What is long-term capitalism? How can policy makers, business leaders, investors, and third parties establish long term behavior across the economy?
Long-term capitalism is one of our most foundational topics. We investigate how we might instantiate a variation of capitalism that optimizes over longer time horizons that a quarter, which is the form of capitalism that dominates the public market.
Michelle Green, founding employee, President Emeritus, Board member and Interim CEO of the Long Term Stock Exchange joins us for this foundational conversation. We discuss long-term capitalism at a macro level and delineate how policy makers, investors, and business leaders can put in place measures to institutionalize long-term decision making.
Outline of the episode:
Michelle Greene (MG): “You have everybody saying they want the same thing, yet you have a system that seems to be pushing for something different. What we did was we said, 'Okay, if you want to change a system, how do you change a system?' The way that you change a system is you get the power to make the rules. In the case of stock exchanges, like becoming a stock exchange that lists companies, what you do is you have a set of listing standards or rules that companies abide by in order to list with you.”
[0:00:34] Jenny Stefanotti (JS): That's Michelle Greene, interim CEO of Long-Term Stock Exchange. This is the Denizen Podcast. I'm your host and curator, Jenny Stefanotti.
In this episode, Michelle returns to Denizen to talk about one of our most central and foundational topics, long-term capitalism. It was actually one of our very first conversations three years ago, when we started on this journey and Michelle joined us as a guest. We recorded a fresh conversation on this essential topic last week. In addition to her current role as interim CEO, Michelle has served on the board of LTSE for a long time. She was formerly the President, and one of the earliest employees. She's also an adjunct professor at Columbia University. She formerly worked at the New York Stock Exchange as Global Head of Corporate Responsibility, and has also worked at the US Treasury.
In this conversation, we're talking about the really interesting work that they're doing at the Long-Term Stock Exchange, but that's really couched in an overarching conversation about long-term capitalism. Michelle, and I talk about what long-term capitalism means, and key trends that have led us to quarterly capitalism, and trends around movement towards long-term capitalism today. Then we talked about, well, if you care about long-term capitalism, how might you implement that if you're a policymaker, or if you're an executive, or if like, Michelle at Long-Term Stock Exchange, you're a third party looking to shape the market.
We get into the details of what those policies could look like and what are the different components of corporate governance that one would need to deploy to really instantiate long-term incentives within the firm. I consider this a really central topic, because the center of the Denizen inquiry is capitalism. This is looking at capitalism today and what are some of the marginal things that are actually happening. This is really things that are right beside the mainstream that are within grasp. We talk about this, how do we get from here to there. I think this is a really important thing that's happening now in the space. This is an essential topic, so we also have a summary on the website of our research and key background reading if you're interested in going deeper. You can find it at www.becomingdenizen.com. There, you can also find show notes, a transcript, and sign up for our newsletter. Every Wednesday, I send the latest content to your inbox, alongside news from our partners and other things that are happening within Denizen.
This conversation does sometimes get a little bit technical. We get into the weeds, but stick with it because this is a really important conversation. I really hope you walk away with a grasp of what we mean when we talk about long-term capitalism, and our ability to really distinguish between rhetoric and actual implementation.
[0:03:23] JS: Thank you so much. I'm so excited to have you again, I just want to start with a really basic question. When one says long-term capitalism, what does that mean to you? I'm curious to the extent that there is heterogeneity and what that means across the landscape, what are those other meetings that people carry?
[0:03:42] MG: I think that's a really good question. I think it does mean different things to different people in different companies even. But I think, almost defining it by what it's not or what it stands in opposition to, right? If we look at what's happened in the public markets, and I'll say recent decades, what we've seen is this emergence of what I'll call quarterly capitalism. Where there's this over emphasis on meeting your quarterly numbers. That does a number of really detrimental things. What that does is it gets companies overly focused on quarterly numbers. When you're overly focused on short-term results, you're by definition not focused enough on making longer-term investments. Longer-term investments, the things that are easy to cut, are things like R&D, or maybe you under-invest in your employees, or you're doing excessive buybacks.
There's all of these forces and incentives that are driving companies in the public market to act in ways that maximize short-term quarterly value. Often directly at the expense of long-term value creation and of this broader consideration of this broader group of stakeholders.
[0:04:56] JS: Can you –
[0:04:57] MG: Sorry, go ahead.
[0:04:58] JS: Before you keep answering that question, I think it's really interesting to also understand what were the drivers of that quarterly capitalism that has emerged over the last several decades.
[0:05:09] MG: Yes. I think there are a number of different drivers. Part of it is compensation and the way that the compensation has been structured. I think part of it is around the changes in trading, and the emergence of some forms of trading that are divorced from the fundamentals of performance, and looking at company long-term performance. I think the corporate raiders, if you will, whose goal was to come in and extract short-term value at the expense of longer-term investments.
I think there are many, many forces at work that have been driving us. Part of what I think is broken is just our public market system and the way that it drives this over-emphasis on quarterly EPS, as if that were some indicator of company quality, which it's not.
[0:06:03] JS: Right. Yes. One of the drivers I thought was so interesting when I initially did this research, was that it used to be the case that asset owners were the asset managers. So you didn't have this – I've also heard it described as money market capitalism, so it was really interesting. I'm forgetting the third source, but there was a flood of capital into the American economy that came from the university endowments and foreign capital. There was a third source, I'm forgetting off the top of my head.
[0:06:36] MG: Probably the large pension funds would be my guess.
[0:06:37] JS: The what?
[0:06:38] MG: Large pension funds.
[0:06:40] JS: Maybe that was it, yes. All of a sudden, the asset management industry grew very significantly, and they were compensated based on short-term returns. Then in turn, this is when you saw executive compensation just take off, and they were increasingly compensated in equity that had short-term incentives. I just found that really interesting. Okay, back to the – yes.
[0:07:02] MG: When you look at some of these funds that talk about their investment time horizon being 75 years, or 100 years, or something like that. And yet, the way that they compensate their people is on a very short-time horizon. You have almost this mismatch, even internally in a lot of these types of organizations, where – though they're supposedly managing for the long-term, that's not how the actual compensation of the individual is working. I think that's another driving force for sure.
[0:07:29] JS: Okay. Back to the first question, when you say long-term capitalism, what does it mean to you and what does it mean to everybody else?
