February 28, 2021
President Emeritus, Long-Term Stock Exchange
Fewer and fewer companies are going public. The number of publicly traded U.S. companies reached its peak in 1996 at 7,322 and today stands at just over 3,700. The U.S. population has risen over 20% since 1996, and real GDP has more than doubled, but the number of public companies has been cut in half.
This steady downward trend has been accelerated in part by the pressures public companies face to perform to the quarter. Even though short-term investors remain the minority of stockholders, their actions dominate the Wall Street news cycle and their influence on companies is disproportionate to their holdings. 80% of CFOs say that they would forego long-term value creation initiatives like R&D in order to avoid missing quarterly targets. 85% of respondents to a FCLT Global survey say the pressure on senior executives to deliver short-term results has increased in the past five years. Not only that, but between 2013 and 2016, the share of respondents who reported feeling that their most important objective was to demonstrate strong financial performance within two years or less of going public rose from 79% to 87%.CEOs are also in the cross-hairs. Alongside a 40 year decline in the lifespan of public companies, CEO tenure has also grown shorter, encouraging company leaders to focus on immediate results at the expense of longer-term investments.
The current public markets are not designed to highlight or motivate long-term performance. The rise in investment models that focus on moment-by-moment shifts in stock prices, drive huge volumes of trading, and intensify short-term pressure. Management practices that further entrench this behavior, like incentives and executive compensation that are directly tied to short-term performance, and financial engineering designed to optimize quarterly profits, are all part of a framework that reinforces the value of immediate wins over long-term payoffs.This framework, combined with the increased availability of private capital and other factors, has led many of the companies that do decide to go public to delay their IPOs and remain private for longer. Between 1990 and 2001, the average time to IPO was 4.6 years. By comparison, from 2001 to 2015, the average company took 10 years to reach IPO. This trend gives investors with access to the private market a huge advantage in terms of both choice and returns. Regular investors, saving for their families and retirements, are unable to participate in the fastest-growing sectors of the American economy.Some companies have already made the shift to operating to long-term goals. The results of a recent McKinsey study suggest (with further research coming) that long-term orientation leads to higher profits. Between 2001 and 2014, revenue at long-term-oriented organizations grew 47% more than industry averages. Earnings grew an average of 36% more, and notably they spent an average of 50% more on R&D. Their return to their long-term shareholders was 50% likelier to be in the top decile or quartile.Companies operating with this ethos are keenly aware of something all companies should know. Jeff Bezos summed it up in one of his annual shareholder letters:
“We don’t celebrate a 10% increase in the stock price like we celebrate excellent customer experience. We aren’t 10% smarter when that happens and conversely we aren’t 10% dumber when the stock goes the other way.”
Casting aside the short-term framework and making Bezos’s way of thinking not only possible but commonplace for all public companies is the mission of the LTSE. A stock exchange is a powerful force. Its standards shape the way companies act and where their focus lies, and in doing so, affect society at every level. The most successful long-term companies of our age — Amazon or Apple or Alphabet — have succeeded in spite, not because, of current market realities.We’re building the LTSE as a new listings option for the next generation of long-term focused public companies.