Nairobi Securities Exchange trading board. FILE PHOTO | NMG
Recently, the Securities and Exchange Commission (SEC) approved Long Term Stock Exchange’s (LTSE)—a trading platform that seeks to reward long term investing — application for registration as a national securities exchange.
LTSE’s idea is to help listed companies focus on the long term and simultaneously empower long-term focussed investors by creating an ecosystem in which businesses are built to last. But there’s a little conundrum best explained by my favourite CEO, Jamie Dimon (JP Morgan). In his latest annual letter, he protests: “Many investors legitimately demand that companies think long term and explain their strategies and policies. Meanwhile, these same investors, that demand long-term thinking from companies, often invest in funds that are paid a lot of money for how a stock performs in one year”.
So here’s the part that needs to be addressed—are investors really prepared for an idea like the LTSE? Well, no one really knows but time will tell. However, for now, we can focus on LTSE’s main selling point; the controversial rule that “if you’re invested short term, your votes don’t count”.
Call it smart or otherwise, the “unequal voting rights” rule seems necessary for today’s markets. The requirement for newly public companies to have multi-class structures with unequal voting rights as opposed to a “one share, one vote structure” could easily solve markets short-term thinking. To make it practical, it simply means short-term shareholders’ voting rights will be limited while expanded on long-standing shareholders.
For instance, shareholders who hold their stock say for three or more years get three votes for each share or more. New investors into a stock receive just one vote per share, graduating to two votes per share when their holding period crosses over to the second year. Isn’t that something? And there are reasons supporting this revolutionary move.
One, studies show that, with time-phased voting, shares on the overall outperformed significantly compared to the market as a whole. Two, more importantly, the rule shifts the power to long-term shareholders/owners who now don’t have to suffer pressure meeting quarterly goals at the expense of long-term strategic goals. Three, the rule best aligns the interest of all key stakeholders: founders, management, suppliers, public and minority shareholders.
That said, fixing this old problem is not guaranteed easy. In the past, similar approaches have yielded little in relation to encouraging long-term shareholding.
Further, groups opposing the idea argue the approach is anti-democratic and only serves to entrench the interests of the management. Personally, I am not sure how the idea balances the need for liquidity (which is what makes markets, otherwise, trading OTC is an option).
Be that as it may, LTSE’s proposal is worth a try. If it’s about engendering a long-term investing culture, I’m all for it. But for now, we wait. If the idea garners enough market share – the US stock trading is dominated by markets run by the New York Stock Exchange, Nasdaq and Cboe, which account for a combined share of more than 60 percent of volume—we’ll all learn from it.
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