The Long-Term Stock Exchange Comes to Life

https://blog.ltse.com/the-long-term-stock-exchange-comes-to-life-c497f29bbc73

by kawera • 9 years ago

403 183 9 years ago

blog.ltse.com

It would be nice if they explained what it actually was. This paragraph has zero informational calories:

The LTSE is designed to remove the short-term pressures that plague today’s public markets and reorient companies and investors around long-term thinking. Through brand new listing standards, software tools, and advocacy, we’re reinventing the public company experience with novel approaches to executive compensation, shareholder voting, disclosure practices, board and stakeholder policies, and community governance.

qubex9• 9 years ago

Thanks for posting that.

Have you found any reference to how they would handle short selling or derivatives? What if my ownership is of negative duration (naked short), how would that affect the average against which the seniority is measured (clearly I would have no title to voting). It has to be a relative measure since otherwise if everybody just bought the stock everybody’s rights would be 0 and nobody could vote to control the company.

How would they handle options? How would they handle ownership by means of intermediate vehicles (e.g. trust funds) that have themselves changed hands?

pavel_lishin3• 9 years ago

Have you found any reference

I haven't bothered searching. If they don't care enough to sell me on the idea - and they probably don't, I'm not their target - I don't care enough to go looking for reasons to buy into it.

eries29• 9 years ago

See above - our rules do handle derivatives and options elegantly (imho), but I can’t say too much about how it works yet.

wyldfire• 9 years ago

This article is short on details.

I found this one [1] with good details like, "what is different about this exchange?"

* Tenured shareholder voting power, meaning that a shareholder’s votes would be proportionately weighted by the length of time the shares have been held

* Mandated ties at listed companies between executive pay and long-term business performance

* Additional disclosure requirements that allow companies to know who their long-term shareholders are and investors to know what investments the company is making

[1] https://qz.com/704657/eric-ries-ltse-long-term-stock-exchang...

trothamel• 9 years ago

https://www.wsj.com/articles/silicon-valley-vs-wall-street-c...

In the linked WSJ article, that explains this quite a bit better than the medium blogpost. Basically, it appears that the main thing is that the voting power of shares win increase with the time the shares are owen. (Though there's talk of opting in to this process.) There's also going to be a prohibition on companies giving quarterly earnings guidance.

It seems like it's intended to reward founders and long-term employees of startups by privileging them over the more retail class of investor, and people with short-term goals, like activist investors. (But this is a mixed thing - it's more accountable than a setup with multiple stock classes where the founders retain all control.)

EDIT: Random thought: I wonder how this exchange would handle shorting stock, when it comes to the tenure requirement.

qubex9• 9 years ago

Naked shorters by definition own no stock currently so have no right to vote, but it may or may not affect calculations regarding the average seniority of stock against which rights are measured (it cannot be absolute, since you could conceivably have a situation where everybody shuts purchased the stock, and thus ownership of all would be zero, and thus nobody would have a right to vote).

And what of options and other derivatives? What of trust funds and other intermediate vehicles of ownership that might themselves have (perhaps partially) changed hands?

hendzen3• 9 years ago

Yeah I expect these rules will be rendered effectively moot by equity swap trading.

DennisP• 9 years ago

Seems like it might do a better job of incentivizing long-term thinking if you had to lock your shares, and your vote were multiplied by how long you have to wait before selling them.

eries29• 9 years ago

I like this idea a lot, and hope to have more to say about it next year sometime :)

JumpCrisscross2• 9 years ago

it's intended to reward founders and long-term employees of startups by privileging them over the more retail class of investor

It will just prioritize investors with the sense to stick their shares in an SPV (e.g. an LLC or trust) and then sell the SPV with the premium voting rights attached. (Also amplify the benefits of intergenerational wealth transfer.)

TheRealPomax• 9 years ago

There is no "just". If someone can come up with that exploit in an HN comment, it would be incredible if there were no provisions to explicitly forbid this kind of share from being used in this fashion.

walshemj2• 9 years ago

Ah so this is yet more locking out the ordinary Joe from this sort of investment and another way to screw over employee share holders.

eries29• 9 years ago

On the contrary, unlike most systems today, our rules are very favorable to both retail investors and employees. Anyone can register their shares for Long-Term voting, not just founders or big institutions.

eries29• 9 years ago

I liked your summary. We definitely think our setup is a more defensible governance solution than the typical founder/monarch for life.

Our rules also are carefully tailored to Do The Right Thing with shorts and other derivatives, but I can’t say much yet about how it works in detail

ringaroundthetx• 9 years ago

Unless this was launched by State Street or Vanguard how would anyone think this was a good idea or effective idea

More like Zero Liquidity Stock Exchange am I right?

walshemj2• 9 years ago

Or how the SEC allowed it

eries29• 9 years ago

The way the LTSE is designed allows it to participate in the same level of liquidity as conventional exchanges. There’s absolutely no difference from that POV

yalogin• 9 years ago

So if I understands correctly it’s intended to be a place where one can only go long on shares? Why would some company list here? Why would investors use it? That post was 2 paragraphs long and explains nothing.

thaumasiotes• 9 years ago

it’s intended to be a place where one can only go long on shares? Why would some company list here?

The obvious theory would be "they think they're a scam, and they don't want other people to realize that".

thrill• 9 years ago

I find some irony in that the frequently stated mission of the LTSE is, well, long term thinking, and yet the most recent Dec 7 medium post is about how excited they are to be accelerating their launch by pairing with an existent platform.

eries29• 9 years ago

It’s a paradox of startup life that the best way to sustain a long-Term vision is via rapid experimentation. Amazon is a great example of this, if you want to see it at scale, but there are many others. So I don’t see any irony here.

linkmotif• 9 years ago

How are these two things at all at odds with each other?

