Wall Street has an image problem. Be it speculative excesses, weak governance or lack of ESG commitments, the traditional models of capitalism are being challenged. One area that has notably been shielded from this criticism is perhaps the most central and oldest component of Wall Street: the stock exchange. One company is trying to improve the stock exchange model for a new generation of investors. With a number of large names backing them and SEC approval, this company may very well be on its way. Let's talk about the LTSE.
In this Guide:
What is the Long Term Stock Exchange (LTSE)?
The LTSE is silicon valley’s attempt to disrupt the stock exchange. The new stock exchange is the 14th American stock exchange now that the SEC has given its approval.
The LTSE was conceived and founded by Eric Ries, who has notable fame in Silicon Valley as a successful serial entrepreneur and author of the popular book, The Lean Startup. Ries’ most notable startup was the 3D avatar chat service IMVU. After stepping down as CEO in 2008, Ries began advising startups. While doing so, he started blogging about the methodology he was developing with his startup clients; the blog soon became a cult favorite in Silicon Valley, eventually spawning his book.
Thanks to his reputation and his blogging and writing, Ries has the ears of many of the largest venture capital funds in the area.
The ideological seeds for the LTSE were planted in The Lean Startup — a general idea that spanned just two pages. Since then, Ries has slowly built an alliance of tech titans to support his plans for a West Coast competitor to Wall Street. Notable backers and supporters include LinkedIn founder Reid Hoffman, legendary venture capitalist Marc Andreessen and Peter Thiel’s Founders Fund.
What Issue Does the LTSE Want to Solve?
The principal issue LTSE wants to solve is the problem of short-term thinking, which traditional stock exchanges force onto most CEOs, clouding their judgment. CEOs work around the clock to please shorter-term investors on a quarter-to-quarter basis, which sometimes leads to situations where a CEO may sacrifice long-term security for short-term gains.
Ries understood that this is a two-way street, with both CEOs and investors to blame.
One of LTSE's core tenets is that each company listed must set its long-term objectives to shareholders ahead of time, in terms of years and decades. In order to convince shareholders to invest for the long term, companies are able to offer incentives, such as voting rights, that gain more weight the longer you are a shareholder. However, these incentives are not mandatory and are at the company’s discretion.
What Makes LTSE Different
In its attempt to tackle the issues that come with unbridled capitalism, every company that wants to list on the Long Term Stock Exchange must comply with a set of five principles and five policies, which every listed company must publish.
- Stakeholder Policy
- Long-term Strategy Policy
- Long-term Compensation Policy
- Long-term Board Policy
- Long-term Shareholder Policy
1. Stakeholder Policy
As highlighted earlier, the genesis of LTSE was the issue of CEOs being forced to make decisions that please the short-term favoritism of traditional stock exchanges. To combat this, companies listed on the LTSE must publish a long-term stakeholder policy.
- Within this policy, a company must highlight its most important stakeholders and how it plans to incentivize these stakeholders to support the business for the long term.
- In addition, the company must list its diversity policies, how it invests in its employees, and its impact on the environment and the local community.
- The idea is that companies looking to partner (or in some way become a stakeholder in the business) should be able to see exactly what the ideals of the company are and if they align ethically.
- It goes without saying that despite the growing trend in companies publishing ESG reports, there is no obligation on traditional stock exchanges to publish them. This makes LTSE the first exchange to do so.
2. Long-term Strategy Policy
To further build a long-term mindset between companies and their shareholders, each company on the LTSE must publish its long-term goals.
Within this document, the company must be explicit in what it considers long-term, with LTSE preferring horizons of years and decades. Within this long-term horizon, the company must lay out metrics for how it will measure success as well as its goals and missions.
This is a significant difference between traditional company filings. Generally, each company reports plans for the coming year/quarter, though these reports are often short and general unless a major event is on the horizon. It is also incredibly rare to see an annual report discuss something a decade in the future.
3. Long-term Compensation Policy
Continuing with the principle of transparency, companies listing on the LTSE must publish executive compensation packages ahead of time. Clearly, a response to the backlash during the great financial crisis, when companies received taxpayer-funded bailouts and executives enjoyed extensive compensation packages.
