Long-Term Stock Exchange Seeks to Upend Short-Termism in the Markets
Investors seeking to shift the economy to a model of stakeholder capitalism may often feel limited by the tools at their disposal. Traditional stock exchanges, for example, often reward investors who prioritize short-term returns over long-term business resiliency and positive impacts. This narrow focus is consequential and feeds cycles of exploitation of the environment and marginalized people.
Seeking to upend this financial short-termism, a public market emerged in 2015: the Long-Term Stock Exchange. The Long-Term Stock Exchange is SEC-approved and SEC-regulated, just like the NYSE and Nasdaq. Companies that are listed on the exchange must commit to a set of long-term principles via their business policies. These principles include measuring impacts over years and decades rather than quarters and ensuring there are structures in place within the organization to facilitate long-term planning and value creation for a broader group of stakeholders.
“There are studies showing that many executives will literally choose something they know is not long-term value-creating when they won’t reach this quarter’s numbers,” said Michelle Greene, President Emeritus and Board Member of the Long-Term Stock Exchange. “And if you just take a step back and look, that’s crazy because that literally means they are destroying long-term value in favor of meaningless quarterly numbers. So our goal is really to flip that on its head.”
In a recent conversation I had with Greene as part of my research on purposeful businesses, Greene shared how the Long-Term Stock Exchange ensures long-termism is upheld by the companies that list on the exchange and by the investors who buy stocks off it.
Christopher Marquis: In your view, how has short-termism been bad for society and the planet and how has it affected our economy?
Michelle Greene: If you look closely, short-termism has impacted almost every part of our society. This idea that we want instant gratification. And we, as a society, have collectively failed the marshmallow test. When you look more specifically at the markets, what you see is this excessive quarterly cadence drives decision making that’s based on meeting quarterly numbers. That means underinvestment in innovation and underinvestment in workers and underinvestment in anything that’s long-term value creating.
There are studies showing that many executives will literally choose something they know is not long-term value creating when they won’t reach this quarter’s numbers. And if you just take a step back and look, that’s crazy because that literally means they are destroying long-term value in favor of meaningless quarterly numbers. So our goal is really to flip that on its head.
Every time that decision point comes, let’s have the metrics be something about that long-term value so that the incentive is, “Let’s choose that long-term value creating path. Even if it means the quarter doesn’t look quite as good.” And similarly on the innovation front, to innovate you need to fail. That’s what innovation requires. If you’re excessively focused on the short term, you’re not willing to kind of embrace those failures that help you learn and innovate for the long term. I think those are some of the ways that the markets have led to negative effects from short-termism, and I think there’s a lot that needs to happen. The Long-Term Stock Exchange is one brick in a big building of change that we need to make.
We hope that this can help to influence the behavior of public companies. We think companies have a big influence on society, but there are many other pieces where the excessive focus on the short term is driving bad results. I think there’s a lot of policy that needs to happen. Climate change is a great example. We are polluting today, and it’s our kids who will pay the price tomorrow, and we need to take a more long-term perspective immediately to fix that. There are lots of other examples as well, but I think there’s a lot of room for policy change, a lot of room for the financial system to change, and we see the Long-Term Stock Exchange as one piece of that puzzle.
Marquis: How do you ensure that companies are actually sticking to their long-term policy commitments and not just symbolically gesturing toward those principles?
Greene: That’s actually one of the reasons companies find the Long-Term Stock Exchange appealing. You have companies that are really committed to operating with a long-term, multi-stakeholder focus and doing that over a long period. This is a way for companies to actually commit themselves to doing that. Obviously there’s a lot of focus on this purposeful business movement right now — whether it’s the Business Roundtable letter or companies saying they’re going to be long-term focused or multi-stakeholder focused — and listing with the Long-Term Stock Exchange is a way to actually commit to what they say they’re going to do.
The company’s policies around long-termism have to be published and made public. We also, as the exchange, have a duty to make sure that they are in fact consistent with the principles. So they’re not just any policy on, for example, the environment. If their policy was, “We think climate change is fake, and we intend to pollute forever,” that’s a policy on the environment, but it’s not a policy that’s consistent with long-term principles. So there is a need for the policies to be consistent with the principles. There’s also an annual review for every company listed on the Long-Term Stock Exchange starting at the time they initially list. Every year, the company has to re-examine the policies and change them if they need adjustments.
We, as the regulator, actually see additional materials about how the company plans to implement these policies, so that it’s not just some wishful thought that they put out there into the universe. That is something that we help to ensure. And, of course, once they make these promises publicly to their stakeholders and put them out there, that’s something that they need to do and are expected to do, so it really is a more meaningful commitment to operate in a long-term, multi-stakeholder focused way.
Marquis: And what about the investors? How do you ensure that your market is attracting investors committed to this long-term approach?
Greene: Like all stock exchanges, we have members, but in terms of our market model, we have something called a “Very Simple Market” and that’s really the idea that we want there to be transparency and for things to be as straightforward as possible in terms of regulating the trades in our market. Initially, we really focused on the listing side, so we don’t have constraints on trading. But we do feel that the investors are an important piece of this picture, and actually we spent many years speaking with investors while developing our principles. We have a coalition of long-term focused investors primarily composed of large institutional investors and pension funds, who really have truly long term time horizons. And the idea is really to engage with those folks, so that they understand how this commitment to a set of long-term policies influences company behavior.
We also find that the long-term investors are looking for these signals of how companies intend to behave. It’s hard in today’s market for investors to really give companies credit if they’re saying they’re going to do something because they might change their mind next year. But when they list with the Long-Term Stock Exchange, it’s a long-term commitment to operate in a particular way. Investors have found that to be a valuable thing. The principles-based approach was founded, in large part, upon conversations with investors who felt that they really wanted to give companies the room to innovate and to take a long-term and multi-stakeholder approach in ways that made sense for them. And companies are doing some really creative things. We wanted to encourage that but, at the same time, enable investors to know who’s really doing it.
We do think there’s a large set of investors who are very well aligned with this. In addition, we see ESG and sustainability investing continuing to grow and to be a larger and larger portion of the fund dollars out there. Another element of the Long-Term Stock Exchange listing standards are that they aligned very well with those sorts of sustainability concerns. Providing additional information about topics that may be a particular interest to sustainability and ESG investors is another way we can help companies access that growing share of funds that are focused on and interested in that set of issues.