A new stock exchange focused on the longterm Michelle Greene
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 with hero 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 were 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 the 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 I think we’re in the current
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 in this moment
the last thing that most companies want
is to be judged on quarterly results
because the near-term numbers are often
pretty pretty bad um but I’m curious
what you 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 a
third party research firms you know
they’re satellites looking in on parking
lots and and all of this data is
collected and put out there and so how
do you you can’t sort of stop the flow
of that so how do you how will companies
kind of manage that against you know you
can’t you can’t stop 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 on the
long term despite that yeah it’s a great
point and look more information is a
good thing and particularly if it’s
information that investors can use and
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
is
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 like comparing one
company to another yeah we so we took a
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 long term in
a retail company might be very different
than 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
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 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 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 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 a 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 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