United States: LTSE Proposes Listing Standards To Support Long-Term Value Creation

Last Updated: August 5 2019
Article by Cydney Posner

As evidenced by Corp Fin's most recent Roundtable, short-termism is a major concern of SEC officials, both in terms of its potential impact on Main Street investors—who are investing for the long term to fund their retirements and other long-term needs—and its potential to deter companies with a long-term focus from becoming public companies, instead driving them to seek funding in the private markets, where short-termism is less of a factor. (See e.g., this PubCo post and this PubCo post.) As SEC Chair Jay Clayton commented during the Roundtable, with so many companies delaying their IPOs or avoiding them altogether, at the end of the day, he was concerned that, in 10 years, the general public would not be able to participate in 70% of the economy because those companies would be privately held. (See this PubCo post.) Will the Long-Term Stock Exchange, a novel concept for a stock exchange that was approved by the SEC in May (see this PubCo post), come to the rescue?

Much has been written about the problems associated with the prevalence of short-term thinking in corporate America. As noted in a post from The Harvard Law School Forum on Corporate Governance and Financial Regulation, an academic study revealed that "three quarters of senior American corporate officials would not make an investment that would benefit a company over the long run if it would derail even one quarterly earnings report." (See this PubCo post and this article in The Atlantic.) There are, of course, many points of view with regard to the causes of short-termism, with blame attributed to, among other things, executive compensation (see this PubCo post and this PubCo post), pressure from Wall Street to increase quarterly results (see this PubCo post), traders' compensation (see The Atlantic), the "legal underpinnings" of capital markets regulation and the business model and prevailing culture of the investment management industry (see this PubCo post), caselaw regarding directors' fiduciary duties (see this PubCo post), and, perhaps most significant, hedge-fund activism (see this PubCo post).

The San Francisco-based LTSE, which is expected to begin accepting listings and to start trading later this year, is a concept that started to come to fruition in 2017, backed by some heavy-hitting investors. (See this PubCo post.) The concept is to offer, through listing standards and other tools, a "new approach to governance designed for the mutual benefit of companies and investors." In particular, LTSE's founder said that he discovered in his conversations with entrepreneurs that many were reluctant to go public. Why? Always for the same reasons: "managers are concerned. Concerned about losing control of their company. Concerned about having to manage to the quarter. Concerned about compromising the company mission. Concerned about the distractions that take energy away from serving customers and creating value. Concerned about being punished by the markets for investing in anything other than driving short-term metrics." What was needed, he decided, was "a new public securities exchange designed to promote long-term value creation." The new exchange would "craft a new bargain between great companies and long-term-oriented investors that share the collective goal of innovation and value creation."

While the LTSE would certainly "be a marketplace for buying and selling shares of listed companies," the Exchange's CEO explained, the LTSE expects that when companies list shares for sale to the public, "they will adopt a set of governing practices that are designed to help them build lasting businesses and empower long term-focused shareholders. For example, we expect that companies listed on LTSE will, among other things, develop indicators of progress toward long-term success and link executive pay to long-term performance. And that they will disclose investments in long term-focused research and development, and explain their approaches to community, diversity, and the environment."

As discussed in this PubCo post from 2017, the LTSE had originally planned to include, as part of its "bargain" with listing companies, these three tenets:

  • Additional disclosure policies, such as a moratorium on "guidance," and disclosure requirements that allow investors to know what investments the company is making, such as more detail on R&D spending.
  • Tenure voting, meaning that long-term holders (which the exchange's founder refers to as "citizens of the republic," according to the NYT) have incrementally more voting power than short-term holders (termed "tourists"), so long as the investor discloses the real name of the beneficial owner. (For a discussion of tenure voting, see this PubCo post from 2015.)
  • Selection from "a menu of LTSE-approved compensation plans designed to make sure executive pay is not tied to short-term stock performance," with vesting required for at least five years and recommended for as long as 10 years, even after the executive may have left the company. Reportedly, these plans would avoid bonuses tied to metrics such as EPS, which, the exchange's founder believes, "pushes [executives] to goose the numbers."

With regard to the tenure voting component, which was criticized in a comment letter from the Council of Institutional Investors, the founder has acknowledged that it's "likely that the tenure voting proposal, which is controversial among many market watchdogs, will need to be revised," according to the thestreet.com. However, the other principles were not evident in the LTSE's listing application either. In response to the LTSE's application for approval as an exchange, the SEC concluded that its corporate governance standards were "substantially similar to the corporate governance listing standards of other exchanges, such as the NYSE and Nasdaq, including its Voting Rights Policy." Tenure voting aside, what happened to the LTSE's much ballyhooed governance practices for listed companies focused on long-term value creation? Where's the beef?

