‘Stakeholder capitalism versus short-term shareholders’: Behind the Long Term Stock Exchange’s vision for better-principled companies
- The Long Term Stock Exchange encourages companies to aim for long term financial gains.
- The new stock market’s listing standards require companies to be held accountable for their commitments to stakeholders.
San Francisco-based Long Term Stock Exchange wants to transform how companies measure their success. The stock market, which launched in September, crosses out antiquated reliance on quarterly performance and replaces it with a long term vision.
LTSE’s innovation stems from its listing standards that require companies to prioritize success over the span of decades and for future generations. This approach greatly differs from typical boardroom attitudes that espouse a culture of short-termism. According to a study in the Journal of Accounting and Economics, 55 percent of corporate upper management would not make an investment that would benefit a company in the long run if it would deflect from quarterly consensus earnings.
“Listing on LTSE means a company is creating incentives – in compensation and decision-making – to empower its team to make the right choice for success over years and decades rather than being driven by a myopic quarterly cadence that prevails on some other exchanges,” said LTSE’s president emeritus, Michelle Greene.
The stock market appeals to companies that want to operate with a focus on long term value creation and a consideration for multiple stakeholders such as local communities and employees.
“We wanted to enable visionary company leaders to operate in a marketplace that aligns with their time horizons, enables them to differentiate themselves with a meaningful commitment to operate in this way, and provides investors with the information to reward such choices,” said Greene.
LTSE's listing standards pay strong emphasis on transparency and corporate accountability. It requires companies to commit to diversity, the environment, local communities and company employees. Stakeholder capitalism, which departs from traditional models of shareholder primacy, values the combined interests of customers, suppliers, employees, shareholders and local communities. Investors and companies are increasingly drawn towards this equitable model for the operational and financial benefits it offers. Recently the Business Roundtable’s declaration on the Purpose of the Corporation called for investors to support companies that invest in their employees and communities.
“A market that is overly focused on the quarter doesn’t care enough about companies’ impact on the environment or their communities or their employees,” said Greene. “But a long-term marketplace recognizes how important all of these stakeholders are to a company’s ability to succeed over years and decades.”
This year’s Black Lives Matters protests have moved the needle on conversations surrounding diversity, equity and inclusion (DEI). There is mounting pressure from consumers and investors on corporates that have inadequate levels of diversity in their hiring practices, especially when it comes to positions of power.
According to LTSE’s white paper on its listing requirements, its diversity standard is grounded in research that demonstrates the relationship between diversity and significant improvements in financial performance. LTSE requires companies to come up with their own DEI policy which can be in the form of board composition requirements or overall hiring practices. Companies are then required to publish their DEI initiatives in a Long Term Stakeholder policy, which includes similar commitments to the environment, local communities and employees.
Other stock exchanges are following LTSE’s example. Earlier this month, Nasdaq filed its proposal for board diversity and disclosure with the U.S. Securities and Exchange Commission. If approved, the proposal will require more than the 3,000 companies listed on Nasdaq’s U.S. stock exchange to have at least one woman and one under-represented minority member on their boards.
“Nasdaq’s purpose is to champion inclusive growth and prosperity to power stronger economies,” said Adena Friedman, Nasdaq’s president and CEO.
“Our goal with this proposal is to provide a transparent framework for Nasdaq-listed companies to present their board composition and diversity philosophy effectively to all stakeholders; we believe this listing rule is one step in a broader journey to achieve inclusive representation across corporate America.”