The Long Term Stock Exchange — A New Foundation for our Civic Society?
“It’s tough to make predictions, especially about the future.”
This quote, often misattributed to Yogi Berra — a baseball player made famous for his various malapropisms — is a troubling truism in a world of unpredictability and an increasing prevalence of Black Swan events.
With a deluge of scary statistics from the media, this week has felt like the start of the apocalypse. With the largest wildfire in California’s history raging and more than 900,000 people killed by COVID-19 since the WHO made the coronavirus pandemic official six months ago, there is no shortage of bad news.
Amid such pessimism, let me offer a glimmer of hope: this week’s launch of the Long-Term Stock Exchange (LTSE).
A public market offering “… investment, experimentation and scaling that companies can use to find continuous success,” the LTSE “…supports companies that are built to last and investors who measure their horizons in decades and value companies accordingly.” In short, a public market that supports capital formation while sustaining long-term thinking.
Bravo, I say.
The brainchild of Eric Ries, the creator of the Lean Startup methodology and the man who made famous the term ‘Minimal Viable Product (MVP)’ through his New York Times bestseller The Lean StartUp, the LTSE has a bold and necessary vision for rethinking the practice of investing.
Fifty years ago this year, the Nobel laureate in economics Milton Friedman argued that corporate governance should focus solely on shareholder value maximization. A little over a year ago, 181 CEOs from the Business Roundtable signed a “Statement on the Purpose of a Corporation” committing to four updated principles that take into account all stakeholders, a major rethink of shareholder primacy.
Building on a revised vision of how corporations can and should operate, the LTSE makes running a sustainable business a top priority. This rethink of the stock market as we know it gives higher value, for example, to training employees, R&D, community support, and environmental stewardship. In fact, companies listing on the LTSE are required to publish policies on how they will focus on long-term value creation, providing relevant stakeholders with insights into how they operate and build their businesses.
These required policies are based on the LTSE’s five principles for long-term-focused companies:
- Consider a broader group of stakeholders and the role they play in one another’s success. This includes the company’s impact on the environment and its community, its approach to diversity and inclusion, and the firm’s approach to investing in its employees.
- Measure success in years and decades and prioritize long-term decision-making.
- Align executive compensation and board compensation with long-term performance.
- Have boards of directors who engage in and have explicit oversight of a long-term strategy.
- Engage with their long-term shareholders.
The Long-term Mindset
In his most recent book The Infinite Game, Simon Sinek argues that short-term thinking or “shortsightedness” is indicative of a finite mindset. In his words:
“Finite-focused leaders are often loath to sacrifice near-terms gains, even it is the right thing to do for the future, because near-term gains are the ones that are most visible to the market.”
Sinek offers up the difference between owning versus renting a car as an example of the foolhardiness of shareholder primacy. According to him, “…shareholders seem more focused on getting to where they want to go with little regard to the vehicle that’s taking them there.”
Such a finite mindset is reinforced and rewarded through various amplification tools and systems. From media outlets and financial pundits commenting and prognosticating daily — if not hourly — on market movements, to the proliferation of purely short-selling firms, there is the need for a profound reset in the time horizons associated with equity markets. After all, did these companies not “go public” based on IPO valuations based on expectations of future earnings generated over many years?
With reference to public companies, Sinek concludes: “If our goal is to build companies that can keep playing for lifetimes to come, then we must stop automatically thinking of shareholders as owners, and executives must stop thinking that they work solely for them. A healthier way for all shareholders to view themselves is as contributors, be they near-term or long-term focused.”
The Godfather of Long-term Investing
While much of the world faces record-high unemployment and economies are being supported by government relief programs to combat economic disruptions caused by the COVID-19 pandemic, the stock market is riding high. Is this an example of long-term investors seeing light at the end of the tunnel or opportunistic investors and day traders piling into the markets to buy and trade stocks based on market movements? I suspect that more of the truth lies with the latter.
It is telling that Berkshire Hathaway held $146.6 billion in cash (an all-time high for the company), at the end of its second quarter. It seems Warren Buffett, the CEO of the company since 1970, is unwilling to deploy cash in the current equity market. Buffett is, arguably, the godfather of long-term investing, and it is worth remembering that he once said: “Be fearful when others are greedy and be greedy when others are fearful.”
Yet in the face of the global travel, hospitality, retail, energy, and tourism sectors in complete disarray, trading apps like Robinhood and investing services like TD Ameritrade are seeing record usage. I wonder if these traders are thinking long-term. Are they, for example, contemplating the climate change-induced financial crisis to come? With the increasing severity and frequency of extreme weather events, there will most certainly be rising costs. There is no doubt that major storms, floods, fires, and droughts will have major impacts on mortgages, banks, home prices, and other financial assets.
For one, insurers must be quivering in their finely polished black dress shoes…
ESG versus CSR
Last moth, Canada’s main stock market, the TSX, released a ‘Primer’ to help inform companies looking to improve the way they assess, measure and disclose their environmental, social and governance (ESG) factors. In their words, these factors “can influence decisions by investors and other capital market participants.” The Primer also tried to make a distinction between ESG factors and Corporate Social Responsibility or CSR. Arguing that because so much of corporate value is now based on intangibles, CSR issues can quickly transform into material environmental and social factors… #semantics.
As I see it, ESG considerations relate to the factors — either currently apparent or in the foreseeable future — that can impact a company’s reputation and its potential to generate revenue in a sustainable manner. CSR refers to the practice of being a respected corporate citizen, including actions taken to demonstrate the careful consideration of ESG factors material to an organization.
It’s the difference between making an argument that an action should be taken because of potential impacts on the future prospects of a business, and actually taking an action based on the rationale that the action is responsible and beneficial (or at least not harmful) to the firm, its stakeholders, and systems upon which it depends for its ongoing success.
Quite simply, the difference between talking about the right thing to do (ESG), and doing the right thing (CSR).
As the Long Term Stock Exchange sets sail on its (long) journey ahead, hoping to appeal to companies interested in “long-term value creation” and being held to a higher standard, I commend their bold vision to put our society on a path to a better future. Or as Mr Ries puts it: “The Long-Term Stock Exchange represents, I hope, one brick in a new foundation for our civic society.”