[0:07:35] MG: So I'll define what it's not. But when I say long-term capitalism, what it is, is it's really the investment, it's folks who have what I'll call patient capital, who are investing not to make microsecond profits, or even a profit over a quarter. They're folks who share in the long-term vision of a company, believe in that journey that the company is taking to growth, and want to engage their capital, because they believe over the long-term, it will create significant additional value. It's marrying those investors with companies that are thinking in very long-term ways, have a vision and are committed to achieving that vision, even if it means that because I'm going to make a big investment in R&D, this quarter, I might earn a little bit less this quarter in the name of that next big invention. Or maybe I'm going to invest a little bit more in my people. That might mean, my profits this quarter are a little bit lower. But I recognize because I think about success in terms of decades and generations, that that's the right investment to make for the long-term. It's when companies and investors are aligning to really make the investments that are right for employees, communities, and customers over a much longer time horizon than what's right for an investor this quarter.
[0:08:57] JS: Where's their discrepancy in terms of interpretation of that?
[0:09:02] MG: Well, I think there's some natural discrepancy, for example, if you are an energy infrastructure company. Long-term to you is a much longer time horizon than if you are a fashion company. Those are just their different industries. I think the natural difference is – but I think a lot of companies that are truly long-term use different time horizons for different purposes. They may evaluate their own success. They may be thinking over 100 years, but they're not going to do strategic planning over 100 years. Their strategic planning is shorter than that.
I think you can be long-term and have different time horizons for different purposes. But it's really, ultimately, when you're making the day-to-day decisions, are you trying to meet those quarterly numbers? Or are you trying to think about long-term success and investing in long-term success?
[0:09:57] JS: This conversation around long-term capitalism is very closely tied to stakeholder capitalism, which I know is an inextricable part of the Long-Term Stock Exchange, which we'll get to later in the conversation. But one of the things that I find important to talk about is this distinction between rhetoric and actual implementation in companies. That will be the bulk of our conversation. But before we get there, I do just want to talk about some of the trends that you're talking about.
Part of the reason I think this conversation is so important, because now, we're talking about what is actually happening on the margins of the dominant economy. Business Roundtable stated, in their Common Sense Corporate Governance Principles in 2016. That “companies should take a long-term strategic view, as though the company were private, and explain clearly to shareholders how material decisions, and actions are consistent with that view.” For those who don't know, Business Roundtable is an association with the largest companies in the US. Most major corporate names that you know of are part of it.
Then there was this article in the Wall Street Journal, it was a while ago, 2016. Warren Buffett and Jamie Dimon, saying “We are encouraging all public companies to consider moving away from providing quarterly earnings per share guidance. In our experience, quarterly earnings guidance often leads to an unhealthy focus on short-term profits at the expense of long-term strategy growth and sustainability.” The narrative of very important and dominant institutions is also pushing away from short-termism into long term view.
[0:11:29] MG: Yes, sometimes. The narrative and the reality I think differ quite a bit. I mean, one of the things that I talked to a lot of companies that are approaching an IPO or recently have had an IPO, and one of the things you find is that every investor describes himself as long-term. But if you actually look at their holding periods, and their behaviors, and what makes them actually go in or out of a stock, very few of them are actually long-term. I think every investor likes to think of themselves as a long-term investor. But behavior often blocks that, because – we talked a little bit about this. There's a whole bunch of reasons, but one of them is the incentive structures by which the folks who operate in the marketplace are rewarded. That is not a long-term incentive structure.
We don't need to go down a rabbit hole on trading. The markets themselves, the exchanges used to be public utilities, and the exchanges themselves went public in the 1990s. That changed their incentive structures, and who they consider their primary customers to be. This bastion of capitalism, the stock exchange went from being a place that was almost like a utility, and whose primary function from early days had been to marry investors' capital to a place where trading is the primary focus, right?
[0:12:52] JS: Yes, of course. Right.
[0:12:54] MG: You've got a lot of different contributors to this – and again, part of the reason that we started the Long-Term Stock Exchange was because when you talk to investors, every investor says, "Well, we're long-term focused, but people managing the companies have this incentive system that's driving them to behave in short-term ways. Then you talk to companies, and obviously, I'm oversimplifying here. But then you talk to companies, and every company says, I really want to be operating for the long-term, but I get all this pressure from my investors to deliver every quarter's numbers. Even if that means making trade-offs that destroy long-term value because I've got to meet this quarter's numbers.
The average tenure of CEOs has dropped significantly. What have you done for me lately if you're not meeting those quarterly numbers? I think you've got a system that is talking about being long-term on every side, and then pointing fingers at the other side saying, "Well, we're long-term, but it's that other side that's stopping us in operating this way."
[0:13:51] JS: Interesting. Another really important point is the incentives for managers when they are public versus private. 45% decline in public companies in the US between 1996 and 2016. I know that's part of the backstory for LTSE. Can you speak more to that?
[0:14:12] MG: Yes, absolutely. Look, there's a lot of reasons for the decline in public companies.
[0:14:17] JS: A really important one is just concentration and power.
[0:14:20] MG: Yes, exactly. Concentration, availability of private money. There's a whole bunch of contributing factors to that for sure. But when you look at that time period, it's pretty astounding when you see that significant, almost 50% decrease in public companies at a time period when GDP is growing. This is not that we were in a depression. GDP is growing, yet companies are not going public.
I think part of it is also a mentality change where it used to be like, "Wow, you have made it when you ring that bell at the New York Stock Exchange." Now, you talk to a lot of private companies and they're trying to avoid going public as long as they can. I think you have this decline in the perception of the public markets, and again, lots of reasons behind it. But when you talk to executives who have gone public, you do often hear – we were suggesting that, "Wow." When I was private, my investors for a certain period of time now, it's not forever. But for a certain period of time, they wanted to hear about my growth plan and wanted to hear about how I was doing against that. There was certainly not any sort of quarterly check in to make sure I was earning greater profits this quarter.
Then when I went public, and there's also lots of research, as you know, backing this up, suddenly, the incentives entirely changed. It's all about the quarter. My ability to invest in innovation, my ability to invest in my people, et cetera, all became much more difficult to do. This sense that going public, if you are a company that is trying to make those long-term values, somewhere along the way, this sense change that going public was this impediment to that long-term orientation, despite the fact that we have called the investor saying they're long-term and all the company saying they're long term. There's obviously a systemic problem there when everyone's claiming to want the same thing, and yet, we're in a system that is driving behavior that's exactly the opposite.
[0:16:14] JS: Yes. We had talked about when we first talked about this, again, I just mentioned BRC and Buffett, this moving away from quarterly guidance. I remember at the time, nobody wanted to talk about quarters during the pandemic, because this was three years ago in the middle of the pandemic. What has happened since? What's the current state?
[0:16:35] MG: Yes. We've largely gone back to the quarterly focus markets.
[0:16:38] JS: Interesting.
[0:16:39] MG: Look, I think, that's not to say there hasn't been any change. I think the change has been much more on the stakeholder side. Right now, you have most companies talking about a broader group of stakeholders, and most companies talking about the way they interact with their community, and talking about diversity, and talking about a whole set of topics that I think before the pandemic were not nearly as mainstream.
Part of that is driven by the massive exponential growth in sustainability capital. And part of that I think is just driven by expectations of customers, of employees, of communities. There are different expectations on corporations now, and a rise of employee activism. I think the pandemic accelerated a lot of those trends. But unfortunately, I think the quarterly pressures of the public marketplace kind of returned.
[0:17:34] JS: Yes. This is so interesting too, stakeholder capitalism is in a similar state, where the rhetoric is there, but the deep incentives are still dominating behavior. Some of this boils down to, as the rubber really hitting the road in the guts of the corporation and how it's governed. That's what we'll spend a lot of time talking about today. But it's just really interesting how so many pieces of the puzzle need to shift and absent those shifting, you still slip back into the default. The really important part of that is buybacks.
When I first researched this, again, three years ago, the most recent data was 2018. There were record high buybacks of $800 billion. Last year, I was amazed to pick up this number. It was $1.2 trillion, 50% higher. Let's talk about buybacks.
[0:18:28] MG: Yes. Buybacks are when a company buys back its own stock in its most simple form. There are times when that absolutely makes sense, and it is the best use of capital, and it's what a company should be doing. But it's not at this level, right? We can just look at the level and say this is crazy. If you look at certain periods over time, and depending on which year you look at, anywhere from 90 to in some years even, over 100% of profits are being poured back into buybacks and dividends.
Essentially, you're taking all of that money and turning it back over to your shareholders, which is great for your quarterly EPS, because shareholders really like that. But what are you not doing with that money then? You're not invested in R&D, you're not investing it in your people, you're not investing it in the future of the company at the same level you're spending that much to do these other things.
One of the reasons that you'll see buybacks used, and I think there's some studies showing this as well. Buybacks are much more likely to be used by companies that are just about to miss their quarterly EPS, because buybacks can be used for financial engineering. Because if you buy back your shares, you change the denominator, you can meet your number more easily.
[0:19:36] JS: Exactly.
[0:19:36] MG: Companies will literally cut their R&D budget and buyback in order to meet their quarterly numbers. That's driven not by anything having to do with value, or the company should be investing in it. It's literally just driven by a desire to financially engineer a better quarterly EPS.
[0:19:53] JS: Totally.
[0:19:53] MG: It's a huge problem.
[0:19:55] JS: Totally. Again, that's the dissonance between the rhetoric and the actual behavior. Buybacks are such an important indicator of both short-termism and extraction.
[0:20:04] MG: Yes, absolutely.
[0:20:07] JS: Yes. I want to talk about - okay, so if we recognize that we want to shift from quarterly capitalism to long-term capitalism, how might we do that? As we'll speak to it, the rubber hits the road when we talk about what actually gets implemented within the firm, and that's really where LTSE is working. But before we talk about that, I do want to just present a macro view of – I want to talk about policy. If you're a policymaker, and you care about long-term capitalism. What are some things that you can do? One thing that happened since we first talked about this was that in the beginning of this year, 1% excise tax was implemented on buybacks in the US.
[0:20:44] MG: Yes.
[0:20:45] JS: That's one.
[0:20:47] MG: Yes. Look, on the buyback one, and not to get too into the weeds. But on the buyback one, one of the better proposals that I've heard is requiring the reporting of quarterly earnings net of buybacks. So if you're doing engineering, and you have to report the number net of buybacks, then you're going to have that number out there anyway, right?
[0:21:06] JS: Right.
[0:21:06] MG: And or require reporting around which – because sometimes you have to do buybacks, for example, for compensation reasons.
[0:21:15] JS: Can you speak more to that? What does that mean?
[0:21:18] MG: Yes. Sometimes a company needs to pay off shares that are owed to executives. They might need to do buybacks for the purpose of those sorts of shares, things like that. But there are internal legitimate reasons companies do buybacks. It may also be that sometimes companies feel that their shares are vastly undervalued, and so they feel like a buyback is a good use of their capital. There are legitimate reasons to do buybacks. Another proposal that I've heard is, require transparency around the reasoning for particular sets of buybacks. Then moving away just from the buyback problem.
[0:21:49] JS: Before we move away from buybacks, I did uncover an interesting list. We talked about taxing them. That's what the Biden administration has done in the 2022 Inflation Reduction Act. Now, interestingly, he commented in the State of the Union in February proposing to increase it to 4%, a very significant increase.
[0:22:07] MG: Very significant.
[0:22:08] JS: That's something to watch. We talked about disclosing them so that you don't have the same financial engineering incentives. Other things that I surfaced banning them altogether, limiting them as a percentage of shares, requiring board, or shareholder, or stakeholder approval. That's an interesting one. Restrictions on corporate executives or directors selling after a buyback. I think that was in Elizabeth Warren's Responsible Capitalism Act.
[0:22:34] MG: Yes.
[0:22:35] JS: Then this one, I think, is really interesting. The last one that I uncovered was conditioning buybacks and other corporate attributes, like a ceiling on executive comp, or wage dispersion threshold, or a debt limit. Because this is a really important point around buybacks. I don't want to stay on them, but it's such a critical problem, I think, in capitalism, as we know it, particularly in the US. Is that companies will take on debt to buy back shares, which then increases corporate fragility. Then you have companies that had very significant buybacks, and then there's some economic shock, and then they get bailed out with public money. Whereas if they had that cash on the books, so they didn't have that debt on the books, then they would be able to weather that shock.
[0:23:18] MG: Right. No, absolutely. Look, I think there's a lot of bad behavior around the way that buybacks have been used. I think any of these proposals would be a good step in the right direction. But you’ve got to look at also realistically, what's actually going to happen in today's system. The 1% tax was a step that I think some people thought would never happen.
[0:23:40] JS: That's interesting, because I think there was speculation that the reason buybacks were so high in 2022 was because the excise tax was coming. But from what I've seen, they're on track to be higher than ever this year.
[0:23:54] MG: Yes. Look, I like the transparency approach, just because I think it's more likely to actually be enacted.
[0:24:03] JS: Yes, of course. Of course. Yes.
[0:24:06] MG: It just lays a bear. It takes away the incentive that companies have to do it for EPS, if you have to report about it.
[0:24:15] JS: Okay. Now we're going to move on from buybacks, but I just want to make sure we delineated that whole list because I think it's interesting.
[0:24:22] MG: No, I appreciate that. Absolutely. Absolutely. I think another important public policy approach is to really treat different types of investment differently. Like boarding investment in R&D in different ways, treating human capital not as a cost center but as an investment. I think there are things in both our reporting schemes, and in GAAP accounting that treat human capital differently than capital investment. I think those sorts of changes would be helpful. I think we have activist shareholders who have focused on short-term profits and extracting short-term profits. Treat that differently as well.
I think there's a bunch of changes, and without getting into the technical nitty gritty, I think there are a bunch of changes that could be enacted in ways that are fairly, dare I say, bipartisan. But that really would not be particularly controversial changes. Some of them are things that, let's say, the SEC could do. Some of them are things that require legislative action. But I do think there are a lot of levers available that are not kind of massive changes that are realistic, that have a pretty significant impact.
[0:25:44] JS: Yes. I just think this factor is really important to just talk about and understand. Because when something happens at the policy level, it affects the entire market. Yes, versus interventions that might happen by third parties. I think LTSE is such an interesting intervention that we'll talk about, we'll get to. But I first want to talk about, okay, so you have your company, and you want to actually implement this. When we talk about governing and innovation that can have their own governing to be more long-term oriented. Maybe we can just talk a little bit about some of those vectors, and then we'll get into what that looks like for LTSE.
[0:26:20] MG: Sure. Yes, absolutely. Look, I think it happens at every level of the company. To be effective, and being like a truly long-term company, you need to have it happening at every level. First, you have the board level. If you look at what boards say about their own engagement. They think they do too much looking backwards and not enough looking forward. I think part of this is about – and this is the executive setting at the board oversight of it. But part of it is really about how do you as a company want to be evaluated for your performance. The market says quarterly EPS.
But the narrative that a long-term focused visionary company should be setting forth is not quarterly EPS. The narrative that a long-term company should be setting forward is, here's our plan, here's our long-term plan, here's where we want to go in 10 years, five. Pick your timeframe. Here's how you – employee, customer, investor – should hold us accountable for that. Because we're not saying check back in 10 years and see if we got there. Obviously, there's accountability in the shorter term. But that accountability needs to be defined in meaningful ways that relate to that longer-term vision.
Clearly, quarterly, yes, is not that appropriate road post on your longer-term journey. Say to your company, “Define for us, define for your long-term shareholders, define for your employees, define for your customers, what are the right metrics.”
[0:27:50] JS: This is so important too, because when we're talking, for example, about steward ownership and implementing steward ownership. Sometimes the process of getting there to get clear on what your goal is, or in this case, what does long-term actually mean. Getting consensus on that is such a big step in the first place. But obviously –
[0:28:09] MG: It's a huge step, yes. Getting those metrics right is so important. Because if you get the right long-term metrics, and you can align as a company, as a board, as an executive team, around that set of long-term metrics, then you can use that to drive things like compensation, things like decision making, and what are the incentives within the company on an operational level for the line manager day-to-day. When they're making decisions, what are they being rewarded for, and what's being held against them. I think it's when you start to think about how do you actually operationalize – be more focused in terms of metrics, in terms of goals, in terms of time horizon. That's how as a company, you really start to change the way that you operate to make it long-term focused.
[0:29:02] JS: There's all that around operating within the company, then there are interesting pieces around incentivizing long-term investment.
[0:29:11] MG: Yes, absolutely.
[0:29:12] JS: Let's talk about those.
[0:29:14] MG: Yes. Here, again, I think what's really interesting, as I mentioned earlier, is every investor says they're long-term, right? But what does that mean? What does that mean in today's marketplace? This goes back to what you were saying earlier about what's the incentive system that exists for the asset managers? What are they getting rewarded on? I think that's a huge point of misalignment. When you're talking about who the long-term investors are, how are they being rewarded? How are they being allocated? How can you even judge that? When you look at things like an IPO, is the kind of long-term historical performance of investors being used as a factor for allocating shares?
Yes. I think you need to look at investor behavior more than what they say, to understand who's really there with you, right? Then, I think part of this is also, if you get really clear on what's our long-term vision, and what are those long-term accountability metrics, then investors can make a really informed decision about, are they going to be with you for that journey or not. We're going to trade off our profits day to pick your long-term smart thing. Treat our employees really well and pay higher wages, so that we'll have less turnover and higher productivity. Invest in R&D so that we'll be innovating five years from now. Whatever it is that is truly a long-term trade-off, make it very clear to your investors so they can decide to come on the journey with you or not.
[0:30:48] JS: Yes. That's such an important point, because so often it's about finding aligned capital, and being clear in dictating what that is. But I like some of the other things that I remember came out in our conversation, which is around differential voting rights. So investors who hold the shares for longer get more voting rights, more control of the company than those that don't or either preferred access or discounts to future stock issuances.
[0:31:17] MG: Yes. There's some really interesting steps that companies can take. They have to be obviously done in ways that comport with the securities laws, of course. But there are interesting ways that companies can differentiate shareholders and have shareholders self-select to be in a long-term class, not a separate class of shares, to be clear. Just that the shareholders themselves can opt-in to say, "Yes, I'm long-term, and I'm going to gain additional governance authority as I hold for longer."
[0:31:46] JS: Well, doesn't differential voting rights make it a different class of shares or no?
[0:31:51] MG: No, not necessarily. No. For example, there was a tool that we created at the Long-Term Stock Exchange. It's not a requirement, but it's a tool that companies could access. What that essentially did was, it said, anyone with a common share had this opportunity to opt-in to say, "Hey, I want to be a long-term shareholder." It wasn't a different class, anyone holding the common stock could do it.
