Will the Long-Term Stock Exchange Make a Difference?

There's certainly a lot to unpack with some of the recent focus on "what is a company for", in all it's varied forms. I think you're correct to focus on some of the empire building, and you're right that there are lots of notable examples of companies that do have latitude to invest in the future (amazon, but this is also true of other big companies like apple, microsoft, google). And I think that what gives away the gambit with this LTSE is that the dual-class structure is protected -- THAT is for empire building and protection of the fiefdom, full-stop.

That said, I like this Harvard piece a lot because the sidebars do point out that there is a pretty strong correlation between excess short-termism that came along with evolution of the shareholder preeminence theory. There's more than enough room here for everyone to be wrong in their own special, unique ways ;-).

I am glad someone brought this point up. It reminds me of the story of Drexel Burnham Lambert and Michael Milken.

Connie Bruck's book on him and his company* provides good context for how and why Milken and his junk bond raiders and the Gordon Gekkos were able to upend corporate America in the 80s. It's because the prior couple decades had fat cat CEOs and middle management that coasted on empires founded by the prior generation. Gekko's speech about Teldar Paper's middle management was not an inaccurate metaphor. There is a trend now that executive tenures are getting shorter, no doubt in part because many are now held to higher standards than many in the 60s and 70s.

There are founders who start companies with bad intentions of using the company as a financial vehicle to funnel money to themselves with as little work as possible, as opposed to founders who start companies to create external value for humanity. The first set of founders and CEOs should be constrained.

All that said, I am still pro-Long Term Stock Exchange because there are issues with the quarterly cadence and high-frequency trading. Don't know if LTSE will be the solution but I support experimentation.

* https://www.amazon.com/Predators-Ball-Burnham-JunkBond-Raide...

https://www.nytimes.com/2018/10/23/business/dealbook/ceo-ten...

> Regular quarterly targets are an important part of management discipline.

This boils down to "having goals is important", which is certainly true, but most of us have seen managers try to improve quarterly numbers at the expense of company health. The effect is pronounced enough that people time purchases to be near other companies end of quarter, knowing they'll get a better deal.

> towards wasteful ego-stroking empire building when not properly monitored

What is "ego-stroking empire building" exactly? I think I can imagine cartoon-characters who do this, but I'm having difficulty thinking of real world examples.

Managing to metrics because they are easy to measure instead of because they actually reflect the outcome you want is a very common mistake, but it seems like a particularly destructive problem to design our economy around that. It's probably why so many companies treat their employees like disposable punching bags: they can't easily measure the payoff from investing in employees so it must not be worth doing, right?

> When management does demonstrate credibility, Wall Street's usually more than happy to let them focus on long-term initiatives. Just look at Amazon, which is a darling of the investment community, trusted to steer nearly a trillion dollars in shareholder capital. Bezos has continuously poured huge resources into long-term speculative initiatives at the expense of quarterly earnings. And he's loved by shareholders for it, because he has a history of competence and putting company interests above personal ones.

I'm sure this perspective is not correct.

You are pointing out something that exists, but your argument about why it exists is misguided.

Bezos can do this because he is a Founding CEO. I recommend reading Andreessen Horowitz's primary thesis on why they invest in Founding CEOs (https://a16z.com/2010/04/28/why-we-prefer-founding-ceos/).

Founding CEOs, as opposed to Professional CEOs, have two things working for them: 1) Moral Authority 2) An Ability to Recognize New Product Cycles.

1) Moral Authority: It's not that shareholders trust Bezos more than anyone else. It's that he has Moral Authority to take risks because he founded the company. Per Ben Horowitz:

"Often, true innovation requires throwing out many of the foundational assumptions of the company. If the company is significant, doing so may be extremely difficult for the professional CEO. The company’s core belief system is often entangled in those assumptions. Since the founding CEO made the assumptions in the first place, it is much easier for her. An excellent example of existing, invalid assumptions paralyzing a whole set of companies recently played out in the music industry."

2) Ability to Recognize New Product Cycles: This is a skill professional CEOs simply don't have. Again, per Ben Horowitz:

"Founding CEOs naturally take a long view of their companies. The company is their life’s work. Their emotional commitment exceeds their equity stake. Their goal from the start is to build something significant. They instinctively know that big product cycles come from investment and that even the biggest product cycles will eventually fade. Professional CEOs, on the other hand, tend to be driven by relatively shorter-term goals. They are paid in terms of stock options that vest over 4 years and cash bonuses for quarterly and yearly performance."

So in essence, what you are saying, that public companies have the ability to be like Bezos, is simply not true and never will be true. This is why something like the LTSE is a needed experiment.

I feel this would be spot on if it were not for the massive advancements in financial engineering that have occurred over the last few decades.

Financial engineering almost always outperforms performance over the short term. Until eventually the problems it causes long term eventually catch up to the company and things go downhill.

I don't think it's a transparency issue. It's the conflicting goals that come from different investing timeframes.

I'm buy-and-holding for retirement. I want my shares to peak in 2040. The next guy churns his portfolio every few months and wants prices to peak in November.

Even if you communicate your vision and goals well, any type of long-term vision is saying to the short-term investors "we're going to give you smaller dividends and lower numbers for future promise." So the short-term investor can either hope that the communication is solid and long-term buyers are engaged by that messaging enough to keep the price high, or they can lean on boards to prioritize stuff like dividends and buybacks that provide a more direct boost. We can definitely see the latter approach in play.

I worry that in pursuit of pricing efficiency, we've started underprice the future value of some business structures. The decline of conglomerates fits that sort of fear. You can shard a company like Honeywell/GE/Hyundai/Sony/Hitachi into 200 individually priced and tracked units, but then you lose the difficult-to-quantify magic of "predictable money-making businesses that can provide the financial resources and stability to support long-term bets and moon-shot R&D". I would be unsurprised to see this attitude in more monolithic firms too-- being open with your figures to investors will lead to pressures against anything that's not identifiable as a very low risk play with obvious payout.

Going the other direction would be interesting: if companies produced ongoing metrics, there might be fewer rewards for gaming them and less impact from missing one hour's target. I doubt either the SEC or the accountants are interested in going that direction, but it seems like it is the periodic nature that is the problem, rather than the specific length of time. Perhaps there should be a Continuous Reporting movement.

Different classes of stock with different voting privileges could at least prevent some abuses by speculators that buy up shares and seek to force through actions that benefit speculators but harm all the other stakeholders (long term investors, customers, employees...).

There are certainly questions about if a long term exchange can make a difference. But it seems to me possible that it could. It does seem to me the voting rights on the shares would have to be different for it to have much of an affect. It seems to me it makes sense to have voting rights largely vest with those interested in the long term success of the company.

The problem with reporting is it's actually a liability. You're legally responsible for reporting accurately to shareholders so there's a non-trivial amount of work to ensure you get it right. You could do that in real-time but there would be a significant overhead to it. There are also other problems, for example the sales team will always make sure their paperwork is completed in time for the end of quarter to hit their targets, if you're reporting continuously you're going to see a lot more noise in the sales reporting figures that gets averaged out by only reporting the quarter. You aren't gaining information by reporting more often, you're just exposing your investors to a noisier signal.

It's likely important to distinguish whether this disdain is from being a public company due to regulatory requirements or due to having public shareholders. I agree with your point if it is the later. If it is the former, perhaps regulatory changes are needed versus a new exchange.

Founders will push to list on this exchange because tenure voting systems will advantage them more than anybody else.