8 ms·

Will the Long-Term Stock Exchange Make a Difference?

110 points by wyldfire 7y ago

cheez 7y ago
I don't see the right incentives for companies here. The only incentive could be that more investors (and therefore) more money exist on this exchange. That will take time.
- whatshisface 7y ago
  Founders will push to list on this exchange because tenure voting systems will advantage them more than anybody else.
  - kolbe 7y ago
    But they didn't propose tenure voting. "With respect to CII’s concerns about tenure voting rights, the SEC noted that the LTSE had not yet proposed those rights and that, as a registered exchange, it would be required to file with the SEC any changes to its rules as a proposed rule change, allowing for public notice and comment."
    - whatshisface 7y ago
      The organizers are talking about tenure voting, "not proposing" means they have not formally filed with the SEC for permission.
      - kolbe 7y ago
        i.e. there is no exchange that offers tenure voting, and it's not clear that there ever will be one.
        whatshisface 7y ago
        Right, we're discussing the plans for the long term stock exchange. It hasn't been created yet.
        kolbe 7y ago
        It sounds like the article is about the (proper noun) Long Term Stock Exchange, and whether or not it will make a difference. I tend to think of problems like that in the context of first asking "what is the Long Term Stock Exchange?" At the moment, at best it's a marketing ploy that advertises emphasis on long-termism, but without any approvals to do anything that they think supports long-termism. And the ideas they want to implement don't look feasible from a legal perspective. So, knowing these things, will it make a difference?
        roguecoder 7y ago
        Tenured voting is already legal on NYSE and NASDAQ (https://corpgov.law.harvard.edu/2016/03/07/tenure-voting-and-the-u-s-public-company/ https://corpgov.law.harvard.edu/2016/03/07/tenure-voting-and...): it simply requires the company to choose to adopt it and figure out how they would administer it. Right now, tech companies are going with dual-class instead, which only entrenches the founders rather than all long-term investors and is trivial to implement.
        kolbe 7y ago
        This is just not true, at least in the sense that the LTSE is trying to use the term 'tenure voting'. Right now, every share of a particular security is equally fungible. When Person A sells security X to Person B, the security does not change. Dual class shares are a way to hack around accomplishing something similar to tenure voting, but that hack is that they issue two different types of securities (which, of note, companies have been issuing many types of securities for a long time), but for that security to trade on a listed exchange, it cannot be selectively prejudicial about who owns it. It's the same security with the same rights.
  - hendzen 7y ago
    I'm sure Adam Neumann and his cronies on the WeWork board would have loved to be able to list on the LTSE. Would make it much harder for non-colluding market participants to call them out on their self dealing!
kolbe 7y ago
Since the LTSE didn't appear to put any of the 'innovative' ideas into their SEC application[1], it shouldn't make any difference for now. [1] https://cooleypubco.com/2019/08/01/ltse-proposes-listing-standards/ https://cooleypubco.com/2019/08/01/ltse-proposes-listing-sta...
navigatesol 7y ago
The disdain that (mostly) tech company CEOs have for the people to whom they sold ownership to is utterly baffling. >LTSE’s founder said that he discovered in his conversations with entrepreneurs that many were reluctant to go public. Then don't. You need money? Well then, I guess the people who have it get to make some decisions and hold you accountable. The idea that you can't build a long-term company on the public markets is hogwash.
- pmart123 7y ago
  It's likely important to distinguish whether this disdain is from being a public company due to regulatory requirements or due to having public shareholders. I agree with your point if it is the later. If it is the former, perhaps regulatory changes are needed versus a new exchange.
dcolkitt 7y ago
The prevailing narrative on this topic is "greedy investors only care about short-term profits". The spin is that visionary CEOs try to build long-term growth and innovation, but they're continuously stymied by Wall Street vultures. However the empirical evidence tells a very different story. Corporate managers have a demonstrated tendency towards wasteful ego-stroking empire building when not properly monitored. This is a classic principal-agent problem, where incentives drift away from shareholder interests. Regular quarterly targets are an important part of management discipline. The longer CEOs have before being expected to deliver results, the longer they have to empire-build without being held accountable. Similarly investors bias towards bottom-line profits and cash flow. Those metrics are much harder to fake or spin, compared to intangible stories about brand value, market dominance or skunkworks projects. When management does demonstrate credibility, Wall Street's usually more than happy to let them focus on long-term initiatives. Just look at Amazon, which is a darling of the investment community, trusted to steer nearly a trillion dollars in shareholder capital. Bezos has continuously poured huge resources into long-term speculative initiatives at the expense of quarterly earnings. And he's loved by shareholders for it, because he has a history of competence and putting company interests above personal ones. [1] https://pdfs.semanticscholar.org/c1cb/684257b67940b9cf0d5aaabf26d4c20d31a5.pdf https://pdfs.semanticscholar.org/c1cb/684257b67940b9cf0d5aaa...
- awinder 7y ago
  There's certainly a lot to unpack with some of the recent focus on "what is a company for", in all it's varied forms. I think you're correct to focus on some of the empire building, and you're right that there are lots of notable examples of companies that do have latitude to invest in the future (amazon, but this is also true of other big companies like apple, microsoft, google). And I think that what gives away the gambit with this LTSE is that the dual-class structure is protected -- THAT is for empire building and protection of the fiefdom, full-stop. That said, I like this Harvard piece a lot because the sidebars do point out that there is a pretty strong correlation between excess short-termism that came along with evolution of the shareholder preeminence theory. There's more than enough room here for everyone to be wrong in their own special, unique ways ;-).
- loganfrederick 7y ago
deleted 7y ago
[deleted]
jshaqaw 7y ago
Whenever a CEO complains about quarterly accountability I ask them “would you like your direct reports to check in with you once a year?” It is ironic as management move towards real-time 24/7 dashboards to track key metrics, every 3 months is viewed as an inappropriate timeframe to judge progress or lack thereof. The fact is public market investors are desperate to find high return places to invest capital. There is a shortage not a glut of long term opportunities to invest capital at an adequate rate of return. Companies that can do so are well rewarded by the marketplace. Those that aren’t either aren’t generating adequate returns on invested capital or are unable to communicate their prospects.
- roguecoder 7y ago
  Going the other direction would be interesting: if companies produced ongoing metrics, there might be fewer rewards for gaming them and less impact from missing one hour's target. I doubt either the SEC or the accountants are interested in going that direction, but it seems like it is the periodic nature that is the problem, rather than the specific length of time. Perhaps there should be a Continuous Reporting movement.
  - jshaqaw 7y ago
    That’s an interesting concept long term. Some investors are (perfectly legally to be clear) mining big data sources to try and replicate real time monitoring of many companies. Maybe to level the playing field companies will have to provide much more frequent disclosures. For now, as an investor, I find quarterly results a decently optimal balance of factors.
rb808 7y ago
One issue is that its difficult for companies or anybody to plan for the long term. 12 years ago no one had a smart phone. Internet shopping was rare. House prices only went up. China was a trusted trading partner. How are you supposed to plan for the long term, when you can't even see what is going to change in the next 5 years? It makes sense to keep current customers happy and spend most of time planning for next year or two.
tempsy 7y ago
What I don't necessarily get is that from interviews with the founders they are suggesting that they think companies will list on multiple exchanges, including LTSE. How would that work? If you list on a traditional exchange, then the problem is not solved since they still are going to be reporting quarterly and the speed of price discovery will stay the same as it is today. Wouldn't the price on that exchange inform the price on LTSE? How would that change anything?
- curiouscats 7y ago
  Different classes of stock with different voting privileges could at least prevent some abuses by speculators that buy up shares and seek to force through actions that benefit speculators but harm all the other stakeholders (long term investors, customers, employees...). There are certainly questions about if a long term exchange can make a difference. But it seems to me possible that it could. It does seem to me the voting rights on the shares would have to be different for it to have much of an affect. It seems to me it makes sense to have voting rights largely vest with those interested in the long term success of the company.
  - tempsy 7y ago
    That doesn’t really address the main thesis behind LTSE - the idea that public companies are too focused on the short term due to quarterly reporting requirements. It just seems like if you list on multiple exchanges then you’re still beholden to short term thinking created by quarterly reporting unless you choose to list exclusively on LTSE.
pmart123 7y ago
Conceptually, this is interesting. In Europe, some companies like L'Oreal already offer bonus dividends for institutional shareholders who have held shares for longer than one and two years. Voting rights could be another way to incentive long-term holders. However, it is hard to tell where the rubber meets the road. There has been a strong movement to passive ownership. Would this disincentive index providers from adding new economy stocks by kicking out old economy stocks? Would the ETF providers eventually have too much control? There's definitely fixable solutions to these issues as well as hopefully solving other recent prevalent problems such as no voting rights common stock. Right now is NYSE and Nasdaq no longer make money on listing fees, but make money on selling datafeeds. Given the LTSE's objectives, it will likely need to monetize through listing fees or an alternative way.
rjf72 7y ago
I found it extremely surprising that this company didn't mention the new trend towards "public" companies. For instance Zuckerberg controls the majority of voting shares for Facebook, at Google Page/Brin control the majority, and so on. For those that don't know the 'trick', it's simply different quality shares. They allocate themselves a minority of shares, but ones with 10x the voting power of normal shares - enough to ensure unilateral (or bilateral in the case of Sergey and Larry) control over "public" companies. This is, for instance, why trying to unify shareholders against Zuckerberg was quite bemusing. Literally every single Facebook shareholder could vote to do away with Zuckerberg. It wouldn't matter - he's not going anywhere unless he wants to. Suffice to say, these sort of "public" companies don't seem to be engaging in any more enlightened longview than those who are genuinely under the heel of profit seeking shareholders.
oilman 7y ago
Perhaps the solution is more reporting instead of less reporting. Some sort of real time (or hourly, daily, whatever) metrics about a company instead of quarterly reports. I feel like a certain frequency makes it harder to game, and much more routine, so people aren't as likely to make decisions that are detrimental to the long term. I think faster reporting and quicker feedback loops are the way the world is going, why not for public markets?
- Traster 7y ago
  The problem with reporting is it's actually a liability. You're legally responsible for reporting accurately to shareholders so there's a non-trivial amount of work to ensure you get it right. You could do that in real-time but there would be a significant overhead to it. There are also other problems, for example the sales team will always make sure their paperwork is completed in time for the end of quarter to hit their targets, if you're reporting continuously you're going to see a lot more noise in the sales reporting figures that gets averaged out by only reporting the quarter. You aren't gaining information by reporting more often, you're just exposing your investors to a noisier signal.
  - roguecoder 7y ago
    But wouldn't that be more productive for the business to have people always producing value, rather than rushing things in for a deadline and slacking off immediately afterwards?
jackcosgrove 7y ago
Reading through the article, it seemed as if the LTSE is more about norms than rules. Norms seem too much like marketing to me. If the exchange is toothless to enforce its norms, there will be hijinks. I hope they are aiming for rules rather than norms and just aren't there yet.
crb002 7y ago
Maybe. Class A shares should be untradable for 5 years.

110 points by wyldfire 7y ago

I don't see the right incentives for companies here. The only incentive could be that more investors (and therefore) more money exist on this exchange. That will take time.

whatshisface 7y ago
Founders will push to list on this exchange because tenure voting systems will advantage them more than anybody else.
- kolbe 7y ago
  But they didn't propose tenure voting. "With respect to CII’s concerns about tenure voting rights, the SEC noted that the LTSE had not yet proposed those rights and that, as a registered exchange, it would be required to file with the SEC any changes to its rules as a proposed rule change, allowing for public notice and comment."
  - whatshisface 7y ago
    The organizers are talking about tenure voting, "not proposing" means they have not formally filed with the SEC for permission.
    - kolbe 7y ago
      i.e. there is no exchange that offers tenure voting, and it's not clear that there ever will be one.
      - whatshisface 7y ago
        Right, we're discussing the plans for the long term stock exchange. It hasn't been created yet.
        kolbe 7y ago
        It sounds like the article is about the (proper noun) Long Term Stock Exchange, and whether or not it will make a difference. I tend to think of problems like that in the context of first asking "what is the Long Term Stock Exchange?" At the moment, at best it's a marketing ploy that advertises emphasis on long-termism, but without any approvals to do anything that they think supports long-termism. And the ideas they want to implement don't look feasible from a legal perspective. So, knowing these things, will it make a difference?
      - roguecoder 7y ago
        Tenured voting is already legal on NYSE and NASDAQ (https://corpgov.law.harvard.edu/2016/03/07/tenure-voting-and-the-u-s-public-company/ https://corpgov.law.harvard.edu/2016/03/07/tenure-voting-and...): it simply requires the company to choose to adopt it and figure out how they would administer it. Right now, tech companies are going with dual-class instead, which only entrenches the founders rather than all long-term investors and is trivial to implement.
        kolbe 7y ago
        This is just not true, at least in the sense that the LTSE is trying to use the term 'tenure voting'. Right now, every share of a particular security is equally fungible. When Person A sells security X to Person B, the security does not change. Dual class shares are a way to hack around accomplishing something similar to tenure voting, but that hack is that they issue two different types of securities (which, of note, companies have been issuing many types of securities for a long time), but for that security to trade on a listed exchange, it cannot be selectively prejudicial about who owns it. It's the same security with the same rights.
- hendzen 7y ago
  I'm sure Adam Neumann and his cronies on the WeWork board would have loved to be able to list on the LTSE. Would make it much harder for non-colluding market participants to call them out on their self dealing!