When they did that, not to get too into the weeds, but their shares would transfer to being held on the company's books. Why that's important is because it gives the company a view into who's the beneficial shareholder. Then, while they're held on the company's books, perhaps most importantly, which companies really liked, and some of the investment community did not really like, is that those shares – so if you're a long-term shareholder, presumably, you're in it for the long-term. What happens in practice, is that many long-term shareholders get paid to loan out their shares for shorts against the company. Because when you do a short, you have to borrow shares to do that.
So you have these long-term investors who are – believe they're fulfilling their fiduciary duty by earning more, by loaning out these shares for shorts. But how can a long-term investor be basically facilitating a short against the company? A part of the benefit of this scheme as we had imagined, was that when those shares are held on the company's books, they can't be loaned out for shorts. So it's forced an alignment of, you say you're a long-term shareholder, then you shouldn't be facilitating shorts against us. It has some ancillary benefits like that as well.
But the real idea was, if you could put more of the governing power in the hands of those who are long-term shareholders, that really would do a great job of aligning capital in a way that would enable you to have the ability to make those long-term decisions.
[0:33:46] JS: I love this piece. I love this lever for actual implementation. This is maybe a bit in the weeds, but I just want to make sure that I understand it. What does it mean to have a different class of shares? Because as my understanding with Alphabet, Class A versus C, both have ownership stake in the company, but Class C shares don't confer voting rights.
[0:34:06] MG: Right. But yes, dual class tends to be where one share has the controlling votes. One class of shares has the controlling votes, and there's another class of shares that confers economic ownership, but not governance authority.
[0:34:19] JS: Or weighted one to ten or something like that.
[0:34:22] MG: Right. That's dual-class. They're different classes, that this scheme that we had talked about, and created this tool around, again, not a requirement of the exchange at all. But what that tool did was it said, you don't have to have dual class to do this. One class, and anyone in that class can move into this long-term system and start accruing votes at any time can move out of it at any time at all is the same class. Everyone within the class is treated the same, just everyone has this option. So it's not a separate class.
[0:34:53] JS: Because a separate class is more complicated from a regulatory perspective?
[0:34:57] MG: Not necessarily.
[0:34:58] JS: Is it an easier way to implement it?
[0:34:59] MG: A separate class is generally implemented at – I think, in fact, it has to be implemented at IPO. It's just a system in which the founders are – currently has more.
[0:35:15] JS: That makes sense. It's such an important lever to do innovative things, because access to capital is just the common challenge for well-intentioned entrepreneurs that want to adopt these more progressive governance structures. I just think that this is such an important thing. It’s like, okay, capital wants to come in, but can you not lose control and still get that capital in? Obviously, it depends on how much leverage that particular company has vis-à-vis the investors. But it's just such an important piece.
[0:35:44] MG: Absolutely. Absolutely.
[0:35:46] JS: Differential information rights was something that I thought was really interesting and differential dividend payouts.
[0:35:52] MG: Yes. There are ways to implement those, again, I won't go into like the nitty-gritty of the securities laws. But once you've offered something that anyone in the class can access, that by putting certain lockup provisions in place, et cetera, you can then use that to offer some differentiated benefits to the shareholders who opt in to that longer term scheme. It is an option for companies to do all of these things for those who want to opt in to self-identify as long term.
[0:36:21] JS: Okay. So we're not holding our breath for the policy things that we have outlined. There are some entrepreneurs who are interested in implementing this and implementing that. But I get really excited talking about third-party players who can influence market dynamics. LTSE is such an exciting example of that. That's what I want to turn to now. I think LTSE in and of itself is just a really important thing that's happening in this space that I think the listeners need to be aware of. But on top of that, it's just as a very interesting case study for third-party market intervention. We'll talk about how that's related to things, like a certification. But let's just start with, what is LTSE?
[0:37:06] MG: Yes. LTSE, the Long-Term Stock Exchange. We are in SEC-approved national market system, Stock Exchange, like NYC and NASDAQ. We are different in that. What we've done is we've created an exchange that's really focused on the rules that govern companies. As I mentioned earlier, you have everybody saying they want the same thing, yet you have a system that seems to be pushing for something different. What we did was we said, "Okay, if you want to change a system, how do you change a system?" The way that you change a system is you get the power to break the rules. In the case of stock exchanges, like becoming a stock exchange that lists companies, what you do is you have a set of listing standards or rules that companies abide by in order to list with you.
We decided, you know what, it's not an easy path to get approval to be an exchange. But we thought it was really important to have that ability to set the rules. We went through the process of becoming an exchange with a different set of rules. Our rules, we are an exchange that does what's called dual listing, which means a company would list on one of the legacy exchanges and then also list with us. So list on NYC or NASDAQ, and then list on the Long-Term Stock Exchange as well.
Our listing standards, those rules that companies have to operate according to, to be on an exchange, ours are compatible with NYC and NASDAQ. NYC and NASDAQ are slightly different, but essentially the same thing. Then what ours do is they layer on five principles. Those are really principles that get to how you can tell if a company is truly long-term focused and stakeholder focused. The company has to adopt five policies, one for each of the principles that essentially tells their story and tells their intentions. It becomes a binding commitment with the power of the securities laws behind it to really differentiate. This is where you mentioned earlier greenwashing. I think it's become the hip thing for companies to say they're the good guy company, and they're doing all the right things.
It's become very hard for a customer, or a potential employee, or an investor to know who's saying it, and who's doing it. What this does is it really differentiates, because the companies that decide to list with the Long-Term Stock Exchange, those companies make a binding commitment to behave in the ways that they say they're going to behave. That commitment is something that they share publicly. All of their stakeholders know what it is and know that they're now bound to behave in these ways. It's a very self-selecting group, and it's companies that always intended to hold themselves to a higher standard. But now, they can actually be out there saying, look at these long-term standards we're holding ourselves to. We operate in a different way.
[0:39:59] JS: I really appreciate how this plays the dual role that not only is it functional as an exchange, but it also plays a similar role that a certification might, and that it defines what we mean by the thing. If you look at something like B Corp certification, so fascinating back when I did research on it – more than 10x companies used it as a tool than actually got certified, because it showed them what it meant, what are all the components of being a company that would lead me to call it like a good for the world company, right? Just by defining it, that's enormously valuable and it can point well-intentioned business leaders to the areas of the company that they might overlook otherwise.
[0:40:45] MG: Yes, absolutely.