How is a post that talks about a seven year project not long term enough for you?

jgh• 9 years ago

Their about page is kinda weird. Unless there are a bunch of people not listed, it seems like there are only 3 people in the company who aren't a manager of some kind. For example there are 2 software engineers, a software engineering manager, a VP of technical operations, and a vp of engineering.

eries29• 9 years ago

Indeed. We don’t list most of or employees to protect their privacy. This is a pretty controversial project.

juanmirocks• 9 years ago

Very much looking forward to this idea coming into fruition. The post doesn’t give much information though. I‘d so wished, that a service like Robinhood and this too were available in Europe.

eries29• 9 years ago

Thanks

whack• 9 years ago

"Tenured shareholder voting power, meaning that a shareholder’s votes would be proportionately weighted by the length of time the shares have been held"

I wonder if we're going to see the rise of holding companies just to get around this rule. "Our holding company owns shares in XYZ, and will never sell those shares ever. Instead of buying/selling XYZ directly, you can instead buy/sell shares in our holding company. We will confer voting power in XYZ, proportional to how many shares of our holding company you own, regardless of how long you've held them."

I suppose one way to prevent this loophole is to grant voting power only to individuals, and not entities, but that would screw over index-funds, mutual-funds, foundations, non-profit-endowments etc etc.

nickparker2• 9 years ago

Nowhere near a lawyer here, but:

Would it be possible to contractually obligate any entities holding these stocks to also adopt tenured shareholder voting power?

Doing so would certainly improve the loophole situation, though I suspect it doesn't fix it entirely... Things probably get weird when you nest tenure effects.

qubex9• 9 years ago

I don’t see how that could work generally. Sure, it might be possible to enforce by-laws when making a sale/purchase (but extra obligations would inevitably drive down the sale price), but what of situations in which collateral shares are foreclosed upon, they are inherited, or other non-voluntary transfers of ownership? What if one day they ended up even temporarily in the hands of a government (for example, the Italian government’s property and assets cannot by law by encumbered in such a manner). What then? The chain is broken.

erikpukinskis2• 9 years ago

Doesn’t that still achieve the goal? No one is dumping the shares on news cycles.

pavel_lishin3• 9 years ago

The shares of holding companies would end up being the ones getting dumped.

jerf• 9 years ago

It seems like sufficiently clever lawyering ought to be able to prevent this, by tying the voting power to the entity that has the right to obtain the benefits of the stock price going up. At the very least this prevents the LLC hack.

eries29• 9 years ago

Nice to see someone thinking past the obvious loopholes. Our rules are a little more complicated than this, but you’re on the right track.

runeks• 9 years ago

[…] by tying the voting power to the entity that has the right to obtain the benefits of the stock price going up.

If I own shares in a holding company, which owns shares in an LTSE-company, don’t I have this right? If not me, who else?

lozenge• 9 years ago

In this case, I would have voting power for each of the thousands of companies in my pension plan.

nostrademons• 9 years ago

It makes me wonder if we'll see a Gresham's Law effect as well. A financial services company creates a new fund ABC which exists solely to hold shares of LTSE company XYZ. Its fundamentals should be completely coupled with XYZ, except for the voting rights and restrictions on trading. ABC is then listed as an ETF, with no restrictions on trading, and weights votes on XYZ based on number of shares with no tenure restriction. Because new holders of ABC have more rights than holders of XYZ, all new trading would occur in ABC.

The LTSE serves its purpose of incentivizing long-term ownership of XYZ, but it's a pyrrhic victory: whenever an XYZ shareholder wants liquidity, rather than sell, they could borrow shares of ABC with their XYZ shares held as collateral (by definition, they have the same fundamentals) and short-sell the ABC. Or if they truly want out, they sell their XYZ shares to ABC (no other buyer would be interested, if they can get the same ownership claim with fewer restrictions by buying ABC directly), which then issues new shares on the normal public markets to maintain the peg. Either way, owners of XYZ are still incentivized to care about the short-term price movements of XYZ (through its ABC proxy) on the public markets, because they can achieve liquidity by proxy.

phkahler3• 9 years ago

Your concern is only the tip of the iceberg. Any set of rules will be gamed. The only way I can think of (and it can probably be gamed) that would really put the long term into the executives mind is to have most of their compensation based on the value of the company a few years after they're done. But given the existence of options and shorting stocks and any number of ways to mitigate risk or make money that don't depend on positive outcome for the average investor, anything can be gamed.

With a shift to long term outcomes, one could do any number of things that are short term bad to line their pockets and claim the benefit is further down the road. The problem isn't really about short or long term goals - does Amazon or Tesla give a rats ass about profit next quarter? No, and IMHO one of those is a solid company while both have high valuations.

In some cases I think the answer is to strip investors of control. They are the ones allegedly pushing short term profits at the expense of the long term. But what is ownership if not a form of control?

Another thought I keep coming back to is dividends. A proper investment gives returns without having to sell your stake. Lets provide incentives for companies to share profit rather than pump stock prices, then everyone can get excited about the right things. This has its downside too in cases where growth may require reinvestment. Perhaps forcing dividend payments for all cash equivalents above some threshold? I dunno, there are a lot of ways to approach this and none of them are good for all companies.

