Michelle Greene – A New Stock Exchange Focused on the Long-Term.


What we’re looking to do is to really change the way that companies show up in the world and in order to make that change, we have to think about the system in which companies operate. So companies aren’t operating in a vacuum.

They’re operating in our current capital markets, which are really overly focused on the short term, and we want to create the new system and that new system is something that will enable companies to act differently.

So when the focus is on quarterly reports – and as you heard from the last question, in fact, in the last session when that focus is too heavily on quarterly reporting, that puts a lot of pressure on companies to behave in short-term ways and to make Short-Term decisions, and when that happens, we always for me when I was at the Treasury Department in the last financial crisis.

This became abundantly clear because what we could see was that there were financial companies that had taken actions that were having a real negative impact on their customers on their communities and on the economy as a whole.

And that was because they had acted in ways that we’re too focused on short-term results and weren’t focused on the broader picture, and so we want to change that kind of behavior by changing the whole system.

And we want to create a different kind of financial market that allows for a different kind of capitalism. Now the reason that a stock exchange is a way to do that. It is really for two reasons. The first is that, if you want to change the system, you have to change the rules and that’s.

What stock exchanges do they make rules? They make listing standards that companies that list on the exchange have to follow and our rules are all geared toward that long-term focus. What we’re trying to do is create a place where companies can maintain their focus on their long term mission and vision and, at the same time be accountable for their impact on the broader world.

So, to make these rules, we created five core principles and those core principles are really about how you can put them together to come up with a long term system, and the core principles also have some specific requirements with them, and these requirements are very different than Those of any existing exchange so, for example, companies that list with us commit to adopting publicly a policy on diversity and inclusion, and that’s incredibly important in today’s world, of course, companies that list with us commit to investing for The long term in their employees also very important and in the current system, treated as overhead, rather than investment and companies that list with us commit to taking in a certain approach to the environment.

So there’s, a bunch of other standards as well, but the broader point is that these standards taken together create a different kind of commitment than companies can make now because it’s, a different set of rules than any Stock Exchange Has and that commitment is the second reason that a stock exchange is important.

We’re in a moment where there’s, a real move to change capitalism, there’s; moves towards stakeholder capitalism and there’s. A desire to really think about things differently and we’ve, seen that everything from the Business Roundtable letter to different types of pledges and frameworks, and it’s, become really difficult for a company.

That really means it and really intends to operate differently, to distinguish itself. How can that companies show that they’re, not just signing on to something, because it’s kind of the interesting thing of the day, but in fact, they intend to operate differently and listing on a stock exchange?

Is a legally binding commitment? It’s, a way to say publicly. We are not only operating this way today, but we intend to continue to operate this way, and that sounds a really powerful signal. It’s, a powerful signal to a company’s, investors to their customers to their employees, and it’s. a powerful signal that those groups can then use to make decisions about what companies they want to invest in what companies they want to buy products from and where they want to work, because, increasingly, that really matters to people.

At the moment, we have an opportunity for a reset. We have a chance to really change our system and if we can create a long-term focus system where companies are freed up to really make long-term choices, what those companies will end up doing is creating more long-term value and that’s good for companies, But they’ll.

Also, do it in a way that’s better for the rest of us, and this is the type of new system that we need. We need it because it’s, the right thing to do, but we also need it because it’s. The only way that we can create a system of capitalism that is more sustainable, more equitable, and something that will work for everybody.

So I feel optimistic, I feel optimistic that in this current moment we can use this reset to change capitalism, and I think this is one area that we really can build back better Thanks, thanks for sharing that Michelle, you and I talked about it at this moment.

The last thing that most companies want is to be judged on quarterly results because the near-term numbers are often pretty bad um. But I’m curious. What you know. It seems like a lot of the response.

To quarterly results is the availability of data like there’s, so much data out there, and even if the companies themselves aren’t providing them. Sometimes they’re provided by third-party research firms.

You know they’re satellites, looking in on parking lots and all of this data is collected and put out there, and so how do you can’t sort of stop the flow of that? So how do you? How will companies kind of manage that against stopping that from getting into the hands of investors?

So so what do companies do to kind of refocus? How will the market help them refocus? In the long term, despite that, it’s a great point, and more information is a good thing, and particularly if it’s, information that investors can use and employees and customers and other stakeholders can use to really make smart choices that align with their own values.