[0:40:46] JS: That's important. Also, from a just market dynamics and information perspective, it's just a valuable signal. So that people who want to bias long-term capitalism over quarterly capitalism, can know I can trust that if it's on LTSE, it carries that mark. It's also very interesting as a potential policy perspective, or a way to incentivize companies to be more long-term, provide some sort of incentive to companies that are listed on the LTSE.
[0:41:18] MG: Absolutely. That's really the goal. We spent, as you know – you know, a lot about our journey, but –
[0:41:24] JS: I should disclose that I'm an investor. I think that's important to say.
[0:41:27] MG: Yes, that is important, yes. We spent a long time looking at what were the right levers to really drive long-term focus at a company, and we began in a very prescriptive place. We ended it in a principles-based place. The reason for that was really because we found that there's so much variation among companies, among industries, among sectors. So we wanted to allow for that creative variation, while still holding companies accountable. What we did was we spent years talking to companies, their boards, their executives, their employees, to policymakers, to investors of all different types.
Where we came out was, we really boiled it down to five areas that we thought were the most important levers for change. Some of those investors thought were the most important, some of those companies thought were the most important. We encapsulated those in these principles, and took this approach where we said, "You company need to create these five policies. We as the exchange, because now we have the authority as the exchange, will then look at those policies and say, "Okay. Do they comport with the principles? Are you not just talking rainbows and butterflies and putting something on a brochure? But do you have an actual plan to implement it? Has your board approved that plan? Do you have a way that this is going to be operationalized?" So that it's companies that really stand apart from those that are just talking the talk, and really are those walking the walk. We as an exchange are verifying that.
[0:43:05] JS: I just think this is so interesting, and so important, this distinction between being principles-based versus standards-based. Whereas, principles sort of said, here's the idea and the direction and standards that this is the specific thing that you have to do and implement. With LTSE, you just saw that you were inhibiting innovation by being too prescriptive, and sort of stepping back to the principles.
[0:43:30] MG: Exactly. It gets what you said, it's really about driving innovation. Now, at the same time, you'll see that – well, the principles are all of course at principle level. The implementation has varying degrees of prescriptiveness.
[0:43:40] JS: Well, let's talk about the five principles. Let's delineate them because this is important.
[0:43:45] MG: Okay. The first one is about long-term stakeholders. The underlying principle is what we've been talking about: long-term focus companies should consider a broader group of stakeholders, and the critical role they play in one another's success.
[0:43:57] JS: BlackRock now has a research group around long-term capitalism, and the stakeholder pieces front and center when they talk about the case for it.
[0:44:07] MG: Yep. Look, part of the reason we put this in here is because we really believe that that is essential to long-term success.
[0:44:14] JS: Yes, it's important to note that LTSE's definition of long-term capitalism is also stakeholder capitalism, because the stakeholders are instantiated in the government policies.
[0:44:25] MG: Absolutely. Absolutely. We really believe, and this is fundamental to this policy, that you can't have a successful long-term company unless you are in fact, thinking about a broader group of stakeholders. By definition you need to be doing that, right?
[0:44:41] JS: Yes. It's principle number one.
[0:44:43] MG: It's principle number one and it's also the most prescriptive. We have varying levels of prescriptiveness around these principles on purpose, because we really think that it's important that the principles are followed at the appropriate level. The stakeholder one, we felt like, you know what, it's not just enough to say, "Oh, yes. We care about our stakeholders." Who are your key stakeholders? You have to define them. The companies define them very differently, and prioritize them differently. It's important to know that, right? Then, we also include in the stakeholder policy that companies have to talk about their impact on the environment and on the community.
Because again, if you want to operate successfully over the long term, you need to have that license to operate from your community. You need to not be fundamentally destroying the environment. You're doing bad things to the environment, because that is not a long-term success strategy. You have to have a well-articulated approach to diversity and inclusion. Again, lots of studies showing how important that is to long-term performance and success. I think one of the most important ones is about employees. This is where companies have to have a policy around, how do you invest in your employees? How do you reward your employees for contributing to your success? That's one that I think goes to that issue we were talking about earlier, about thinking of human capital, as an investment, not cost. Those are the elements of the stakeholder policy, and number one, and most prescriptive because we do see them as highly related.
[0:46:13] JS: Yes, I love this one.
[0:46:15] MG: Our second one is around long-term strategy. This one really gets to the operationalizing of it, that’s we were talking about, right? The principle here is that long-term focus companies should measure success in years and decades, and prioritize long-term decision making. This one really has companies talking about what are those long-term success metrics? How does your company think about the long-term? What does it mean to use a company for different purposes, perhaps? Then, how do you implement it? How does it play out in the day-to-day?
This one has a certain level of prescriptiveness. Again, just because we feel like you need to actually share all of those pieces for your stakeholders, including your long-term investors to understand what long term means to the way you operate. That's critical, right? Third one is around compensation. This one's interesting, because, surprise, a lot of the companies were like, "We don't need a policy around our long-term compensation." Investors were like, "Our number one is around long-term compensation.” But the fear I think, on the company side was we already have so much disclosure on compensation. Isn't this going to hurt us from a competitive perspective?
Our compensation policy is not an all around, what are you paying any individual? That's not what it's about. It's about as a policy matter, how are you aligning – and importantly, not just executive compensation. This was something that investors felt really strongly about board compensation as well, with the long-term success and those long-term success metrics. Because once you align compensation with those, they're not going to get implemented in a meaningful way.
That one's not as prescriptive because we recognize that actually, these norms have changed over time. Norms around what is effective long-term compensation change. We also didn't want any company to feel like this was impeding their ability to attract talent to their vision and mission. But they do need to provide that kind of policy perspective on how they align these things. The fourth one is around really shared vision between the board and the company. That's getting the board explicitly involved in the oversight of the long-term focus. Where does that responsibility live? Is it with the whole board? Is it in a particular board committee? But there is an explicit responsibility for the oversight of that long-term strategy and those long-term success metrics, so that the board is engaged and aligned.
Then the final one, which we recognize shareholders are a stakeholder, of course, but we wanted to explicitly call out the long-term shareholders. Here, the principle is that long-term focus that companies need to engage with their long-term shareholders. This one, again, is very broad, because there are lots of ways to do that. But it's for the company to talk about how they effectively engage with their long-term shareholders. We believe those five policies and principles are completely interlinked. You obviously need to be doing all of these to be truly long-term focused.