IgorPartola• 9 years ago

I read somewhere about splitting control and ownership, but really you can’t. You either own a thing or you don’t. Time shares notwithstanding.

I do like dividend paying stock, but is that not a form of short term thinking? “May me my dividend this quarter, I don’t care when happens next year!”

roenxi• 9 years ago

In some cases I think the answer is to strip investors of control. They are the ones allegedly pushing short term profits at the expense of the long term.

Hopefully this was a very fleeting thought; when it comes to ideas about changing corporate structure you couldn't really come up with a worse one. It is a complete violation of the skin-in-the-game principle that has so successfully propelled capitalist society for more than 200 years.

If management aren't accountable to the wishes of people who have proven they can preserve or grow piles of money, there will be economic waste on a colossal scale compared to what we have now. Corporate management would be overwhelmed by fast talking con men.

Turn your attention instead to the forces that are making short term decisions the better ones. I'm no expert, but if short-term thinking has been going on for a long-term time then something is more fundamentally wrong than "gee, people with money must just be stupid!". People don't seem to like accepting quite how rationally intelligent markets are - the only thing markets have been shown not to do well is make sacrifices for moral reasons.

clairity• 9 years ago

Another thought I keep coming back to is dividends. A proper investment gives returns without having to sell your stake. Lets provide incentives for companies to share profit rather than pump stock prices, then everyone can get excited about the right things.

the psychology behind dividends is not on your side here. dividends are viewed by knowledgeable investors as a company admitting they have run out of good ideas to generate even more profit (aka growth). while dividends can be issued for a host of reasons, the common case is that dividends are issued when reinvestment in the company would generate diminishing returns. typically returns diminish when the company is no longer in a high growth phase, so the company gives the money back to investors to find better returns elsewhere for their risk.

this is why dividends are largely issued by larger, mature companies rather than growing ones. you just won't get most companies to issue dividends because it hurts their growth potential.

you have to change structural incentives to make people care about the long-term. one fundamental reason for this is that many people on wall street want to get rich quick, so there's enormous pressure for companies to be that vehicle, in exchange for which, the companies get rich quick too via their stock price (underlying fundamentals be damned).

why do people care so much to get rich quick? (rhetorical question) i personally don't respect such people, but apparently plenty enough do that my opinion simply doesn't matter as they seem to get the prestige and power they seek. if we all genuinely respected ingenuity, determination, and the ability to make things (not shuffle money around), we wouldn't use income & wealth as a proxy for those things and we wouldn't have perverse incentives that make companies seek short-term pops (high-minded, i know).

ianai• 9 years ago

What’s stopping long term investing being based on bonds? Ie the company sells bonds today for a $x pay out 10 years from now. Maybe it’s secured by a t-bill. Maybe the investor pays the cost for a 10 year tbill plus some. The company agrees to pay out some operational profit from the 10 th year or the return on the tbill. (Back of envelop logic here, ymwv) Maybe make it more of a pool/fractional banking type arrangement. A clearing house company sells bonds of a company backed by some portion of tbills (10 year bonds for 10 year tbills, etc). At the end of the period either people are paid out the tbills (only if the company went belly up) or a percent of their operating profit from that period.

markvdb• 9 years ago

Individual beneficial ownership as a criterium would widen your definition only somewhat. Plus you could give corporate shareholders non-voting shares I guess.

salty_biscuits• 9 years ago

What does a bike race have to do with it :)

felipeko• 9 years ago

Having more control would be valuable, and thus, more expensive. You will have to pay more in order to have more control, while you could pay less and earn the same.

It appears to me that it will, at least, make more expensive to think short term than long term, and that is the intended incentive of this stock exchange (as you could as well just buy more shares if you want more control).

csdreamer7• 9 years ago

I suppose one way to prevent this loophole is to grant voting power only to individuals, and not entities, but that would screw over index-funds, mutual-funds, foundations, non-profit-endowments etc etc.

Why not just block organizations that sell such a service as above be denied the benefit from increasing voting shares? Why ban all organizations instead of the ones trying to game it?

uiri• 9 years ago

Grant voting power only to individuals or to entities which follow the same voting power rules. This recursively enforces the rule.

A holding company like that would confer at most the same voting power as trading XYZ directly, but most likely strictly less voting power in XYZ.

A mutual fund which has only held XYZ for a short time would confer little voting power even to shareholders which have held it the longest.

wodenokoto• 9 years ago

You don't buy shares in the holding company, you'll buy shares in the shares.

tomatocracy• 9 years ago

Probably not for the general case. Voting rights are almost irrelevant to the average shareholder in public equity (including institutional holders unless they have large blocks). If they truly disagree with management, they'll just sell instead and put their money elsewhere. It's both less work and less risky than trying to force change - management can ultimately simply say "feel free to vote us out if you disagree" knowing that that is extremely unlikely to ever happen because it's so incredibly rare that a large enough group of shareholders in a listed company feel strongly enough to go down that route.

Large institutional blocks will probably be structured this way because the cost of doing so is low so "why wouldn't you?". In fact there are companies out there where this is already the case as they have similar rules in their constitutional documents and the large blocks do indeed work that way.

There are actually many examples of companies where some shareholders are disenfranchised in one way or another (e.g. family ownership with special rights, minority listings, this type of scheme, 51% "Russian Dolls" holding companies, etc etc). Generally where I've seen these type of rules they serve to strengthen management against shareholders and entrenches the agency conflict to the detriment of the company's value over the long term.

