CME Group Inc's super-sized board of directors is about to go on a diet, but the results are going to take a while to show.

The giant futures exchange operator, which owns the 164-year-old Chicago Board of Trade and offers trading on assets from oil to interest rates, has the largest board at any U.S. publicly traded company.

Despite changes like electronic trading that have swept the exchange industry in the past decade, CME's board is a throwback to the days when futures markets were private clubs run by their traders.

Ten of the board's 32 members are there to represent the Board of Trade, beneficiaries of a deal made five years ago to grease the way for CME's acquisition of its smaller rival.

In May, CBOT's right to those seats will sunset, and the board will likely start shedding members who now gather regularly around its long, dark brown, rectangular boardroom table.

CME also plans a switch to annual elections for all board members, giving it further flexibility to remake itself once current members serve out their three-year terms.

The board's size has not held the company back, CME says, yet some shareholders are craving a change.

It's a very large board, and we have concerns on that issue, said Anne Kvam, global head of ownership for Norway's $550 billion sovereign wealth fund, which is seeking a bigger shareholder voice at CME and several other U.S. companies it sees as falling short on corporate governance.

While optimal board size should be a decision left to the company, she said, You can just imagine yourself being in a room with 32 people trying to make good solid decisions and trying to have honest, frank discussions. That doesn't seem to be a good mix.

Even if it shrinks to 20, the number it had before the CBOT acquisition, CME's board will be bigger than any other financial company, according to executive search firm Spencer Stuart.

Jeff Carter, a former board member, said the board would work better with 15.

I don't have anything personally against any of the guys on the board, he said. They've got a lot of smart people on there - but there's too many of them.

A trimmer board would reduce costs at the company, which has vowed to make expense management a priority. CME paid the 30 directors who are not also employees a total of $5.5 million last year, or an average of $180,000 each.


The darkest cloud on CME's horizon is the ongoing scandal surrounding futures brokerage MF Global , which hurt trading volumes and dented customer confidence. MF Global, which filed for bankruptcy on October 31, was one of CME's biggest customers. As much as $1.2 billion in MF Global customer money is still missing.

As CME navigates the fallout from MF Global's failure, a smaller board could help inoculate CME from perceptions of flatfootedness.

Any time you have an unusual characteristic and things go wrong, you're going to be open to criticism, said Ralph Walkling, executive director of the Center for Corporate Governance at Drexel University.

Following MF Global's collapse, CME's board approved a guarantee to prod the bankruptcy trustee into releasing customer funds, and earmarked a pot of funds to help make the brokerage's customers whole. Yet it took nearly two weeks for the action.

The lag time raises questions, Macquarie Securities analyst Ed Ditmire said.

Ultimately, users in the industry are left with the impression that the best offer wasn't on the table right away, which is frustrating, Ditmire said. At the end of the day the industry took a reputational hit and you are left to wonder if something could have been handled better.

CME says its board and management acted aggressively on behalf of customers after MF Global's failure.

Investors hammered CME shares after MF Global's collapse, sending them down 14 percent over the next three months, even as the Standard & Poor's 500 Index gained 3 percent. CME has wooed investors back with a huge increase in dividend payouts announced February 2, and shares have since risen to above where they were before MF Global's demise.

CME Executive Chairman Terrence Duffy, who has spearheaded CME's response to the MF Global crisis, said the board works just fine.

The board's size has never impeded our governance or decision-making abilities, he told Reuters.

Ajay Sadarangani, a senior equity analyst at Manning & Napier Advisors LLC, agreed. Manning & Napier manages $42.2 billion, including CME shares.

As long as the board works effectively, which it has, we don't take much issue with the board being large, he said.


CME's board, like that of many companies, approves major strategic moves and sets executive compensation, among other duties.

Important moves are typically hashed out at either the executive or strategic planning committees, which then make recommendations - usually followed - to the full board, former board members say.

Bylaws require a quorum of 17 directors before any board business can be transacted. That is a bigger group than most companies have on their entire board.

CME's board is the biggest at a U.S. company in at least a decade, according to GMI, a corporate governance research firm. The typical U.S. board has nine to 10 members, and financial firms usually have larger boards than others because their businesses are more complicated, according to GMI's chief communications officer, Paul Hodgson.

James Newsome, a former New York Mercantile Exchange chief who left the CME board last year, said that despite the board's larger-than-normal size, meetings are well-organized and debates are lively.

I did not find the size to be an impediment to conducting exchange business in a timely and efficient manner, he said. At the same time, he said, it optimally should be reduced.

CME's board is heavy with members who have deep ties to the futures industry. This is a characteristic that delivers useful expertise, CME says. But it is also one that can create complications.

Three of CME's board members have had to recuse themselves from discussions about MF Global's failure because of their ties to the brokerage.

And CME's board is the only major U.S. exchange operator that falls short of the standard of its regulator, the Commodity Futures Trading Commission, for public director representation.

CFTC recommends that public directors account for 35 percent of exchange boards to reduce conflicts of interest. Public directors, defined as those with no significant links to the industry, account for just 28 percent of CME's board.

IntercontinentalExchange Inc , the No. 2 U.S. futures exchange operator, has an 11-member board, 10 of whom are public directors. The Kansas City Board of Trade and the Minneapolis Grain Exchange also exceed the 35 percent threshold, as does NYSE Euronext's U.S. futures market.


CME's swollen board is rooted in history.

To appease CBOT members worried about losing control, CME added 10 directorships to represent CBOT interests in 2007.

In 2008, it added three more to represent the New York Mercantile Exchange, which it acquired that year. Two of those seats have since been retired.

BM&F Bovespa , the Brazilian exchange, controls one additional seat.

CME, responding to pressure from shareholders, will propose at its annual meeting on May 23 a switch to annual elections for all board members, instead of putting a third of the board up for election each year.

The change, which is expected to be approved, will give the board more flexibility to start cutting members loose. But all directors will be allowed to serve out their terms, meaning that CME can eliminate no more than 11 members this year. The real number is likely to be a good deal smaller.

Blame its history for that, too.

The Chicago Mercantile Exchange began life as a public company in 2002 with 20 board members. Some were political bigwigs; others were long-time exchange denizens.

And six, according to a permanent arrangement struck when CME converted from a members-owned club to a shareholder-owned company a few years earlier, represented traders, whose interests often diverge from those of regular shareholders.

CME needs enough people on the board to overrule that group of members if they get out of control, said Carter, who was on the board when CME transitioned from member-owned club to shares-based company.

Of the 11 directors who are up for re-election in 2012, several - including political heavyweight Daniel Glickman, a former U.S. secretary of agriculture; 15-year CME board veteran James Oliff; and BM&F Bovespa CEO Edemir Pinto - do not appear to be candidates for elimination.

Reuters attempted to contact most board members, and they all declined to comment or did not respond to requests for comment.

The board has always looked large and unwieldy, said Greg Heywood, who helps manage $14 billion in assets, including CME shares, for Delaware Investments in San Francisco.

He said he has never stayed up nights worrying about the board's size, but everyone will be happier if they get to be a smaller board over time.

(Reporting by Ann Saphir and Tom Polansek in Chicago, editing by Matthew Lewis)