Many believe that short-term thinking and investing may be at the root of slowed progress towards social and environmental ideals, along with many of the pitfalls of modern capitalism. With many of today’s most powerful companies focusing more on driving short-term quarterly returns for shareholders than on their true qualitative value propositions, the justification for this argument cannot be discounted.
One of the most ambitious large-scale solutions to this problem is the newest US stock exchange, the Long-Term Stock Exchange (LTSE), which was approved by the SEC on May 2019, after 9 years of development. The Long-Term Stock Exchange aims to address problems resulting from “short-termism” by promoting a long-term focus among investors and companies alike. The LTSE primarily accomplishes this through its unique listing requirements. "Modern companies want to innovate consistently, minimize pressure to hit short-term targets, join with long-term investors, and run their businesses with the stewardship that stakeholders and society demand," said Eric Ries, the founder and CEO of LTSE Group Inc. Ries also stated that the “similarity between the…Long-Term Stock Exchange and the roughly 15 other stock exchanges that are expected to host trading between now and the end of next year ends with the word ‘exchange.’”
The LTSE’s listing requirements center around 5 key criteria:
The company must serve the interests of a broad group of stakeholders, identifying stakeholders critical to its success and describing its impact on the environment and society, its policies on diversity and inclusion, how it will invest in its employees, and how it will reward employees and other stakeholders for contributing to its success.
The company must measure success over long-term horizons (typically a year or longer), describing its process for making long-term strategic decisions, how it sets priorities, and the metrics it uses to measure long-term success. The company must also identify the time horizon that it considers to be long-term and how using this time horizon affects strategic decision-making.
The company must implement compensation plans for the Board of Directors and executive management that rewards long-term performance rather than short-term, identifying how its compensation plan for directors and executives aligns their goals with the metrics chosen to evaluate the long-term success of the business.
The company must give directors a crucial role in the setting of long-term strategy and the monitoring of progress, explaining exactly how the Board of Directors are involved in the creation of long-term strategy, and what responsibilities they have related to the monitoring of the business’s progress towards its long-term goals.
The company must engage with long-term shareholders, identifying how it does so.
Let’s dive into why the LTSE may or may not be a better alternative to other stock exchanges.
Comparative Disadvantages to the Long-Term Stock Exchange
Some critics say that compensating executives who are already short-term thinkers based on long-term results will not necessarily change that mentality.
Other critics say that companies today are already rewarded for implementing long-term strategies, while being punished for not being innovative enough.
The LTSE is vastly different than all of the other, more established exchanges available. Because the LTSE is untested and promises a wide array of differences from other stock exchanges, going public and even investing on this exchange may be riskier. That said, contrary to Ries’ claim of astronomical differences between the LTSE and other exchanges, in many respects the LTSE works similarly to other stock exchanges so the risk it presents may be minimal in reality.
Comparative Advantages to the Long-Term Stock Exchange
Although the LTSE has identified itself as a competitor to the dominant NYSE and NASDAQ stock exchanges, the LTSE does not want to prevent those who prefer to maintain the status quo from providing guidance to analysts and performing other activities typical within other stock exchanges. Instead, the LTSE aims to simply provide a better alternative for long-term investors and companies. As such, dual listing is encouraged for companies that do not desire to list solely on the LTSE. If a company dual lists, its shares that are bought on the LTSE can also be sold in other marketplaces such as the NYSE and the NASDAQ exchanges.
The LTSE has the financial support of many prominent private equity firms including but not limited to the Collaborative Fund, Obvious Ventures, Founders Fund, Initialized, Uprising, and Andreessen Horowitz. Notably, legendary venture capitalist and startup entrepreneur Marc Andreessen has been one of the most outspoken supporters of the LTSE. Such overwhelming support from these savvy PE investors validates the founding principles from which the LTSE was created.