Realistically, in a more typical listed company with a diverse shareholder base the only realistic option shareholders have is to force management out. The irony is that this rule acts to stop this from happening or slow it down and insulate management from that threat (further entrenching the agency conflict between shareholders and management).

Investors who are in the business of more actively engaging with management and strategy tend to do so away from public markets because it's not really that great a strategy unless you can gain significant control in terms of %age stake - so Private Equity, VC, family ownership, etc mostly tend not to be things that happen in publicly listed companies.

dude01• 9 years ago

Well, I like the general idea, but am not sure about their implementation. Obviously have to wait for details, like SPV vs. real-person ownership.

But I wonder about their approach -- couldn't any public corporation, any time it wants, put long-term goals into its "constitution" or whatever you want to call corporate goals? Though perhaps their exchange will eventually put pressure on corporations to do so.

choxi• 9 years ago

Can someone tell me if this idea is crazy?

I've noticed that fundraising and liquidity are common problems for startup founders, and it seems to me that the public stock market could solve many of those problems. What if all startups were publicly traded entities right after incorporation?

Some of the benefits you would gain as a founder:

- A larger pool of potential investors. You would have access to investment from anyone instead of just accredited investors. For example, it would be interesting if early adopters could invest in startups that they support just as easily as they can buy stock in Apple because they love Apple products.

- Liquidity. You could buy and sell your shares of the company at any point. If you're a startup founder investing 100% of your time and capital into a business, it makes sense for you to diversify your assets at some point and not put all of your eggs into one basket.

- Better incentives. If your company was publicly traded from Day 1, you would still be incentivized to raise the value of your business because you still own shares. Better yet, now you don't have to worry about building a billion dollar business to satisfy the economics of your investors, you can sell shares of your $20M business so you're not worrying about your exit strategy all the time.

There's been a lot of activity in this space with the new crowdfunding bill, the SEC loosening up requirements for small companies, and things like ICOs. Has anyone else ever considered doing this with their startups? Just curious to hear what others think.

skilgarriff• 9 years ago

This is a real scenario where I think cryptos will change the ecosystem in the next few years. There is a LOT to figure out in this space (ICO Madness), but I believe once the dust settles, this is a real problem that could be solved.

WhoIsSatoshi• 9 years ago

agreed - what we're seeing is essentially a peer distributed stock market or "blockchain-like" linking of salaries to perf and voting to stock (proof of stake). I view it as a good first step, but I am expecting an ethereum-based platform to one-up this idea in a few years.

filleokus• 9 years ago

I have been thinking about the same thing, and I agree with the benefits you have stated.

In my part of the world (Sweden) we have two market places for quite small companies, Nasdaq First North and Akitetorget.

Akitetorget is somewhat strange, I think it is formally not regulated as a stock market, and that the companies listed there does not need to be "publicly listed". Like the grey markets for non-public companies I've read about, but perhaps less grey.

First North however is a "real" stock market that works the same way as its big brother Nasdaq OMX, but with lesser demands and cheeper entry.

Still, even First North is probably to expensive to list a startup right at incorporation.

I think the biggest hurdle to overcome is to balance the requirements of public disclosure and quarterly reports etc. with cost of listing. If almost no requirements would be set, it would be very cheap to list but also very hard to safely trade on the exchange (alá ICO's). On the other hand, with too stringent requirements it would be too expensive to list as an early stage startup.

toast02• 9 years ago

There is a market for this, the OTC or pink sheets. At initial listing and if the company itself or its insiders or affiliates are selling, there are required financial disclosures.

I think there's resistance to public trading however because it generally requires more structured accounting (GAAP vs cash accounting), and invites external scrutiny and pressure.

chii4• 9 years ago

requires more structured accounting (GAAP vs cash accounting), and invites external scrutiny and pressure.

aren't all these good things? Prevents both scamming, as well as ensuring that the founders take a careful look at their business, and that it isn't purely fueled by stock/investment, but is generating profit?

eries29• 9 years ago

Hey everyone, Eric Ries here. I’m the founder and CEO of the LTSE (and also the Lean Startup guy). Happy to see the discussion here and will try and answer a few questions. Unfortunately, a lot of the details of how the LTSE works are subject to regulatory approval, so I can’t share too much while we are working out the details with them. Still, I’ll do my best to answer.

Thanks for the comments and happy new year

startupdiscuss• 9 years ago

My main question is: what is the LTSE?

Is it a stock market? Will I be able to buy and sell shares on eTrade or another 3rd party platform?

Who will list shares on it?

If I had to guess, I would guess it is just like the NYSE except you can only buy and sell shares every 5 years or something.

eries29• 9 years ago

LTSE = The Long-Term Stock Exchange

Yes, it is in the same regulatory category as NYSE or NASDAQ. Yes it allows you to buy shares of listed companies in all the ordinary ways, including retail brokers.

The best of the next generation of companies :)

Not a bad guess, but not quite right either. Our detailed rules (all 900 pages of legalese!) will be public soon enough.

sixQuarks• 9 years ago

Eric, this is a very interesting project, I'd like to see this succeed. Be aware that Hacker News has a very negative bent when it comes to new ventures like this. You're going to get a lot of criticism about how this will never work, etc, etc.

Go read the Show HN of DropBox to see what I mean. Good luck!

eries29• 9 years ago

Ha, no kidding! You should see what they say about LS.

