When the decision was made several months ago to move Keane Inc.'s shares to the New York Stock Exchange, CFO John Leahy wasn't anticipating the tumultuous events that have engulfed the Big Board. First, former NYSE chairman and CEO Dick Grasso stepped down from his post amid an uproar over his $140 million pay package. Then, other board members' generous compensation, as well as their insider status, came under scrutiny. And most recently, the specialist firms, the firms whose staffers trade shares on the floor, have faced accusations of illegal trading.
All in all, says Leahy with a wry smile, "it's an interesting time to be going down and ringing the bell."
Still, for Keane, an information-technology service provider with headquarters overlooking Boston Harbor, listing on the NYSE is "another step in our evolution," says Leahy. Although the company has traded on the American Stock Exchange (Amex) since 1989, its new address will provide greater liquidity as well as increased visibility, he explains. And while "the Exchange probably has to revamp itself," he says, "what's important to us is to be traded in that marketplace, with its prestige and its strength."
Despite the Exchange's recent troubles, that sentiment still prevails. "For the right companies, the NYSE continues to have the cachet of being the premiere market in which to be listed," says Michael Claes, managing director of the U.S. corporate-financial practice at public-relations firm Burson-Marsteller in New York. In fact, nine other companies joined Keane in listing on the NYSE in October, bringing the number of initial public offerings there to 52 in the first 11 months of 2003. Among them was Carter's Inc., an Atlanta-based maker of children's clothing and accessories that went public on October 24. "Most certainly we were aware of what was going on, but based on our needs and expectations, we felt that the NYSE was still the best place to be," says Eric Martin, director of investor relations at Carter's. Because the company was floating a relatively small number of shares, says Martin, the executive team thought Carter's would benefit from the NYSE specialist system, which is designed to facilitate liquidity and smooth out volatility, as the specialists buy or sell shares of their clients' stocks themselves to counteract any imbalance in supply and demand. Moreover, he echoes Leahy's comment that the Exchange is important "in terms of visibility" to the media and the investor community.
But Louis Thompson, president and CEO of the National Investor Relations Institute, says that although the bad press around the Exchange's governance issues hasn't affected listed companies thus far, the controversy is far from over. "All of this has opened up the question of whether you get the best execution through the specialist system," he says. "The whole future of the auction system is now open for discussion."
Laying the Groundwork
For Keane, listing on the NYSE wasn't part of the plan when the firm was founded in 1965 above a doughnut shop in Hingham, Massachusetts. The family business grew slowly, to $50 million in revenues by the early 1990s. But by the time Leahy arrived in 1999, technology consulting was in vogue. The firm was billing close to $1 billion. "When you go through that sort of frantic growth, you outgrow yourself as a company," says Leahy, who was surprised to find a business of Keane's size still trading on the Amex.
Initial plans to move to the Big Board, however, were put on hold when the IT sector began to struggle. But Leahy, a 17-year veteran of PepsiCo, began laying the groundwork for the eventual move, backed by a push from the board to dramatically improve Keane's financial planning and controls. He brought in the rigorous reporting, forecasting, and budgeting procedures more typical of a large multinational company like Pepsi than a family business, and restructured the finance group to create separate accounting and financial-analysis teams. "There was a recognition that they had grown beyond the processes and systems they had," says Leahy. "And I had a general mandate to help the company become more sophisticated and better managed down the road." These buttoned-down procedures would ultimately help the company better withstand the increased scrutiny that would come with listing in New York.
In the past year, those preparations have been accelerated by the need to comply with the Sarbanes-Oxley Act of 2002. For example, Keane has increased the size of the board to 10 members, adding three new independent directors in the past two years. The company has revamped its board committees as well, staffing the audit and compensation panels with outsiders, including a banking-industry veteran and a former Deloitte & Touche partner who has been designated the "financial expert" on the audit committee.
"We needed to do those things because they were the right things to do, and because we knew they had set a high bar at the Exchange," says Leahy. (In response to Sarbox, the Exchange revamped its governance standards for listed companies, calling for them to maintain a majority of independent board members and outlining the definition of that role, as well as mandating that compensation committees consist solely of such independents. The Securities and Exchange Commission approved the new requirements this past November.)
Traditions and Controversies
Finally, as the stock market began to recover and the company logged a couple of good quarters, Keane's management team decided in April that the time was finally right to begin the process of applying to the NYSE. And that decision launched a listing process that is both steeped in tradition and suddenly under scrutiny.
While the detailed application was being filled out and approved by Keane's lawyers, Leahy and vice president of investor relations Larry Vale spent several months studying and meeting with specialist firms to determine the best fit. Ultimately, Keane sent a letter to the Exchange's Allocation Committee stating the traits and competencies they thought would be most important for its specialist. The committee then produced a list of specialists, from which Keane selected six. "It's like a bake-off," says Leahy.
