With the Long-Term Stock Exchange, or LTSE, officially approved by the US Securities and Exchange Commission in May 2019, the global markets are set for a shake-up.
The LTSE claims to be a stock exchange for a new generation of companies, and it is on a mission to enable 21st-century companies to thrive in the post-financial crisis market. Its founder and CEO, Eric Ries, says the LTSE wants to help companies to build lasting businesses, and to empower those investors who are focused on the long term. It’s about combating the short-termism that has become rife in the modern market, in turn creating an ecosystem in which “businesses are built to last.”
“We are building a market where companies are rewarded for choosing to innovate, to invest in their employees, and to seed future growth,” writes Ries. “And where companies can run their businesses with the stewardship that similarly aligned shareholders, stakeholders and society demand. Our vision is that companies in every industry will be able to go public while continuing to prioritize and pursue strategies for long-term success.”
But what does this mean for investors? Will having a stock exchange focused on long-term value make a difference for investors? And will they actually care, or be interested, if there are no short-term gains to be had?
Thinking beyond the IPO
One of the problems identified with the current system of listing is the focus on the IPO, or the initial public offering. Companies that want to go public put a lot of time and effort into preparing for the IPO, which can take up to two years of planning and needs a lot of time invested in organizing entity data. But that IPO can fail — once a company opens trading on the stock exchange, its fate is no longer in the hands of its founders or managers. Suddenly, there are multiple owners, all in it for their own gain and not necessarily thinking about what’s best for the business. Under pressure from stockholders, a board may be forced to think only of the next quarter, not the next five years. This can lead to lurches in strategy and a compliance and governance process that is less than best in class.
The LTSE’s founder has stated that many entrepreneurs told him they were reluctant to go public because they are concerned about losing control of their company, compromising the company mission, and being distracted from serving customers and creating value.
The fact that going public and listing on an exchange can detract from creating long-term value could be seen as a failing in the current ecosystem. The focus on right now, and on the next earnings call, is stalling sustainable growth and causing many issues in governance and compliance.
What will the LTSE do differently?
In a change of pace for listed entities, it’s expected that when a company lists its shares for sale to the public on the LTSE, they will “adopt a set of governing practices that are designed to help them build lasting businesses and empower long-term focused shareholders,” writes Cydney Posner for the Harvard Law School Forum on Corporate Governance. Companies will need to develop indicators of progress toward long-term success and link executive pay to long-term performance.
Companies will also need to disclose any investments they’re making in long-term-focused research and development, and explain their approaches to community, diversity and the environment.
“The long-term policies that companies who list on the Exchange agree to adopt and publish are based on five underlying principles,” according to the LTSE’s frequently asked questions section. “The principles state that long term-focused companies consider a broad group of stakeholders, measure success over years and decades, tie compensation of executives and directors to long-term performance, engage directors in long-term strategy, and engage long-term shareholders.”
All of these things push toward the LTSE being an exchange that seeks to avoid the corruption scandals, the compliance and governance issues, the extreme highs and lows, and other such challenges faced by many on the bigger-name exchanges. The fact that it will demand transparency on items such as executive pay means that company culture will be of more importance to investors than it might otherwise be. Likewise, the company’s governance and compliance procedures will need to be water-tight, handled centrally and managed through robust processes.
How can compliance software support long-term visions?
Short-termism is a major issue in the corporate world today, and so anything that can be done to encourage investors to think not of the next earnings call, but of the long-term value creation will be of benefit to more than just those investors — it will encourage a more transparent approach to governance and compliance, with stockholders demanding more visibility into company operations to ensure that long-term investment will pay its dividends.
That means that in-house legal operations, compliance and governance teams will need to have a robust approach to their roles to ensure stockholders can get the transparency and visibility they will no doubt demand. Without a robust approach to entity management, the company listed on the LTSE risks alienating stockholders and finding its LTSE IPO failing.
By working with entity management software, such as Diligent Entities, legal operations and compliance professionals can create a single source of truth for entity data. Entity management software creates a central repository in which to store entity information, documents and organizational charts in a highly secure format, and enables compliance professionals to manage the ongoing accuracy of the corporate record by using compliance calendars, reminders and workflows for better data.
Where entity management software becomes relevant to those companies listing on the LTSE is the robust communications model it creates. The cloud-based nature of a system such as Diligent Entities enables companies to surface the right information to the right people at the right time in order to complete routine business processes. And by integrating this system with a board management portal such as Diligent Boards — which allows the corporate secretary to easily manage agendas, annotations, documents, discussions and minutes quickly and securely — the governance and stakeholder communications process becomes seamless.
Get in touch and request a demo to see how Diligent’s suite of governance, compliance and risk management software can help your company to get ready for listing on the LTSE.