I don’t mind, part of being in public with new ideas is putting up with a lot of snark and cynicism. It’s a bug in the human reward system - skeptics are right 99% of the time.

lrmunoz• 9 years ago

Hi Eric, are you using the Lean Startup methodology to develop this? It seems to me you're trying to solve a very big problem directly, and there is less room for iteration... Would you say that when the LTSE opens in 2018 it is an MVP and iteration will start?

eries29• 9 years ago

Yes and yes

qubex9• 9 years ago

Do your rules correctly handle ownerships that cannot be modelled as acyclical directed graphs (ACGs) (i.e. ownership hierarchies with loops in them)?

eries29• 9 years ago

Our rules follow existing SEC rules for beneficial ownership; they tend not to take a very CS-centric view of things :)

bsaul• 9 years ago

I had a similar idea (x) a few years ago, but leading this kind of project is way beyond my capabilities. I'm thrilled to see people try to accomplish this, and you seem to have a fantastic team, congrats.

(x) My first idea was to create a market where you couldn't resell a stock until some (long) time has passed. Pretty much the exact opposite of algorithmic trading trying to pass orders at light speed. Another was to forbid any kind of option (not stock options, options) or any other indirect way of speculating over a stock. The idea was to try to ensure the stock owners that someone wouldn't be able to crash the stock of a company he doesn't have any interest in, just for profit.

All of those considerations stemmed from the 2008 crash of course, and all the irrational behaviors that followed. But i still think there should be a way to provide a "safer" place for business owners to attract new shareholders.

eries29• 9 years ago

Nice

yellow_postit2• 9 years ago

Shorting a stock still does show interest though. That you believe the stock is over valued.

derriz2• 9 years ago

Most of the value of the US equity market is held indirectly - through ETFs, mutual funds, pension funds, etc. This suggests that direct ownership is not particularly valued among the vast majority of investors. Have you calculated the size of the market for direct investors who value voting rights? And their patterns of trading?

eries29• 9 years ago

Our rules are not limited to direct owners, as your question assumes. Many institutional investors are fans too

syedkarim• 9 years ago

Is LTSE designed to allow companies go public more quickly/earlier stage, so that retail investors can invest at A/B-round valuations?

eries29• 9 years ago

We hope in time that better rules will help alleviate the liquidity crisis that is freezing up SV. That said, I don’t think A/B round companies should generally be public

rampage101• 9 years ago

Hi Eric, the idea sounds fascinating.

When will it be open for individual investors to make a deposit? Is there a list of companies which will be chosen for initial listing?

eries29• 9 years ago

Not yet- we have to secure SEC approval before any of that can happen.

arekkas• 9 years ago

How will you add liquidity to LTSE, as (from the little details given) it seems like the market will be moving very sluggish because trading volume is "conceptually" limited.

eries29• 9 years ago

The LTSE is part of what’s called the National Market System, so our stocks still trade on other exchanges. We don’t limit the ability of traders to access the stock.

known• 9 years ago

To counter HFT?

ChuckMcM2• 9 years ago

I like it conceptually but I'm not sure how different it is from schemes where the founders have 10x voting rights to big chunks of stock (like Facebook and Google). These companies, from a voting perspective, can't get bullied by activist share holders but it doesn't help.

The pressure on stock price and its desirability comes in part from using it as compensation (it goes up and your employees with ISOs stick around, it goes down and that 'stock offer' has no drawing power) and using stock to buy other companies (virtual capital). These pressures exist outside the function of voting and are just as prone to creating 'short term thinking' effects. After all gaming the stock price is a universal executive sport and to get rid of that, you have to get rid of the association between high stock price and tangible short term benefit.

eries29• 9 years ago

That’s a good observation. Today’s Dual class systems only protect the founders from a specific kind of short-term pressure. But there are still thousands of employees overreacting to volatility and jumping at shadows. Our rules are designed to address the full “user experience” of being an employee in a public company, with the goal of aligning the whole enterprise towards more Long-Term goals.

chii4• 9 years ago

employees should not be compensated with stock. Stock based compensation creates incentives for such employees to increase just the stock price without increasing the underlying value generation mechanism. Paying in stock also means you're forcing the employee to 'invest'. While it's true that paying with stock is a form of hand-cuffing to make sure the employee's incentive aligns with the company, i feel it's just too easy to 'game' this stock metric.

hendzen3• 9 years ago

Another question - how does the exchange make money if the rules seemingly discourage trading?

eries29• 9 years ago

Even incumbent Exchanges make money a lot of other ways today

hendzen3• 9 years ago

Trading fees? Market data costs? Colocation fees? All things that suffer if you discourage active trading.

marcrosoft• 9 years ago

This is terrible.

Through brand new listing standards, software tools, and advocacy, we’re reinventing the public company experience with novel approaches to executive compensation, shareholder voting, disclosure practices, board and stakeholder policies, and community governance.

None of this reduces short term trading. Even if it did, reducing short term trading would make for a less efficient market and prolong bubbles.

eries29• 9 years ago

Our goal is not to reduce trading

qubex9• 9 years ago

Most people seem to be concerned about ”gaming the rules” but are positing scenarios that can be modelled as acyclical directed graphs (ADG). I’m wondering if who framed the rules even thought of general directed graphs with potential cycles (company A owns shares of company B that owns shares of company C that owns shares of companies B and A). It would seem that most manners of computing seniority would fail in such situations because of the lack of unique, non-ambiguous ancestry (but I might be wrong).

kharms• 9 years ago

Why not just add friction to selling stocks soon after purchase, perhaps a fee % that shrinks for X years. I feel that be simpler to implement and would lead to a healthier market long-term.