kolbe 7y ago

Since the LTSE didn't appear to put any of the 'innovative' ideas into their SEC application[1], it shouldn't make any difference for now. [1] https://cooleypubco.com/2019/08/01/ltse-proposes-listing-standards/ https://cooleypubco.com/2019/08/01/ltse-proposes-listing-sta...

navigatesol 7y ago

The disdain that (mostly) tech company CEOs have for the people to whom they sold ownership to is utterly baffling. >LTSE’s founder said that he discovered in his conversations with entrepreneurs that many were reluctant to go public. Then don't. You need money? Well then, I guess the people who have it get to make some decisions and hold you accountable. The idea that you can't build a long-term company on the public markets is hogwash.

pmart123 7y ago
It's likely important to distinguish whether this disdain is from being a public company due to regulatory requirements or due to having public shareholders. I agree with your point if it is the later. If it is the former, perhaps regulatory changes are needed versus a new exchange.

dcolkitt 7y ago

The prevailing narrative on this topic is "greedy investors only care about short-term profits". The spin is that visionary CEOs try to build long-term growth and innovation, but they're continuously stymied by Wall Street vultures. However the empirical evidence tells a very different story. Corporate managers have a demonstrated tendency towards wasteful ego-stroking empire building when not properly monitored. This is a classic principal-agent problem, where incentives drift away from shareholder interests. Regular quarterly targets are an important part of management discipline. The longer CEOs have before being expected to deliver results, the longer they have to empire-build without being held accountable. Similarly investors bias towards bottom-line profits and cash flow. Those metrics are much harder to fake or spin, compared to intangible stories about brand value, market dominance or skunkworks projects. When management does demonstrate credibility, Wall Street's usually more than happy to let them focus on long-term initiatives. Just look at Amazon, which is a darling of the investment community, trusted to steer nearly a trillion dollars in shareholder capital. Bezos has continuously poured huge resources into long-term speculative initiatives at the expense of quarterly earnings. And he's loved by shareholders for it, because he has a history of competence and putting company interests above personal ones. [1] https://pdfs.semanticscholar.org/c1cb/684257b67940b9cf0d5aaabf26d4c20d31a5.pdf https://pdfs.semanticscholar.org/c1cb/684257b67940b9cf0d5aaa...

awinder 7y ago
There's certainly a lot to unpack with some of the recent focus on "what is a company for", in all it's varied forms. I think you're correct to focus on some of the empire building, and you're right that there are lots of notable examples of companies that do have latitude to invest in the future (amazon, but this is also true of other big companies like apple, microsoft, google). And I think that what gives away the gambit with this LTSE is that the dual-class structure is protected -- THAT is for empire building and protection of the fiefdom, full-stop. That said, I like this Harvard piece a lot because the sidebars do point out that there is a pretty strong correlation between excess short-termism that came along with evolution of the shareholder preeminence theory. There's more than enough room here for everyone to be wrong in their own special, unique ways ;-).
loganfrederick 7y ago

deleted 7y ago

[deleted]

jshaqaw 7y ago

Whenever a CEO complains about quarterly accountability I ask them “would you like your direct reports to check in with you once a year?” It is ironic as management move towards real-time 24/7 dashboards to track key metrics, every 3 months is viewed as an inappropriate timeframe to judge progress or lack thereof. The fact is public market investors are desperate to find high return places to invest capital. There is a shortage not a glut of long term opportunities to invest capital at an adequate rate of return. Companies that can do so are well rewarded by the marketplace. Those that aren’t either aren’t generating adequate returns on invested capital or are unable to communicate their prospects.

roguecoder 7y ago
Going the other direction would be interesting: if companies produced ongoing metrics, there might be fewer rewards for gaming them and less impact from missing one hour's target. I doubt either the SEC or the accountants are interested in going that direction, but it seems like it is the periodic nature that is the problem, rather than the specific length of time. Perhaps there should be a Continuous Reporting movement.
- jshaqaw 7y ago
  That’s an interesting concept long term. Some investors are (perfectly legally to be clear) mining big data sources to try and replicate real time monitoring of many companies. Maybe to level the playing field companies will have to provide much more frequent disclosures. For now, as an investor, I find quarterly results a decently optimal balance of factors.

rb808 7y ago

One issue is that its difficult for companies or anybody to plan for the long term. 12 years ago no one had a smart phone. Internet shopping was rare. House prices only went up. China was a trusted trading partner. How are you supposed to plan for the long term, when you can't even see what is going to change in the next 5 years? It makes sense to keep current customers happy and spend most of time planning for next year or two.

tempsy 7y ago

What I don't necessarily get is that from interviews with the founders they are suggesting that they think companies will list on multiple exchanges, including LTSE. How would that work? If you list on a traditional exchange, then the problem is not solved since they still are going to be reporting quarterly and the speed of price discovery will stay the same as it is today. Wouldn't the price on that exchange inform the price on LTSE? How would that change anything?

curiouscats 7y ago
Different classes of stock with different voting privileges could at least prevent some abuses by speculators that buy up shares and seek to force through actions that benefit speculators but harm all the other stakeholders (long term investors, customers, employees...). There are certainly questions about if a long term exchange can make a difference. But it seems to me possible that it could. It does seem to me the voting rights on the shares would have to be different for it to have much of an affect. It seems to me it makes sense to have voting rights largely vest with those interested in the long term success of the company.
- tempsy 7y ago
  That doesn’t really address the main thesis behind LTSE - the idea that public companies are too focused on the short term due to quarterly reporting requirements. It just seems like if you list on multiple exchanges then you’re still beholden to short term thinking created by quarterly reporting unless you choose to list exclusively on LTSE.

pmart123 7y ago

Conceptually, this is interesting. In Europe, some companies like L'Oreal already offer bonus dividends for institutional shareholders who have held shares for longer than one and two years. Voting rights could be another way to incentive long-term holders. However, it is hard to tell where the rubber meets the road. There has been a strong movement to passive ownership. Would this disincentive index providers from adding new economy stocks by kicking out old economy stocks? Would the ETF providers eventually have too much control? There's definitely fixable solutions to these issues as well as hopefully solving other recent prevalent problems such as no voting rights common stock. Right now is NYSE and Nasdaq no longer make money on listing fees, but make money on selling datafeeds. Given the LTSE's objectives, it will likely need to monetize through listing fees or an alternative way.

rjf72 7y ago

I found it extremely surprising that this company didn't mention the new trend towards "public" companies. For instance Zuckerberg controls the majority of voting shares for Facebook, at Google Page/Brin control the majority, and so on. For those that don't know the 'trick', it's simply different quality shares. They allocate themselves a minority of shares, but ones with 10x the voting power of normal shares - enough to ensure unilateral (or bilateral in the case of Sergey and Larry) control over "public" companies. This is, for instance, why trying to unify shareholders against Zuckerberg was quite bemusing. Literally every single Facebook shareholder could vote to do away with Zuckerberg. It wouldn't matter - he's not going anywhere unless he wants to. Suffice to say, these sort of "public" companies don't seem to be engaging in any more enlightened longview than those who are genuinely under the heel of profit seeking shareholders.

oilman 7y ago

Perhaps the solution is more reporting instead of less reporting. Some sort of real time (or hourly, daily, whatever) metrics about a company instead of quarterly reports. I feel like a certain frequency makes it harder to game, and much more routine, so people aren't as likely to make decisions that are detrimental to the long term. I think faster reporting and quicker feedback loops are the way the world is going, why not for public markets?

Traster 7y ago
The problem with reporting is it's actually a liability. You're legally responsible for reporting accurately to shareholders so there's a non-trivial amount of work to ensure you get it right. You could do that in real-time but there would be a significant overhead to it. There are also other problems, for example the sales team will always make sure their paperwork is completed in time for the end of quarter to hit their targets, if you're reporting continuously you're going to see a lot more noise in the sales reporting figures that gets averaged out by only reporting the quarter. You aren't gaining information by reporting more often, you're just exposing your investors to a noisier signal.
- roguecoder 7y ago
  But wouldn't that be more productive for the business to have people always producing value, rather than rushing things in for a deadline and slacking off immediately afterwards?

jackcosgrove 7y ago

Reading through the article, it seemed as if the LTSE is more about norms than rules. Norms seem too much like marketing to me. If the exchange is toothless to enforce its norms, there will be hijinks. I hope they are aiming for rules rather than norms and just aren't there yet.

crb002 7y ago

Maybe. Class A shares should be untradable for 5 years.