The Long-Term Stock Exchange launched today (Sept. 9) with a humble goal—to reform American capitalism as we know it.
The platform’s debut comes nine years after CEO Eric Ries, a Silicon Valley entrepreneur, proposed its creation in his book The Lean Startup as an antidote to the usual market pressures to pursue short-term results. The US already has more than a stock dozen exchanges, but Ries argues that creating a new one is the only way to enshrine long-term thinking and abandon short-term strategies that get in the way of innovation and leave companies, and their investors and employees, in a cycle of booms and busts.
To list on the LTSE, companies are required to maintain and publish policies that provide insight into their long-term strategies, practices, and measures. The exchange says long-term focused companies must use principles that consider a “broad group of stakeholders, measure success in years and decades, align compensation of executives and directors with long-term performance, engage directors in long-term strategy (and grant them explicit oversight of such strategy), and engage long-term shareholders.”
Quartz spoke with Ries about LTSE’s launch, changes to its listing standards, and how the exchange itself will measure success. The conversation was lightly edited and condensed for clarity.
Quartz: What is taking place today?
Ries: We just did the open of the exchange for the first time with all US exchange-listed securities eligible for trading. We’ve been trading progressively larger numbers of symbols since late August. For me personally this culminates, basically, a decade’s worth of work. But it’s really just day one. And now we can begin the real work of offering companies a public market option that sets them up for long-term success.
Why not create a certification of some sort, or an index, and companies could adhere to the standards that way?
It would be a lot easier, huh? It turns out that the exchange is the only regulatory framework that allows you to bind both investors and the managers of companies at the same time. Without a corporate governance framework like that, you just can’t create promises, or pledges, that investors will view as credible.
So by embodying our reforms into the listing standards of an exchange, it’s a bit of a throwback idea. Stock exchanges now, we’ve come to associate them almost exclusively with stock trading. But stock exchanges have always played a dual role in corporate governance as well as in liquidity. And so we’re trying to harken back to that older sense, that exchanges should be responsible for the behavior of their issuers and advocate for having more high-quality companies to be created and thrive.
I was reading your FAQ, which says the LTSE won’t take a position on enhanced voting rights for long-term shareholders. I thought that taking this position was meant to be a key feature of the exchange. What’s changed?
It’s a different set of listing standards than we tried to get approved two years ago, three years ago, whenever that was. I think it’s a lot better, the new standards, because we were able to get all of our stakeholders on board with what we call “principles-based listing standards.”
In a prior filing, we had tried to create a one-size-fits-all governance paradigm. Every company would have to adopt the exact same rules. And so we had to come up with a compromise that could work for dual class companies, and standard governance companies, and big companies, and small companies. And I do think the enhanced vote proposal was pretty impressive considering the number of factors it had to balance.
But I think that’s as good as you can do with a one-size-fits-all prescription. And luckily in the intervening years we’ve been able to win over the key stakeholders to the idea that rather than having it be one-size-fits-all, we have a principle—which is that companies should reward and engage with their long-term shareholders. And then the company can design programs like the one we proposed before but also different ones, and they can be really customized to the circumstances of that company. In particular, dual-class organized companies really need something quite different from companies that have standard governance.
We still have the same underlying technology that allows companies to track the beneficial ownership of their long-term investors, and to assign rewards based on either how long the stock has been held or how long the investor would commit to holding. So I think it’s a more flexible way to accomplish those same goals.
Who are your market makers, and what’s your stance on market making and high frequency trading?
The truth is, everyone is a high frequency trader now. So that term doesn’t really mean anything. We do have members of the exchange, including all the largest market-maker firms that you would have heard of. I think we have 34 or 35 members at last count. So we are very friendly with the market-maker community.
The focus of our reforms is really on issuers and long-term investors, so we’re not trying to build an environment that is optimized for trading. But we take our role as a facilitator of liquidity seriously and we’re very honored to have so many market makers as members.
My understanding is that you plan to make money through listings, and you’ve said in another interview that trading market share is not your goal. What are the business results that you want to achieve? What is your determinant of success?
Our determinant of success is to reform the way capitalism is practiced, certainly in this country. That’s a long way off obviously. And it’s very difficult to predict what the intermediate milestones should be.
I think getting a company to list will be a seismic event if we can make it happen. And, you know, I’m just reading the comments today—most people think it is not possible to do that. So before we make plans for having tens, dozens, hundreds of companies, let’s see if we can show that it is actually possible to get one.
Let’s say executives look at your principles and decide they are a good idea, and they decide to get their investors on board with the idea, too. Would you consider that to be mission accomplished, even if that company didn’t list with you?
100%. We’re very clear with customers, we’re a mission-driven company. So our goal is to get companies to adopt this framework. If they can do it without listing on LTSE, we still consider them our customer and we’re just as happy.
And frankly I call on the incumbent stock exchanges to copy our listing standards and steal all our business. That would be terrific.
In order to make money on listings, exchanges need companies to join the platform, which might be an incentive to lower listing standards, not to raise them. It can create a race to the bottom. Whereas you seem to be saying, if nobody will meet our standards, we won’t make money.
Correct. I think it’s time for a race to the top. We’ve had plenty of years of the race to the bottom.
Your company’s board is 80% women. Do you consider that to be the optimal? For the sake of argument, if the board were 80% men, I don’t think people would consider the board to be gender diverse.
No, we just didn’t want to lower the bar for the sake of diversity.
If it had turned out to be 80% men, would you say the same thing?
Well, I think the credentials and qualifications of our board membership speak for themselves.
What else should our readers be mindful of on this day?
I don’t think people appreciate how difficult these things are to build. And for most people this is the first they’re hearing of it. It’s just day one. So maybe you can remind your readers that when they see an overnight success story, it’s very likely that, like this one, it was 10 years in the making.