The weighted votes method seems like it would have a more negative effect on liquidity and would disproportionately reward large institutional investors that can afford to stick around regardless of the financial outlook of the company, just to hedge their bets.

Another problem I see is that weighted voting would make older shares more valuable. By purchasing old shares you reduce the number of votes it would take to do anything. This is sort of similar to having a continuous rather than discreet set of share classes. What's interesting about this is that the vast majority of non-institutional investors never vote on anything. This means that, depending on the weighting function, individuals would actually be incentivized to sell their old stock and buy young stock. This would result in consolidation of more voting power in the hands of institutional investors and founders.

The biggest benefit I see of the weighted voting method against other alternatives is a bitcoin-like FOMO buy-in in the beginning.

WoodenChair• 9 years ago

Isn’t that the same as how the capital gains tax currently works? The rate of tax you pay on a winning stock goes down over time until you hit the long term rate at a year.

brucephillips• 9 years ago

No, there's just a single discontinuous tax discount at 1 year.

munchor• 9 years ago

I am pretty sure this is a per-country setting too. I know the US has the one you referred to but other countries might have different taxation laws.

crazygringo• 9 years ago

The LTSE is designed to remove the short-term pressures that plague today’s public markets and reorient companies and investors around long-term thinking.

While it's certainly a popular belief... from my understanding it's not at all proven, or even obvious, that stock markets encourage short-term thinking over long-term.

Indeed, theory would suggest the contrary: the value of a stock is the discounted entire future cash flow, which means the stock market should be focused on the long-term more than anybody else.

While managers, on the other hand, may only be around for a few years, and one could argue they have every incentive to pump the price of the stock as high as it can go in the short term, to maximize the value of their options -- to the detriment of long-term value.

Anecdotes are easy to find on both sides. But ask yourself which is more likely -- that investors are dumb and managers are smart and investors should just trust managers to do the right thing? Or that investors are smart and need to hold managers accountable because it's the investors' own money at stake, while managers are smart too but always want a longer leash to do their own thing regardless of whether it's good for the company as a whole (e.g. spend more resources on cool side projects)?

E.g. see https://www.ft.com/content/23fd921e-3b75-11e5-bbd1-b37bc06f5...

ChuckMcM2• 9 years ago

That's an excellent point. When CEOs are measured by, and compensated with, stock (and stock price), their own judgement runs counter to long range thinking. After all if they can double their net worth with a couple of short term tricks and move on, then they will be much more inclined to drive the company that way.

rsync• 9 years ago

"Anecdotes are easy to find on both sides. But ask yourself which is more likely -- that investors are dumb and managers are smart and investors should just trust managers to do the right thing? Or that investors are smart and need to hold managers accountable because it's the investors' own money at stake, while managers are smart too but always want a longer leash to do their own thing regardless of whether it's good for the company as a whole (e.g. spend more resources on cool side projects)?"

Given that most equity investors no longer make investment decisions and instead blindly buy indexes, there is an enormous opportunity for managers to make decisions that benefit them to the detriment of the investors.

WalterBright13• 9 years ago

If that is true, why do S&P500 index values continue to rise, decade after decade?

monkeydust• 9 years ago

Will the exchange support debt instruments?

eries29• 9 years ago

Unlikely

JepZ• 9 years ago

I hope they have a long breath.

Actually, I expect them to give birth to a few amazing unicorns (not value wise but in terms of innovation), but at the same time it will take some time before there will be any visible results.

WalterBright13• 9 years ago

"short-term pressures were driving their decision-making, often at the sacrifice of the long-term potential of the business."

This is a popular opinion, but I find it difficult to believe. It relies on the notion that stockholders are fools and unable to recognize when a company destroys its long term prospects for short term gain.

The trouble is, once the short term gain is there, who are the short termers going to sell to? A bunch of suckers?

And Wall Street richly rewards companies for long term behavior - there's no other explanation for Amazon's high P/E.

Lastly, the stock market returns for the last 50 years are excellent. If the corporations were all sacrificing long term for the short term, how has such sustained growth been possible?

robbiep3• 9 years ago

There is absolutely no doubt that short term thinking is critical in the modern public company, and certainly examples of detrimental effects of it: at a simplistic level, when executive remuneration and bonuses depend on share prices with quarterly reviews, executive teams can (not do, this is not an absolutist position) focus on short term measures to boost their numbers - maybe they invest less in R&D, maybe they cut training budgets, maybe they fail to invest in long term growth options.

To your other point re Amazon (and really a large number of tech companies) - the multiples we see in these areas are Abberations that are hard to find historical economic rationalisations for. Take Tesla’s PE multiple, for example. At least Bezos laid out to everyone in his first shareholder letter that amazon was going to reinvest everything for pretty much forever. The bottom line: markets don’t always work as efficiently as we believe, and human psychology is the cause

WalterBright13• 9 years ago

focus on short term measures to boost their numbers

Again, this relies on fooling the investors who bid up the stock price based on that. How long can a company continue to fool the investors?

I had a CEO once tell me how he had manipulated the accounts for short term gains "because that's what Wall Street wants." But the stock tanked. The only one fooled was the CEO. The company has since disappeared.

The S&P500 is made up of companies that have been around for a while. How long do you think a company is going to last, if quarter after quarter they eat their seed corn? How do you explain the growth of the S&P500, decade after decade after decade, if the stock market is plagued with short term-itis?

