Last week, the Long-Term Stock Exchange (LTSE) raised $50 million in a Series B funding, after it was approved as the 14th listed exchange in the U.S. by the Securities and Exchange Commission in May. The goal of LTSE is to direct the incentives of publicly listed companies away from short-term goals (e.g. beating quarterly projections, shrinking R&D budgets to cut costs and boosting operating income), so that they can focus on long-term growth instead. Investors in companies that are listed at the LTSE are to provide disclosure of their investment commitment and their voting powers increase in correlation to this, meaning that company founders know the time horizon of their investors and gradually sacrifice their control. Furthermore, executive compensation should be less tied to short-term goals (e.g. a certain share price).
What does this mean?
In his General Theory, John Maynard Keynes described how the financial sphere of the economy became more and more detached from the real sphere (thus voicing a Marxist critique), because of the distinction between ownership and control of companies on stock markets. Whereas a company’s managers are responsible for its long-term survival, shareholders – those who actually own the company – are mostly interested in short-term gains on their investments. One of the results is that investors quickly sell and speculatively buy stocks in times of cyclical and short-term volatility, leading to a kind of “casino capitalism”. In order to align shareholder interests with those of the company itself and create a more sustainable form of capitalism, Keynes proposed that investors should be legally bound to their investments for a longer time.
We have written before that the number of IPOs and publicly listed companies has been diminishing, which particularly holds true for tech companies, that foresee problems explaining their business models and performance to stockholders. Furthermore, the financial cycle has become much more important to macroeconomics and the global business cycle. Both observations show that a more long-term horizon is needed in order to create a more sustainable and equitable form of capitalism. The Rhine model of capitalism, with its stakeholder approach and focus on companies’ long-term relationships, might provide inspiration for these ideas, and thus for a new opportunity for stock exchanges to attract international capital. Especially after Brexit, Europe can position itself as a long-term trading hub, helping companies to outperform if they have a long-term horizon, and boosting its ideas to incubate its own tech sector from this perspective.