The LTSE, with its stakeholder-focused listing criteria, has the potential to prove to early stage investors (Angels, VCs, PE firms) that businesses with a stakeholder focus and socially innovative business models are good financial investments. By function of making such a business’s success more probable, the LTSE may facilitate the emergence of, and investment in, more socially responsible businesses than ever before.
Changes in a given company’s price that are driven more by analyst predictions than by true changes in value could be greatly reduced by the LTSE. The LTSE discourages providing guidance to financial analysts, making it optional where in other exchanges it is standard procedure. This is because analyst reports that follow quarterly guidance typically drive a change in the company’s stock price. This hurts shareholders in the event of a price decrease (which often occurs when the company does not meet the targets it has provided in its guidance to analysts) even while the underlying reasoning for poor ratings may be nothing to fret over when looking at the business over a longer time horizon. Conversely, excessively positive ratings can drive a stock’s price to an unsustainably high level, leading to returns worth more than their true value. In these cases, the subsequent dramatic price decreases to more sustainable levels can once again hurt shareholders. Short-term changes in share price weigh heavily on public company executives’ minds today. But on the LTSE, which has requirements that facilitate more stability in share price than the alternative exchanges, perhaps these executives could better focus on their companies’ long-term missions and on driving long-term returns for shareholders that are invested in the company for the long haul. The optionality of providing guidance allows companies that still want to provide it to do so, but leaves the door open for a more long-term oriented approach.
The way in which the LTSE incentivizes companies to compensate executives, directors, and employees based on long-term success may lead to just that: long-term prosperity and growth for companies on the LTSE. Today, executives are focused on short-term changes in stock price because their compensation is based on quarterly performance. The LTSE encourages companies to use longer time horizons for evaluating success, and to evaluate success based not only on the generation of shareholder value, but value for other stakeholders as well. With these changes, executives’ economic incentives will be more closely tied to the long-term goals of the company and to the consideration of all of the company’s stakeholders.
The LTSE’s focus on the importance of stakeholders encourages businesses to provide meaningful social, environmental, and economic benefits to all parties affected by the business. This ideal includes the implementation and enforcement of diversity and inclusion in the workplace, policies that form an important baseline for the fair treatment of employees and job candidates alike. Businesses listed on the exchange are required to provide (both to the exchange and on their website, to the public) an annual report on their impact to their stakeholders, formalizing the businesses’ accountability to their stakeholders.
The LTSE empowers directors to consider the interests of not only the shareholders, but also other stakeholders. Today, directors believe that they are only accountable to shareholders, and the direction they take the business is based almost entirely on building shareholder value. The LTSE aims to make them more accountable to other stakeholders by requiring the aforementioned detailed annual reports on how the company affects their stakeholders, society, and the environment. With a more accountable Board of Directors comes accountability and responsibility from the top-down for the ethics of a business’s conduct, the impact of the business, and the business’s treatment of its stakeholders.
The LTSE ventures to offer founders and their teams continuity of their vision and values after going public. The LTSE’s founder and CEO eluded to some of the concerns entrepreneurs have about taking their companies public that he aims to address through the LTSE: “managers are concerned. Concerned about losing control of their company. Concerned about having to manage to the quarter. Concerned about compromising the company mission. Concerned about the distractions that take energy away from serving customers and creating value. Concerned about being punished by the markets for investing in anything other than driving short-term metrics.”
The LTSE’s goal to encourage long-term shareholders to engage with companies ensures that public companies serve these shareholders’ (and other stakeholders’) long-term interests, and vice versa. One of the key problems that public companies face today is that hedge funds and other investment firms often hold significant percentages of their companies, with the sole intention of making a short-term profit off of those shares, for better or for worse with regard to the companies’ long-term success. Encouraging long-term investing will reduce the impact of this problem for businesses while creating businesses that are more accountable to long-term investors than those investing on the short-term.
The LTSE gives companies going public the option of a stock exchange that specifically focuses on both profits and purpose.
Very interesting writing that reflects on what it means to support a venture. Thought provoking and well balanced article!