WalterBright13• 9 years ago

By the way, if you know of specific companies that are sacrificing long term for short term stock prices, you can make a ton of money by shorting their stock.

SomeCallMeTim• 9 years ago

I have experienced short-term thinking, driven by stock market expectations, very directly.

Working on a game, we had a build ready two weeks before the end of a quarter, but we weren't quite done. We had just a few minor tweaks that needed just two more weeks to complete, and we in fact delivered a complete game two weeks later...that was ignored, because it was more important to make their quarterly goal than to release a better product.

Turns out there were several games being developed that quarter, and ours was the only one to make it even close to under the deadline. But because they were doing quarterly reports, they were under tremendous pressure to release something, and so an inferior product was released.

Oh, and this was the era of physical cartridges. No updates possible. We put in a ton of extra work to make it perfect and they didn't care.

The international versions were shipped later and included the improved changes. If anyone is interested in seeing the difference, you can probably find the ROMs and a Game Boy Advance emulator: Check out the US release of "Tetris Worlds" and any of the international releases (all include English, but the three different international releases each included other languages as well).

WalterBright13• 9 years ago

We put in a ton of extra work to make it perfect and they didn't care.

The question is whether the game would have made more money for the company if it was perfect and shipped later. It is not necessarily true that making a product better and delaying shipping is long term better for the company.

bsbechtel• 9 years ago

How did those actions affect sales of the game, the short term stock price, and long term prospects of the company?

BurningFrog• 9 years ago

This sounds more like a story about management trying to keep their jobs rather than about the stock market.

yellow_postit2• 9 years ago

"no one will remember if the game is late, only if it's great" (seen this attributed to a few different folks)

But that also ignores the realities of deadlines, contracts, and that sometimes "done" is more important than "perfect"

I'm just not totally bought into the idea that at large analysts and large investors can't recognize a short term for long term tradeoff.

returnInfinity• 9 years ago

From my personal experience I have seen that middle and senior managers make short-term decisions that favor bonuses, rapid growth in their careers that may or may not benefit the company in the long term. As an example the directors and product managers while trying to optimize costs to maximize profits completely lost track of the customer expectations over a decade and the products the company made got disrupted.

sytelus2• 9 years ago

This is not popular opinion, it's exactly the truth. There is enormous pressure on CEOs to meet analyst expectations of growth each quater and not meeting them would immediately mean punishment in terms of sell out. This usually translates to continuously cutting costs and eliminating investments on long term bets. Most boards are heavily populated with representatives of investors and fund managers. They make sure that CEO gets enormously rewarded if growth expectations are met or otherwise gets booted out. They also direct hiring of top execs like COOs, CFOs and prefer the ones who are huge cost cutters - specifically the ones who will go with a stick and shutdown any project which didn't had direct impact on business in near term. They are not fools, they are greedy. None of these "activist" investors are long term people. They specialize in forcing buybacks, unnecessary acquisitions, massive layoffs and other "cost cutting" that will result in stock pop so they can cash out and move on to next vulnerable cow. There is reason lots of companies are sitting on massive cash hoards and unable to utilize it because that would translate to increased capex and tank their quarters. Amazon and Oracle are two companies which have battled through this and have huge scars to prove it. There had been a decade when no one was interested in Amazon stock because it used to take deep dives almost every other quarters. Bezo didn't cared much about his massively fluctuating net worth and kept majority votes but other CEOs are not that gutsy.

WalterBright13• 9 years ago

This is not popular opinion, it's exactly the truth.

Then which stocks are you sure are doing this, and are you shorting them?

There had been a decade when no one was interested in Amazon stock

This is simply not true. AMZN has been a solid performer since its IPO. I should know, I'm a happy AMZN long term investor.

that will result in stock pop so they can cash out

That implies they must find a lot of suckers to sell to. Stock prices are usually driven by analysts who spend their days analyzing companies to predict future performance. Good luck fooling them all.

vadimberman4• 9 years ago

This is a popular opinion, but I find it difficult to believe. It relies on the notion that stockholders are fools and unable to recognize when a company destroys its long term prospects for short term gain.

Not necessarily "fools". "Not experts" and "easy to influence" would be like it. Very much the trouble with the modern democracy: incompetents elect those who scream the loudest and say what they want to hear.

Like many others here, I experienced the short-term thinking firsthand. Reckless and pointless acquisitions and hiring spree to prop up the KPIs and scream to the entire world, "look how great we're doing!!!" is just one example.

The trouble is, once the short term gain is there, who are the short termers going to sell to? A bunch of suckers?

Absolutely. The greater fool, sadly, is the foundation of much of the modern global economy.

Look at any bubble over the last 50 years.

WalterBright13• 9 years ago

I experienced the short-term thinking firsthand

I have too. The company stock tanked and the company disappeared. There's a word for short term companies - "bankrupt". Investors as group are simply not that stupid.

x1798DE• 9 years ago

I more or less agree with this point, but one possibility is that the companies that currently exist are the ones that can survive long term while turning a profit every quarter (or another "number maximizing" strategy), while what is unseen is an entire class of "long term companies" that focus on things like research into "long tail" prospects.

I think from first principles (e.g. just iterating backwards from the first quarter where short-termism has led to long term failures), there's not necessarily a reason to think that this is likely, but I'm not sure it's ruled out by your evidence.

untangle• 9 years ago

I applaud efforts to improve corporate governance and rationalize public market function. But I believe that this initiative to "...realign investors and companies around long-term value creation (LTVC)..." is a suboptimal approach.