Both the firm and the individual trader (also called a specialist) factored into the decision. But Leahy weighed other issues as well, such as the size and sector of the other companies the specialist represents. "We've been very cautious in making sure that as a company with a market cap of $900 million or so, we don't get lost in the mix," he says. At the Amex, "we were clearly a big fish," adds Leahy. Not so on the Big Board. For example, the specialist who trades IBM trades only IBM; the tech behemoth does so much volume that the trader doesn't have time for anything else. Keane, on the other hand, would share its specialist's time with a handful of other companies. Another contrast: on the Amex, Vale talked to the trader on the floor almost daily, getting regular updates on the stock's volume and performance. But in New York, the specialist firms employ liaisons to keep clients updated on floor activities.
Leahy and Vale selected Spear, Leeds & Kellogg to be Keane's specialist, based on the company's technology experience, affiliation with Goldman Sachs, and efficient trading. "They have all the power of Goldman's research and tools," says Leahy, "and they convinced us that they could match the more-intimate client relationship that a small firm offers." But "what really sealed the deal for us was the specialist himself," says Leahy, who liked the fact that specialist John Alatzas had climbed up the ladder of the trading-floor hierarchy, spending "half his life" working at the Exchange. And since adding Keane will bring Alatzas's total book of business to just five stocks, Leahy hopes to receive a lot of his attention.
One potential drawback was that Spear, Leeds & Kellogg was among the five specialist firms under investigation for illegal trading. But in the countdown to the listing, Leahy says he couldn't focus on that issue, since there was so little information available about the alleged wrongdoing at the time, and since the Exchange had cited nearly all of the specialist firms. "We did not make our choice based on an interpretation of who was more in the wrong or more in the right," he says. "There are more important organizations [than Keane] that are going to be governing these guys and mandating changes in their approach. There's no doubt changes will come, and those changes will affect all the specialists." Although no charges have been filed, the NYSE continues to investigate the trading firms, and the SEC has conducted its own review, sharing the results with the Exchange in a critical report.
No Turning Back
Despite the scandals at the Exchange, the listing was still a momentous event for the Keane staff. The night before the listing, Leahy, CEO Brian Keane, and eight employee representatives met at a restaurant in lower Manhattan to mark the milestone. Having each of the firm's divisions send a representative—a long-term, high-performing employee—to stand on the bell platform as the CEO opened the market, says Leahy, added an appropriate touch. It helps "show [our employees] the way we think of ourselves and how we operate," he says.
At the dinner, Brian Keane toasted the assembled employees. "Tomorrow we are graduating to the big time," he said. And at 9:30 the next morning, the employee representatives crowded the bell platform overlooking the trading floor as the CEO rang the bell and "KEA" crossed the electronic ticker. The stock opened at $13.25, and has held its value, ending an early-December trading session at $14.41.
In the face of the ongoing controversy at the Exchange, Leahy remains confident that Keane made the right move—to bolster the liquidity of its stock, gain visibility with investors, and create a "psychological data point" for its employees, showing them that the company has truly transformed itself into a global business. Now, along with 2,800 other listed companies, Keane is waiting to find out what will happen next in New York. "What's the next shoe to drop? Who knows?" says Leahy.
Kate O'Sullivan is staff writer at CFO.
Change at the Exchange
The string of scandals that beset the New York Stock Exchange this past fall revealed deep flaws in its governance practices. In his November letter to NYSE members, John Reed, the former CEO of Citigroup who was brought in to replace ousted Exchange chairman Dick Grasso, wrote frankly, "We have all been embarrassed by a set of problems that has hurt the Exchange and revealed the clear need to change our structure and processes at the top."
Reed's proposal for "fast-track" changes calls for a new, annually reelected, independent board of directors to replace the current group, which is staffed in part by securities-industry insiders. The list of candidates includes two current directors—former Secretary of State Madeleine Albright and TIAA-CREF chairman Herbert Allison Jr.—as well as a former head of J.P. Morgan and the president of Rensselaer Polytechnic Institute. In addition, the proposal outlines the creation of a 20-person board of executives that will comprise representatives from broker-dealers, institutional investors, and listed companies, to serve in an advisory role. (In an amendment to the proposal, the current board voted to add a representative of individual investors to the board of executives as well.) Reed, who has made it clear that he plans a short tenure in his role as interim chairman, also mapped out a schedule for board meetings and a succession plan for directors and the new chairman and CEO. Whether the chair and CEO will be the same person is still under discussion.
Overall, the changes have been well received, winning the support of nearly 98 percent of Exchange members. But critics, including large institutional investors such as the California Public Employees' Retirement System, say the proposal falls short. Calpers is calling for greater investor representation on the Exchange's board of directors as well as changes in the NYSE's self-regulatory group. "This proposal will not significantly restore investor confidence," said Sean Harrigan, president of the Calpers Board of Administration, in a written statement.
At press time, the NYSE was waiting for a final word on the new structure from the Securities and Exchange Commission.