Knight Capital Will Test Whether Board Additions Mean Improved Governance By: Mark Rogers
To say that the past several weeks have been a challenge for Knight Capital (NYSE: KCG) would be an understatement. It started with a software glitch on August 1 that left the brokerage firm with a $440 million loss. Many, including its own executives, questioned whether the company would survive. However, thanks to an injection of capital from outside firms, Knight has lived to fight another day. Now those firms have appointed their own representatives to Knight’s Board of Directors. The three new directors face the unenviable position of ensuring that the company improves its corporate governance and never again finds itself in this position – indeed, a similar software glitch in the company’s future would all but guarantee the end of Knight Capital.
Knight isn’t just any brokerage firm. It is the largest trader of U.S. shares by volume, a fact that makes their blunder on August 1 all that more surprising. On that day, Knight initiated new trading software and as the day went on it quickly became apparent that the software was not behaving as it was designed. The software triggered erroneous buy orders for major stocks. The shares of 148 stocks were affected and the markets were thrown into chaos. Knight quickly removed the software, but the damage was already done. Although its clients were not affected, the company’s stock plunged as investor confidence quickly waned.
In the two days following the software catastrophe, Knight lost 70 percent of its value. It appeared that company was not going to survive without a significant infusion of outside capital. A few days later, Knight announced that it had received a life line in the form of $400 million in capital from a group of investors led by TD Ameritrade, Blackstone Group, LP, and General Atlantic, LLC. The terms of the deal permitted each of these firms to name a director to Knight’s Board of Directors, growing the number of directors from seven to 10. The new directors include: Martin Brand, Managing Director at Blackstone; Matthew Nimetz, Advisory Director at General Atlantic; and Fred Tomczyk, President and CEO of Ameritrade.
The storm is not over for Knight, particularly with a looming SEC investigation into what caused the trading blunder. Knight was trading at $10.33 the day before the glitch. Last Friday (August 31), the stock was trading at $2.76 a share. Investors are clearly not convinced that Knight will weather the storm. Knight was not the first financial firm this year to undergo major technical glitches while engaging new trading software – leading to the question how could Knight (and its board) have allowed this to happen, especially after the firm publicly criticized NASDAQ for its software problems on the first day of trading of Facebook. Although the burden is on the entire board at Knight to set the right course, the reality is that these three new corporate board members must take the lead. Adding directors to a board does not always mean improved governance, but for Knight the alternative is not an option. Bold actions must be taken, including an overhaul of Knight’s management team and board of directors. The company and its investors deserve strong oversight, vision and competency – it is up to these new directors to make that happen.