The views and opinions expressed in this article are those of the author.
In the early 1900s, when the legal and regulatory frameworks of most major capital markets were established, the average stock holding period was 10 years. Today the average on the NYSE is somewhere between 11 seconds to 14 months, depending on your maths. Whichever number you choose, the trend is clear: trading is winning over investing.
That said, the latest battles in this century-long war look like the beginnings of a shift-change. The SEC’s approval of the Long-Term Stock Exchange (‘LTSE’) earlier this year was a significant turning point. In the founder Eric Ries’ own words, it is aiming to meet a real need for “a new kind of stock exchange, designed to trade in the stocks of companies organised to sustain long-term thinking.” Ries’ team have designed listing standards, guidance, tools, and services with the intention of incentivising long-term focus, the most notable of which is increased voting rights as reward for longer tenure of shareholding (‘tenure voting’).
“In a public company, you have to balance long term value creation with acceptable short term outcomes. But the mark of a great board is one that doesn’t allow short-termism to lead it astray.”
~ John McFarlane, Former Chair of Barclays, Aviva, and FirstGroup
The aims of this project are admirable, and not just from a business perspective. Set against a backdrop of years of volatile tech IPOs and companies staying private for longer, shareholders and founders alike have welcomed the attempt to offer an alternative ownership model which could aid stability. It has also garnered sympathy with stakeholders outside capital markets; customers and employees, for whom sustainability and corporate social responsibility are becoming central concerns.
However, looking under the hood of the LTSE proposal, it might not be quite the “fundamental shift in incentives” it hopes to be. The SEC’s approval relies on the proposed exchange’s structure treating all stakeholders in the business fairly (subject to future reviews), but many investors have already vehemently opposed the tenure voting structure on precisely these grounds.
Dual-class share structures have dominated controversy over recent tech IPOs such as Lyft, as they give more power to founders and management than other shareholders at point of IPO. This restricts the company’s access to diverse shareholder opinions and deprive shareholders of real influence. In theory, tenure voting should solve for these inefficiencies. The longer any investor holds a share in a company the more votes they accrue, rewarding long-term commitment with greater sway over company strategy and decision-making.
But if we dig a bit deeper, isn’t the fatal flaw in both systems actually the same? In a hypothetical LTSE IPO, the founders and management of a new corporation will still hold the largest proportion of shares at the outset. If anything, control could become even more concentrated within that small group if they choose never to divest their holdings. The same advantage would be given to the first institutional investors to take strategic stakes in the business, regardless of their intention.
Who’s to say that any subset of individuals are the best arbiters of the interests of all future stakeholders? Who’s to say that the best strategy for a company is that agreed by its long-term investors and not those fresh to the table with new, innovative ideas? While it tries admirably to suggest an alternative model, the LTSE’s voting framework still relies on market participants acting ethically within it — and herein lies the problem, as it is ultimately impossible for any single shareholder to have the best interests of all stakeholders in mind.
“We’ve come from a world where the board represented shareholders and where most board members would have defined their roles as creators of long-term shareholder value. But you can’t create long-term value unless you properly manage and represent all stakeholders.”
~ Penny Hughes CBE, Chair, Aston Martin Lagonda and The Gym Group
It is precisely this independence and diversity of thought which the board of both private and public companies is supposed to provide. Therefore, shouldn’t capital markets and ambitious CEOs focus on enabling their boards to think for the long-term, rather than upend the one-share-one-vote system? Here in the UK, our regulators and government have made their support for that view abundantly clear in recent legislation (SM&CR) and Code updates (S.172). The board may be an old-fashioned tool, but it has never been a more crucial body to empower and leverage to the benefit of us all.
“Being on a public company board can be constraining. What one group of shareholders may want and what’s in the best and long-term interests of the company won’t always align. But our job isn't supposed to be easy. It’s up to the directors to grapple with dissonant voices.”
~ Ian Durant, Chair, Greggs and DFS
Antonia is Associate Director in the Financial Services team at Board Intelligence. She holds a Double First in Modern Languages from Oxford University, has spent her career in Finance with a focus on Equities and ETFs, and can be found hiking when she isn’t painting.