So what’s really important here? If we recraft the narrative right now? The narrative is too focused in the financial markets on quarterly earnings per share and that’s. Just not the right way to judge where a company’s going or how it’s impacting the world or how it’s, going to succeed over the long term.

So what we’re, really trying to do is rewrite the narrative for success. Companies should have their own plan for how they’re, going to succeed over the long term. They need to tell their stakeholders, including their investors, how they’re, going to measure success over that journey because, of course, there ‘

S still has to be accountability, but the accountability should be for the right things. It shouldn’t be for quarterly EPS. It should be for your long-term plan, your long-term strategy and how you’re executing against that, and importantly, how your execution against that is impacting a broader group of stakeholders and the world.

So one of your principles focuses on time horizons, but you let the companies or you’re, going to let them companies themselves define what they consider long term. Why did you make that decision and does that create challenges for investors in terms of comparing one company to another yeah we, so we took the principles of based approach generally because what we found was that it was really important to not try and do a One-Size-Fits-All, you know the long term in a retail company might be very different than the long term in an energy company, for example, right and what you want, the company to be able to articulate is what are the time horizons that you’re.

They are using for different things right, so you have some companies that will say our time horizon is infinite, but obviously, they don’t, do strategic planning for an infinite time horizon right. So, do you do your strategic planning over three years or five years, and how do you use those different time horizons for different activities and values within the company and sharing that information publicly with your stakeholders so that they understand what that means and how you Approach that that’s, an important part of kind of rewriting the narrative and getting to the point where we can be talking about success in a more meaningful way than quarterly financial results.

That makes sense. I also wanted to dig into another one of the principles around compensation, so just to illustrate the difference. Typically, executive compensation is disclosed to shareholders. What will be different about what’s disclosed for a company on the LTS II? Yes, so there is a lot of disclosure around executive compensation, but I’m, not sure there’s, a lot of effective disclosure around executive compensation right.

So there’s, a lot of information, but sometimes you can’t even tell from that information. What the actual compensation is. So what we’re trying to do is not to require more, not helpful, transparency around compensation.

What we want companies to do is instead to talk about their policy around compensation. How do they think about linking compensation to long term success, and it doesn’t require additional disclosure around any particular executives compensation.

It requires additional disclosure around how the company is going to make those important links and when we were doing our work to devise these standards. Executive compensation was actually the number one concern of investors.

So it’s, something that investors are really paying attention to and that they feel like they. Don’t necessarily have the right kind of information, despite all those requirements, when companies report sort of how they’re.

Adhering to your principles, how will you share that with LT se investors and like how often won’t be disclosed? Will it be quarterly? Dare I ask yeah so the way that the system works is there? Are these five principles and companies need to develop policies around each one? They develop metrics that are specific to their company and they share those publicly.

So the policies are publicly available all the time on the company’s website. Of course, if they make any change to the policy that’s, something that they would discuss when they make that change. But in terms of the ongoing reporting requirement, we don’t want to make it a quarterly report.

We think that’s, the right timeframe. We think it’s when there’s, a material change and then updating at least annually, but because they do keep these policies public anytime, that they change. The public will know about that.

Investors will know about that and that’s, something that all of their stakeholders can have transparency into. So how will you hold them accountable? I mean, and so this isn’t just some sort of squishy marketing message I mean: will you be monitoring their, how they update and how they I mean your are you? Are you making sure they’re, doing it yeah? So accountability was really important to us and, of course, this is where you have to balance how prescriptive or you’re going to be, and how do you still find accountability even in a principles-based system and that’s, something that we Really are really committed to and find really important, so it happens in a couple of different ways.

First of all, when companies initially list with us and they develop these policies in these five in these five areas, we actually, as the exchange, make a judgment about whether those policies are consistent with the underlying principles.

So, for example, if someone came along and said you know, our environmental policy is to burn fossil fuels forever, because we think climate change is false. Well, that’s, not actually a long term for pencil policy, so you may have a policy, but it doesn’t actually comply with a long term principle.

So there’s, that initial check of do. They comply with the principles. The policies themselves are made public, but then there’s, also a whole series of information that we receive as the regulator within the exchange, and that information is something that we use to make sure that the company’s.