First, who in the game really favors LTVC? As a generalization, I would say passive investors and/or those seeking income. For these parties, guaranteed dividends might be a more effective alignment tool than titration of voting power. The dividends would also provide more incentive for them to invest.

Second, the folks who actually run the companies – CEOs and Boards – often favor the current setup. Short term metrics mean near term personal wealth. In a world where CEO tenure can be measured in quarters, why wouldn't I want to take money off the table ASAP? And lots of it. I would offer that greed (big bonuses) overcomes fear (shareholder votes) for these players. Thus, the more powerful lever is to reduce (alter) the incentives, not dilute the fear.

So perhaps a market that limits both retained earnings and executive compensation would seem a better mechanism for alignment around LTVC.

roguecoder2• 9 years ago

There's also two other groups here: employees are very likely to value long-term value creation, since it would provide job security, an incentive to invest in employees, and a better chance of bonuses and raises. Second, communities where these companies are located: handing out tax incentives and cheap loans make more sense if the company isn't going to leave the community high and dry in a couple years. The advantages of long-term value creation aren't just fear-oriented: it's possible such a company will be able to hire people and rent office space more cheaply because it has that label.

If that ends up being the case, boards could easily start looking for CEOs willing to make the commitment to qualifying as a long-term company.

hago1234• 9 years ago

The "blind" focus on quarterly reports is real.

It had me wonder what the opposite would be...

Imagine we forged a formula for 1000+ year projects. They would require more money periodically and the availability of new funds would have a strong influance on the value of previous cash injections. One could buy the "failing" project cheap then simply do the new cash injection yourself OR in case of success one could obtain the shares for less than their value.

We have so many papper driven games like this already. I see no reason why this one wouldnt work.

The fun questuon to ask...

What could we build that would take 1000 years?

vadimberman4• 9 years ago

What could we build that would take 1000 years?

A great what-if. While not exactly the same, I think you could look at the publicly funded projects like the Euro-projects, NASA, or the Soviet space program that still yield results.

Now imagine the big public companies doing the same.

tbak• 9 years ago

You might be interested in the wonderful book series "The Three-Body Problem" by Liu Cixin. It explores (among countless other things) how huge expensive projects that last multiple generations could be implemented.

eries29• 9 years ago

This book is wonderful even apart from its interest in Long-Term thinking

twobyfour3• 9 years ago

A great place to begin to explore would be medieval European cathedrals, many of which took 500 years or longer - dozens of generations - to complete.

vadimberman4• 9 years ago

An incredibly important initiative, although I'm wondering how it will catch up.

The current public trading framework has so many issues, it defeats the original purpose.

* amazing number of parasite intermediaries that create absolutely no value. Someone sells a day after they bought, how did it contribute to the economy or the company that tries to create the value?

* opacity required to keep the system "fair", and used to avoid responsibility

* populist decisions harmful in long-term because the management will be long gone after the effects emerge

and much more.

eries29• 9 years ago

I guess we’ll see. Thanks for the kind words

sytelus2• 9 years ago

TLDR;

Currently, an investor who owns one share for a month, or even a day, has the same voting power as someone who has owned a share for years. Mr. Ries wants what he calls “tourists” — short-term shareholders — to have less voting power than long-term shareholders, whom he calls “citizens of the republic.” Over time, shareholders of companies on the LTSE would gain more votes based on their length of ownership.

Mr. Ries also takes aim at compensation plans. He wants companies that list on his exchange to have stock vesting programs of at least five years and recommends 10 years, even for executives who leave the company.

This is from: https://www.nytimes.com/2017/09/18/business/dealbook/ipo-cha...

deepGem• 9 years ago

I was initially very skeptical of this idea and I still am. Like many threads have pointed below, long term strategy is super easy to game. Oh 'we haven't made any money this quarter because we are debating and finalizing our long term goals'. This could become the anathema of rapid iteration.

NVidia and FB are perfect examples of consistent performance Q over Q. That doesn't mean they don't have a long term vision. I'm sure there are many such companies that I haven't heard of.

Companies not going public has little or nothing to do with the focus on short term earnings. Companies are not going public because 1. There are alternative sources of cheap cash PE funds etc. 2. The cost of doing an IPO is incredibly high (in terms of time). 3. Associated processes Sarbanes-Ox etc are a pain to manage.

CEOs are willing to sacrifice some equity to avoid all these hassles and remain private.

roguecoder2• 9 years ago

How is that gaming long-term strategy? That sounds like not having a long-term strategy, which would be terrible under any philosophy. If anything it's easier to coast by now, when no one bothers asking if you've thought past next quarter.

Facebook is a very long-term company, with a consistent mission, moonshot projects and "wasteful" spending all over the place. It gets to do that, though, because it's already dual class and not subject to the whims of the market.

grwthckrmstr• 9 years ago

Can't comment on the "long-term" success of LTSE, but I LOVE the philosophy.

Optimising for long-term benefits could help our civilisation become aware, and actively take steps towards the oncoming ecological disaster (because capitalism says if we're destroying the Earth, the solution isn't to stop "growth" and save Earth... Find another Earth instead!)

eries29• 9 years ago

Thanks

joubert• 9 years ago

Is the intent to compete for listings against NYSE, LSE, SEHK, NASDAQ, etc.?

eries29• 9 years ago

Yes, although companies can dual list too

husamia• 9 years ago

when I saw the title I thought this would be a decentralized exchange since it seems to be a hot topic nowdays. I am still trying to find more information.

The Long-Term Stock Exchange Comes to Life

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