When you do all of these, you set yourself up to be operating in a way that encourages long-term decision-making, that your investors support, that your board supports, that's built into your DNA as a company, and our theory of the case, over time, that is going to create greater long-term value, by definition. That's the idea. As time goes on, and we've been around for a little bit longer, hopefully we can also prove that through the results of the companies and show that a long-term orientation, a multi-stakeholder orientation is just good business and creates long-term value.
[0:49:54] JS: LTSE is engaging with other parties around research, building up a research base, right?
[0:50:00] MG: Yes, yes. We've worked over the years with various groups. We've worked with Stanford and some folks there, who work on long-term investing. We've engaged with folks in all different parts of this value chain, both around investors and how you kind of align investors, and then around governance, and a lot of work with the Aspen Institute, their business, and society program work they've been doing about things like worker voice on boards, for example. Executive compensation principles, those sorts of things.
We're really trying to engage in lots of different places where the conversations are taking place about rethinking human capital, about giving workers a greater voice on boards, about aligning investors. We've actually created our own long-term investor score, where we look at the behavior of investors at an asset manager level to say. "Okay. Everyone says there's long-term, who's really long-term, and how does that mix of investors that a company has changed over time when they take steps to show their long-term orientation. That's a proprietary long-term score we developed ourselves. Really, the idea here is, how can we look at the system and gain an evidence base, when we created these five principles, around five levers for change?
We really were looking at all the evidence that was out there about what is driving the short- term oriented behavior, and what drives long-term oriented behavior, and how can we effectively make change that will be meaningful. That's really what drove us to these particular principles.
[0:51:37] JS: But I just love what a stakeholder driven process it was to get there, and how deeply thought and considered they are. Then generally, I just appreciate how much LTSE is taking more of an ecosystem level view of the work that it does, not just the exchange, which obviously changes incentives, and changes the information dynamics as we spoke to. Yes, go ahead.
[0:51:58] MG: That ecosystem, I'm glad you brought that up, because it's really, as I said, it was very evidence-based, but we also have a business for earlier stage companies. We've had tens of thousands of companies engage with that business, much earlier stage companies. The idea here is really, how can we bake in – and the ecosystem will evolve over time – but how can you help companies bake in from a very early stage, thinking about governance, and thinking about the way they operate, to really be thinking in a broader, more multi stakeholder way, in a more visionary long-term way, and to really be doing that from kind of day one where they are creating in their own DNA those types of behaviors so that it just becomes part of who they are and how they operate?
[0:52:48] JS: Well, this is such an important point that I was about to make, which is that, when companies are going public, where they're listing is a late-stage decision. But implementing all these policies is non-trivial.
[0:53:01] MG: Right. Absolutely.
[0:53:03] JS: LTSE, it includes facilitating incentivizing companies to take the long-term view long before they go public.
[0:53:14] MG: Absolutely, absolutely. We think that's critical. Look, the long-term stock exchange is not for every company. It's really for those companies that are operating and thinking in long-term focused, multi-stakeholder ways. Often, that starts in a company's DNA really early on. Of course, in stage-appropriate ways. But there's kind of this natural progression. Part of what we do is work with companies, both when they're approaching IPO, but also much earlier. But for the IPO, often, it's sitting down with them and looking at what they're already doing. Saying, you may not have been thinking about this in these buckets. This may just be who you are and what you do. But actually, you're already doing all this stuff, you're just not articulating it this way, and getting the credit for it that you deserve. Part of it is really helping companies to tell their own story in a way that gets that recognition they deserve from their employees, and their investors, and their customers.
[0:54:10] JS: How's it going? It's been a long road. It's not a trivial thing. We actually now have companies listing on it, and I just love to hear more about what you're seeing in the current moment.
[0:54:23] MG: Yes. It's an interesting moment, but we put these listing standards and principles together several years ago, before ESG was a mainstream idea, right? Before the Business Roundtable, and before all of these things were part of the public lexicon, really. What we've seen now is this rush to embrace some of these principles. But again, there’s so much greenwashing and so it becomes so much harder to distinguish who means it and who doesn't. Look, now we're actually seeing a backlash against ESG in particular.
[0:54:58] JS: Could you say more about that?
[0:55:01] MG: There are pension funds that are saying we will divest ourselves of companies that do certain things that would be considered part of ESG, and you're seeing political leaders taking stances against some of these things as well. One of the reasons – it's interesting, it’s one of the reasons that we really talk about the time horizon, and we kind of lead with that, and you and I have talked about this, but I think it's worth mentioning. Part of the reason I ended up with the long-term stock exchange is because I had been working at the New York Stock Exchange, many, many years ago, over a decade ago.
It was very early on in sustainability work, I helped launch, I launched the New York Stock Exchange's internal sustainability program and then worked with dozens of Fortune 500 companies that were back then just launching their own programs. Part of my takeaway from that, and this was early days, was that the companies that were doing it well, versus the companies that were doing it as this nice thing over there that somebody's responsible for. Those companies were really integrating it into their core strategy. The differentiator was their time horizon.
The companies that were really thinking long-term, it wasn't that they needed to say, "Oh, wait. We should be thinking about this other group." It was just naturally part of their analysis if they had a truly long-term perspective. That's what really initially attracted me to LTSE, was this idea that we can really reward those companies that are thinking this way, and give them an ecosystem to operate in, that they're not swimming upstream. It's a system that actually rewards and incentivizes that. In our early days, we would go down to Washington regularly, and we would talk with folks on both sides of the aisle. While they liked it for different reasons, both sides liked it. Who doesn't want to create long-term value? I think the current political climate, I think everyone is still in favor of long-term value creation, ultimately, right?
That's speaking to the larger trends we're seeing. Certainly, the exponential increase in sustainability investing is a force at work. I think one of the reasons that you see so many more companies talking about these issues, and that you see a need to really differentiate those companies that are committed to those companies that are just talking about it. Because those investors are looking for evidence of who's really committed. I think those are some of the interesting trends we've been seeing in terms of the companies themselves. It's been, for me, such a fun journey.
The group of companies that we talk to are self-selecting, right? They're companies that care about these issues, and that are focused on these issues. We talk to companies that exist because they want to change the way the business operates. They exist because they are about a broader mission and a broader purpose. One of the things I love the most is companies that don't even realize they're doing cool, innovative things, and come and tell us how – oh, yes, we're going to have employee shareholders represented on our board and don't even realize that that's a really cool idea, because they just think that's the right thing to do.
