "over the top, lads", looked behind them, and found there was no one there. Full marks to Allan Leighton, Royal Mail's combative chairman, who in appealing directly over the heads of the union to each and every member of his workforce has won a famous victory.

Yet there is a significance in the vote that goes beyond Royal Mail's need to modernise to meet the challenge of deregulation. It's hard to recall the last time a union called a ballot only to lose the vote. What it tells us is that trade unionism á la 1970s is indeed dead beyond revival. Despite the way the so-called "awkward" squad has been built up as a renewed threat to industrial peace in Britain, there seems to be little support for it outside a few pockets of public sector activity.

Even when the union does manage successfully to mount a strike, as with the firemen, the outcome for members has been a miserable one. The firemen were marched all the way to the top of the hill only to end up with roughly what they were being offered in the first place. In the meantime they had deprived themselves of weeks of pay and cast serious doubt on whether they serve any useful public service at all.

The Government's apparent desire to form a new partnership with unions is laudable as long it is confined to workplace issues, training, health and safety and general improvement. The collective interest in any workplace needs to be represented by someone. But there it must end.

What the postal workers vote has demonstrated is not just that economic and management power no longer lies with union bosses, but also that some unions seem wholly to have lost touch with the wishes and interests of their members. Beer and sandwiches at Number 10 went out with the flood. Accept it.

GlaxoSmithKline

A year ago Jean-Pierre Garnier, chief executive of GlaxoSmithKline, terrified investors by warning that the big pharmaceutical companies were in danger of being consumed by a "perfect storm" of adversity, which combined the erosion of patent rights, the growth of cheap imports and a collapse of productivity in research and development labs. As hurricane Isabel batters the North American coastline, is the storm still building or are there signs of it abating?

The pressure for cheaper drugs looks irreversible but, for Glaxo at least, there is growing cause for optimism on the R&D front. Mr Garnier is not due to present to the City on progress in R&D until December, but the signs are that his controversial reorganisation of research operations into six "centres of excellence" is beginning to pay dividends, with many more compounds reaching first and second phase of human trials than was happening before the merger of Glaxo Wellcome and SmithKline Beecham. Mr Garnier desperately needs this to happen, since it was one of the primary justifications for the merger.

By making the centres compete for resource from the mothership, Mr Garnier has succeeded in creating the entrepreneurial environment the vast bureaucracy merger risked stifling. Mr Garnier could build on his success by creating yet more centres. The sceptics will wait to see the clinical data before believing he's cracked it. But with GSK shares still trading at a substantial discount to their peers, even an average-looking pipeline could generate a sustained rally.

A severe gale is still blowing outside, but it looks as if Glaxo may have bypassed the perfect storm.

jeremy.warner@independent.co.uk

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