Not just saying we’re gonna do this. They have a real actionable plan for implementation and that they have ways that they’re, going to make sure that it’s really happening within the company. You know it’s, gotten board approval.

If that’s necessary or there’s, a plan to enact it throughout the company, so it has to be really actionable. And then the other piece of this is that these policies are part of the listing standards and that’s.

A a very serious commitment for companies. And if companies put out there into the world pursuant to the listing standards that they are going to do something there is a really legally binding up to do that.

So we think there is a serious level of accountability here. I have such a long list of questions, but I think we should take a few from the audience. So we’ll have the first one up here. It is from Chadbourne.

Is it more important to get a large company to modify their short term behavior or for smaller startups to start with that philosophy, both no, we do. We are actually working on both ends of that spectrum because we do think both are important.

We want to see this change for big existing public companies. They can do lists with us, so it’s, not that they have to change that. But we want to see those behavior changes with big existing companies, but we also think it’s really important to start early, because the earlier that a company starts thinking this way, the more embedded it becomes in their culture in their operations and as They grow that will just become something that they incorporate in a stage appropriate way as they move forward and then when they’re ready to list there will be a public market that aligns with those values.

So we think it’s. Not an either/or it’s about okay, we’ll. Take another question from Steven: do Bitcoin and Bitcoin and other digital currencies benefit a long-term market. That’s, an interesting question and it’s.

Not you know it’s, not one that we’ve spent a lot of time focusing on to be honest because we’re initially working within the US system as it exists now later phases might move in different directions, but we feel like initially, we want to start working within the current system and Then we’ll start looking at all of these other issues that could impact having a more long-term focus system holistically.

So not something we’re working on now, but could be in phase 2 all right, let’s. Take one more from the audience and then I have one more question and then I think we have to get here, oh and Chris back on.

So how long do you expect it will take to see widespread adoption of ESG philosophy, or maybe in other words, how long do you think it’ll take before the market gets up and running well, so those are two different questions, but let me Answer each of them so where we are, as we have all our approvals, we were getting ready to launch when the pandemic hit and so have delayed the launch just because we want to do it in a smart.

You know people first kind of way, so we will be launching in the coming months how the pandemic plays out in the coming months will influence exactly when but soon, and we are already in conversation with a lot of companies and if anything, i’d say: the pandemic is actually really increased interest in this idea.

So I hope that the answer to both of those questions is very soon, but you know we’ll have to wait and see how quickly the companies adopt these changes, but we are. We are very optimistic, given the interest that we’ve seen in this current environment.

So one of the criticisms of short-term thinking, especially related to this current moment, where so many companies were hit incredibly hard with the pandemic and the loss of business was around stock buybacks, which I think last year there was 700 billion dollars worth of stock buybacks and If you think about that now, you know that if we were thinking long term that money might have been better spent, you know on shoring up balance sheets and taking care of employees.

How do you think do you think the behavior would be different for those companies on the LT se yeah? I really do because I think excessive stopped buybacks, I think, are just a symptom of this short-term pressure.

You know why do companies do buybacks? Well sometimes it’s, the best use of the capital right. But, as you say, the sheer volume of buybacks that we’ve been seeing seems to indicate that that’s, probably not the only buy bets that are taking place.

So why else might companies do them? Well, if you want to make your numbers look better, making your denominator smaller is a good way to do that. So I do think a lot of the buybacks sort of happened have been driven by this desire to meet quarterly numbers and actually, there’s, some good academic evidence that shows that as well.

So the hope is if we can remove that pressure and focus on this quarter, that hopefully, companies will make buybacks when it makes sense, but not use them so excessively for reasons that are really about financial engineering yeah, and be nice.

If this long term thinking really took off right now in this moment,

Becoming Smart!

It is said that with age comes wisdom. As a "senior" I would candidly say that were I able to live my life over again but retain all of the lessons that I have learned in my life, then the new, young me would enjoy a very different life than that which I have enjoyed. Experiences (good and bad) teach us life's lessons if you apply them. My intention with this blog is to provide a constant source of wisdom to you, gentle reader, in the hope that you can avoid some or more of life's mistakes and thus enjoy a better quality of life. My sources are global because applied wisdom is what counts.

Recent Posts