It turns out that a lot of the beef is in this Notice of Rule Proposal recently filed with the SEC, which, if approved, would provide for new listing standards that "require companies listed on the Exchange to develop and publish certain policies that the Exchange believes will facilitate long-term focus and value creation." Under the proposed new listing standards, the company would be required to review all of these policies at least annually and make them publicly available on or through the company's website, disclosing that fact in its proxy statement or 10-K. These policies would be required to be consistent with the set of principles below, developed by the LTSE and its affiliates over several years to promote long-term value creation and to help combat short-term pressures:

  • "Long-term focused companies should consider a broader group of stakeholders and the critical role they play in one another's success;
  • Long-term focused companies should measure success in years and decades and prioritize long-term decision-making;
  • Long-term focused companies should align executive compensation and board compensation with long-term performance;
  • Boards of directors of long-term focused companies should be engaged in and have explicit oversight of long-term strategy; and
  • Long-term focused companies should engage with their long-term shareholders."

The LTSE believes that adding these mandated policies to its listing standards will help to differentiate LTSE-listed companies for investors that want to "promote long-term focus and value creation." Listed companies will have flexibility to develop policies appropriate to their businesses, so long as they include certain minimum elements and are consistent with the principles identified above. LTSE's proposed new policy requirements are described below (substituting "company" for the LTSE's defined term "LTSE-Listed Issuer"):

Long-Term Stakeholder Policy

This policy would explain how the company, in operating its business, takes into account "all of the stakeholders critical to its long-term success. At a minimum, this policy must include a discussion of (i) the stakeholder groups the company considers critical to long-term success, (ii) the company's impact on the environment and its community, (iii) the company's approach to diversity and inclusion, (iv) the company's approach to investing in its employees, and (v) the company's approach to rewarding its employees and other stakeholders for contributing to the company's long-term success." The LTSE believes that consideration of sustainability and various stakeholders enhances long-term planning.

Long-Term Strategy Policy

This policy would explain how the company "prioritizes long-term strategic decision-making and long-term success," and would include a definition of the company's "long-term time horizon," and include a "discussion of how this time horizon relates to the company's strategic plans, how the company aligns success metrics with that horizon, and how it implements long-term prioritization throughout the organization." The LTSE believes that "long-term" success should be measured in "years, decades, and generations rather than quarter-by-quarter, and this approach should be integrated into strategic planning and decision-making throughout the organization." Disclosure of this policy is also intended to "increase transparency for shareholders on the strategic goals of the company's managers and provide for greater alignment and accountability between a company's long-term vision and investor expectations."

Long-Term Compensation Policy

This policy would explain how the company aligns executive and board compensation (financial and non-financial) with the company's long-term success and long-term performance metrics. The Exchange believes that long-term focused companies seek to align the compensation of their executive officers with long-term performance. Even though much of this information is required in CD&A, the LTSE believes that the policy disclosure would still be helpful because it would extract and possibly expand on the CD&A discussion "most relevant to a long-term focus."

SideBar

At the recent Corp Fin Roundtable on short-termism, one institutional investor attributed the problem of short-termism to a misalignment of incentives, beginning with the confluence of deeply embedded incentive schemes that have long promoted short-term interests, including, for example, large components of equity compensation for management triggered by short-term performance goals. With that as the root cause, he suggested, an answer might lie in shifting the focus to long-term incentives. He indicated that some benefit might result from the increased attention to long-term plan metrics and investor dialogue that have stemmed from say on pay. He also discussed the need for companies to promote their long-term strategies and marry those with investor needs, such as by laying out their core purposes and how they plan to address big trends and big risks. This type of disclosure would help provide a context in which investors could better judge "misses." (See this PubCo post.)

Long-Term Board Policy

This policy would require the company to explain the nature of the involvement of the company's board in maintaining the company's long-term focus, including "discussion of whether the board and/or which board committee(s), if any, have explicit oversight of and responsibility for long-term strategy and success metrics." The LTSE advocates a forward-looking engagement role for the board on strategy rather than a role in "primarily an audit function and looking backwards, as many boards seem to today."

Long-Term Investor Policy

This policy would require the company to explain how it engages with long-term investors. In the LTSE's view, "forward-thinking companies value long-term investor input and consider their perspective on company governance as important to the development of the company's long-term strategy." Engagement is also likely, in the LTSE's view, to better enable investors to support a company's long-term approach.

In its application, the LTSE also indicated its intent to separately propose other changes in the future designed to further a long-term perspective.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions