
Will the Long-Term Stock Exchange Make a Difference? - wyldfire
https://corpgov.law.harvard.edu/2019/06/08/will-the-long-term-stock-exchange-make-a-difference/
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dcolkitt
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/684257b67940b9cf0d5aaa...](https://pdfs.semanticscholar.org/c1cb/684257b67940b9cf0d5aaabf26d4c20d31a5.pdf)

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nitwit005
> Regular quarterly targets are an important part of management discipline.

This boils down to "having goals is important", which is certainly true, but
most of us have seen managers try to improve quarterly numbers at the expense
of company health. The effect is pronounced enough that people time purchases
to be near other companies end of quarter, knowing they'll get a better deal.

~~~
jshaqaw
I accept that but ANY measured goals will be games as a fairly universal
principle of human organization. If you shift accountability to annual the
incentives to game increase because you have a whole year before you need to
fess up.

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roguecoder
This seems like it would be a good reason not to link CEO pay to outcomes at
all: game theory says that as long as metrics have no impact on you
personally, you don't have any incentive to game them.

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jshaqaw
Management incentives will always have agent-principal issues. These things
can’t be set by autopilot. That’s why corporate governance and a fiduciary
voice for shareholders is so important. Of course the same CEOs who want
annual reporting also want to neuter the capability of shareholders to enforce
accountability.

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jshaqaw
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.

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roguecoder
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.

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jshaqaw
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.

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pmart123
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.

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rjf72
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.

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tempsy
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?

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curiouscats
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.

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tempsy
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.

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kolbe
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-
sta...](https://cooleypubco.com/2019/08/01/ltse-proposes-listing-standards/)

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jackcosgrove
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.

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oilman
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?

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Traster
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.

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roguecoder
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?

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rb808
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.

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navigatesol
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.

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pmart123
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.

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crb002
Maybe. Class A shares should be untradable for 5 years.

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cheez
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.

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whatshisface
Founders will push to list on this exchange because tenure voting systems will
advantage them more than anybody else.

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kolbe
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."

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whatshisface
The organizers are talking about tenure voting, "not proposing" means they
have not formally filed with the SEC for permission.

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kolbe
i.e. there is no exchange that offers tenure voting, and it's not clear that
there ever will be one.

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roguecoder
Tenured voting is already legal on NYSE and NASDAQ
([https://corpgov.law.harvard.edu/2016/03/07/tenure-voting-
and...](https://corpgov.law.harvard.edu/2016/03/07/tenure-voting-and-the-u-s-
public-company/)): 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
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.