[0:58:11] JS: One of the things that has always gotten me excited about LTSE is that it has its roots in the technology industry with Eric Ries, the founder. Tech is such an enormous part of the economy, just by sheer size, the largest companies in the world are all tech companies. A lot of the initial dual class shares to retain control and address some of the issues that we talked about came from tech companies innovating in governance. But I just get excited about technology companies adopting this not just because of the size of the economy, but also just influence in the economy.
[0:58:43] MG: Absolutely. Absolutely. Look, Eric Ries, as you mentioned, our founder, the author of The Lean Startup, it's in our DNA. We are a tech company. We work with a lot of tech companies. Part of the reason we were founded, and really Eric striving for us, and founding us was around innovation. It was the idea that companies when they went public, suddenly their ability to innovate was so impeded. It's about how we can create a public marketplace where innovation is still encouraged.
[0:59:12] JS: I love that he called for this at the end of The Lean Startup.
[0:59:17] MG: Yes. Yes.
[0:59:17] JS: Then there's like, "Shit, nobody's doing it. I guess I have to do it."
[0:59:22] MG: Exactly. Yes, he loves to joke about that. I was like this throwaway line in a book, and he thought somebody would take it up in the capital markets, and then nobody did. He felt so strongly that this was something that needed to exist in the world that he was like, "All right, not my field, but I can do it." Now, through a lot of time and effort by him early on with lots of naysayers, we like to joke in the early days, we'd go to venture capital firms. These firms that were funding life on Mars, and cryogenic, live forever were like, "Funding capital market system? that's not possible."
[0:59:58] JS: I love it.
[0:59:59] MG: It was definitely seen as an audacious goal. But we're live, we have an exchange, we're starting to implement it, and bring about some of the change, we hope.
[1:00:08] JS: What are you seeing as the limitations?
[1:00:12] MG: I think there's a few. One of them is just identifying and connecting with the right companies, right? Because as I said, this is not for every company, and it shouldn't be for every company. So it's not just anyone who comes along. It's really identifying, connecting with companies that this is how they operate. I think that's a challenge. Then, frankly, having those companies say, "Yes, I want to do something with my listing, and have that be meaningful to change in the capital market system.”
Especially the moment of IPO is a moment that feels inherently risky to a lot of companies. Some companies will list with us after their IPO because that feels perhaps more comfortable. Identifying, connecting with those companies and bringing them along on the journey to understand things like – one of the big questions we get is, there's this perception that where you list is where you trade, which is actually not true at all. The way that what's called the national market system is set up is that every company regardless of where it's listed trades everywhere. There's no negative impact on liquidity from listing with us at all. But there's that perception sometimes, so that's just an educational piece.
Then, there's strong interest in the status quo for many parties that don't want to change that status quo. I'd say that's an impediment. Then, it's really – part of it is really identifying on the other side of the equation, those investors who are truly long-term. As I said, we've been doing a lot of work on that as well. But it's really for us about aligning that capital and rewarding that behavior by companies, and helping all of their stakeholders to see that including the long-term investor.
I think those are the pieces that kind of pose the greatest challenges. As I said, we put long-term in the name, because we see this as a long-term goal. We knew it wasn't going to happen right away. We knew it was going to take time to become an exchange, time to then get the listings, and to get the critical mass of companies, and that years of data to prove the value proposition true. We're still in process on all of that, but it seems that the world has moved in our direction in terms of value –
[1:02:17] JS: Slowly but surely.
[1:02:18] MG: – take their approach and valuing this longer-term orientation and valuing a broader group of folks. We feel like there are some good forces moving in the right direction.
[1:02:28] JS: Are you seeing challenges in access to capital? Because what I generally find is that the companies want to do these progressive things, and its access to capital that leads to the compromise.
[1:02:38] MG: Yes. It's interesting, because I think in the public markets, that's a little bit different than the private markets. I think that plays out differently. Certainly, the private markets have changed pretty significantly recently, and access to capital has become a much harder road. At the same time, as I mentioned, the percentage and the sheer number of investors who explicitly care about these things has grown enormously.
[1:03:09] JS: Yes. What do you think will be really interesting is the research. Once the research actually starts to come out, particularly around just insulating from economic shocks, with these long-term policies, which ostensibly would be the case?
[1:03:24] MG: Well, this is our theory of the case, and our own research will come out over time. But there's lots of great research out there. That was how caring about these types of issues actually creates long-term value. Companies that stopped giving quarterly guidance tend to outperform. We based this whole year on a lot of evidence out there. We're excited to have our own evidence, but there's a whole body of evidence out there already, underlying each of these theories.
[1:03:53] JS: You can never have too much.
[1:03:55] MG: Yes. If you want to be contributing more.
[1:03:58] JS: The opposing forces are quite strong, so you never have too much. This conversation is so foundational, it's so important because it really shines a light on where we're at now. What can happen to marginally shift us to a better version of capitalism, because that's the thing that's so interesting about the long-term question. If we just optimize over a longer time horizon, we get such better alignment with our social objectives.
[1:04:26] MG: Yes. Yes. That's literally why I'm at the Long-Term Stock Exchange, because that was my whole idea, was – all we need this alignment over time horizon? Can we get there? Why is that so hard?
[1:04:37] JS: I think that if you have implemented long-term capitalism and stakeholder capitalism, you get very far.
[1:04:45] MG: Yes. I'm not suggesting it's the whole solution, but I feel like if we can make this long-term orientation, this multi-stakeholder orientation kind of mainstream, it gets us a long way.
[1:04:57] JS: Stakeholder capitalism is a whole nother conversation. We touched on a lot of the key pieces. But if you implement a variant of stakeholder capitalism, that actually gives people without financial incentive control. Then, you're looking at something quite different. I think if you're compensating around long-term, there still may be some tension between growth and extraction and social objectives. But it's light years superior to the dominant form today of quarterly capitalism that we spoke to at the beginning.
[1:05:30] MG: Yes, could not agree more.
[1:05:32] JS: Okay. Thank you so much. This is such a central foundational conversation. It was literally one of the first five that we had when we started. I'm very excited.
[1:05:41] MG: Well, I'm honored to have been one of the first five and honored to come back again and talk to you. I really, really enjoyed the interesting conversations and fascinating different ideas that you explore. Thank you.
[END OF INTERVIEW]
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