This policy document offers full transparency on the compensation structure, and the company must also link the compensation back to its long-term goals as previously discussed.
4. Long-term Board Policy
The business must outline which board member or board committee is responsible for what long-term goals, which are also published. The policy also lays out exactly what metrics the board will use to judge the success of these long-term goals, be it in business or ESG.
With this policy requirement, the LTSE aims to improve public company governance. Investors should be able to know who is responsible for each goal within the organization. On the company side, the board is much more accountable for its actions.
5. Long-term Shareholder Policy
Each company on the LTSE must also describe how it plans to interact with shareholders so that they feel they are part-owners of the business. While the requirements for this policy are intentionally vague, giving companies more free reign over implementation, the idea is clear: Convince shareholders to become long-term partners rather than speculators.
For example, a company might incentivize shareholders to take a long-term view of the company by granting them additional voting rights on a tiered system, based on how long they have held shares.
The Long Term Stock Exchange reserves the right to de-list any company that is not fulfilling all five of these policy mandates, a rule unique to the LTSE. The hope is that the threat of delisting will further incentivize companies to fulfill all the commitments that they lay out in these policies.
Further Reading: How to Invest in stocks
Will the LTSE Work?
The Long Term Stock Exchange officially launched in September 2020. Launching during a global pandemic was a risky move and LTSE may be paying the price as it does not yet have any companies on its exchange. Before Airbnb chose a direct listing, there was much speculation that it may be the inaugural member of the service, though plans eventually fell through. LTSE has claimed that it is in ongoing discussions with a number of companies to potentially list.
While part of the reason for the lack of listings may be the macroeconomic environment, that hasn’t stopped startups from going public the traditional route in record numbers.
The Voting Rights Issue
When the LTSE filed with the SEC for approval, the Council of Institutional Investors filed their own worries about the structure of the Long Term Stock Exchange. The Council claimed that LTSE’s preference for CEO’s managing long-term objectives would allow them to legally accrue majority voting rights, which would allow CEOs to not be beholden to regular shareholders.
The issue of voting rights that grow over time was also a concern. The Council feared a complex and opaque shareholder registry, which would be incredibly difficult for regulators to keep track of.
The worries laid out in the Council's filing may accurately reflect the feelings of most institutional investors, which drive the supply and demand of public companies. Public companies rely on these institutions to generate the volume necessary for a successful listing, meaning many companies may be thinking of this risk when choosing whether to list with the LTSE or not.
Lack of Support from Investment Banks
Other reasons for hesitation may be the lack of support from investment banks, which are the primary channel of IPOs on traditional markets. Their disinterest may be part of a larger issue: The business of stock exchanges is a de facto duopoly between ICE and CBOE.
- ICE (Intercontinental Exchange) owns 14 major international stock exchanges
- The CBOE (Chicago Board Options Exchange) essentially manages the world’s options markets.
These two companies control the lion’s share of money that moves around exchanges and obviously do not want the extra competition. As most major IPOs occur on an exchange owned by the ICE, the investment banks are incentivized to support where most of their business is done.
Take the example of the IEX, an exchange that launched in 2016 to counter the opaqueness of high-frequency trading and to allow traders more transparency than the traditional exchanges. IEX was started under the backdrop of large “flash crashes” and increased scrutiny over the high-frequency trading process. Yet today, IEX has given up on its listing business entirely, and its trading volume only accounts for 3% of US equities traded.
Clearly, breaking into the exchange business isn’t easy. But Eric Ries believes that as the ESG movement gains steam, the LTSE will be a natural home for companies to list. The fact that they are allowed to dual-list (that is, to have a listing on the LTSE and the Nasdaq, for example) is also meant to push companies to consider the option.
Further Reading: How to Get Started with ESG Investing
Is There a Future for the Long-Term Stock Exchange?
There isn’t much to see for investors with the LTSE as there have yet to be any listings. That said, ESG initiatives have gained an avalanche of support in 2020 and the LTSE could position itself perfectly to capture this opportunity.
Ries' idea is certainly commendable and, if it works, could usher in a new era for long-term shareholders. As of yet, however, it remains to be seen if LTSE can work at all.